Around the Globe 11.04.2013

Janet Yellen’s mission impossible—Commentary.

Could QE spur deflation, not inflation?.

There are two reasons why the Fed will keep printing. 1st:

Fed Balance Sheet vs. SP500 10.2013


US 10yr through 11.04.2013

The creation of the 401(k) years ago politicized the stock market.  The government’s policy of herding Americans into purchasing equities to fund their retirements has created an expectation that the government must do something about falling markets, so it does.  Additionally, the government must be able to finance itself.  A rise in treasury rates would result in higher deficits down the road; hence, the Fed must keep rates low and the only method currently at its disposal is the printing press, so print it does.

Ultimately, all of this printing is slowly destroying the economy, because QE is ultimately both inflationary raising assets prices and deflationary suppressing income growth.  Japan started its own money printing program in the late 90’s, and you can see for yourself how incomes are performing:

Japanese Incomes

Like the Fed, ECB expected to keep on pumping.

ECB may soon join the flight of the doves | Reuters.

Debt crisis has left Germany vulnerable –

USDEUR Exchange Rate vs Fed to ECB Balance Sheet Ratio

The MFP and its assorted shills, hangers on and supplicants believe that the ECB will begin printing in earnest to match pace with the Fed, and it just might but not for the reasons it endlessly touts: unemployment, lower inflation and economic contraction and stagnation in the periphery.  Rather, the only thing you need to know is the USDEUR exchange rate.  When it rises to a level that threatens Germany’s export machine, then there will be an ECB rate cut and not one second before.

The chart above illustrates the relationship between the dollar/euro exchange rate and the Fed/ECB balance sheet ratio.  As you can see, the rate has diverged from its long-term relationship, but these divergences are only temporary.  The euro will continue it general, upward trend for the near future.  Once the euro crosses the $1.45 line, the ECB will consider a rate cut because this is the rate that curtails Germany exports.

China reform checklist: How to tell that this time it’s for real? | Reuters.

China 7 Day Repurchase Rate 11.04.2013


Chinese leaders enjoy discussing economic reforms almost as much as the mainstream financial press hyping said reforms.  Chinese leadership has linked economic growth with political stability.  In light of this fact, this is all you need to know about Chinese economic reforms: if the reforms have any negative consequences, they will quickly be rolled back.  The PBOC has been attempting to liberalize the financial system by stepping away and letting the banks fund each other rather than relying on central bank liqudity.  Unfortunately, whenever it begins backing out of the overnight lending market, interest rates spike, so it rushes right back in.

This is exactly how government reforms will proceed.  The government will attempt to reform the economy.  Once adverse consequences erupt, (i.e. higher unemployment, the wrong guy’s factory being shuttered) the government will reverse course in short order.  After conditions settle down, it will make another feeble attempt to reform and change its mind once the consequences return.  Rinse and repeat.

High unemployment? Blame high home ownership, study says – NBC

Unemployment versus Home Ownership


This is an interesting study.  High rates of home ownership lead to higher structural unemployment.  This study’s conclusion makes sense, and it survives a careful reading.  Renters are more mobile than homeowners, and this affects the unemployment rates.  In the chart excerpted from Dr. Oswald’s study, we can see two examples that tend to prove the rule.  Of course, there are other reasons why Greece has a drastically higher unemployment rate than Germany, which is why the country is so far above the trend line.  BTW, Greece’s neighbor on the chart is Spain.


Around the Globe 10.10.2013

U.S. retailers’ sales rise in September, but shoppers stay cautious | Reuters.

September Retail Sales Were Tepid –

US Retail Sales YoY


US retail sales grew at a sluggish pace in September.  Considering the health of the labor market, these results are unsurprising and do not bode well for the future.  Retail sales have seemingly turned over and are growing at the slowest pace since the beginning of the recovery.  You can see for yourself what happened the last two times the retail sales pace slowed on the chart above.

Jobless claims rise to 374,000 vs. 311,000 estimate.

California, government shutdown lift U.S. jobless claims to 6-month high | Reuters.

Jobless Claims Surge on California, U.S. Federal Shutdown – Bloomberg.

Initial Unemployment Claims Through 10.05.2013

Jobless claims have spiked in response to the shutdown “crisis.”  A great deal of the spike can be attributed to survey technical problems, but the shutdown has generated at least 15,000 new claims.  Even temporary unemployment will subtract a bit from growth as consumer spending is lost that is never made up.  The shutdown combined with other headwinds will reduce economic growth in both the 3rd and 4th quarters.  As to initial claims, once the shutdown is resolved the number will drop back down to around 300,000 or so.

Euro Zone Sees House Prices Rise –

Eurozone Housing Index

The mainstream media loves housing recoveries, because the high number of homeowners guarantees positive housing market articles a lot of clicks, and now Europe has it very own American-style “housing recovery.”  Spain, Ireland and the Netherlands have endured the bursting of property bubbles.  Prices have begun rising again in these countries due to the effects of cheap money, banks keeping distressed properties off the market and speculative activity.  Incomes are either stagnant or falling, so these gains are not sustainable and will not lead to a second, European postwar miracle.


Around the Globe 07.25.2013

According to the mainstream media, the world is about to embark on an economic boom similar to the post-WWII economic miracle.  Let’s examine these items outside the recovery narrative and see what we learn.

South Korea Growth Surges to Fastest in More Than Two Years – Bloomberg.

Won to USD 07.25.2013

South Korea is one of the few bright spots in the world economy with GDP growth of 2.3% over the past year.  This growth is based on a weakening currency and bringing forward government spending from the second half to the first half of the year.  Once the effects of the weaker won and spending surge wear off, South Korea is left with a flailing China and an increasingly competitive Japan as its two largest trading partners.  Growth will slow significantly in the second half of the year.

U.S. Jobless Claims Rose Last Week by 7,000 to 343,000 – Bloomberg.

Durables surge past expectations; jobless claims tick higher.

Initial Unemployment Claims Through 07.20.2013

Jobless claims remain elevated in comparison to other recoveries, and “breadwinner” jobs are just not being created.  If you want a part-time job at a fast food restaurant, then this is the recovery for you.  Note that we are still using the word “recovery” to describe the economic situation, because implicit in the term is that the economy has not recovered yet, it is still sick.

U.K. Economic Growth Quickens to 0.6% as Recovery Gains – Bloomberg.

UK GDP Performance 07.2013

For the first time since the beginning of the Eurozone recession, the U.K. has managed to grow for two consecutive quarters.  The British wagon is hitched to the EU for better or worse, and the U.K. will not be able to expand GDP better than the present level as long as the Eurozone remains weak.  It was assumed that new BOE head Mark Carney would increase money printing, but these positive numbers may change the plan.

Spanish Unemployment Falls as Rajoy Sees Growth Return – Bloomberg.

Spanish jobless data boost government claim of economic pick-up –

Spanish Unemployment 07.2013

Of course, politicians are proclaiming the end of the Spanish depression with the recent 1 point drop in unemployment.  The red circles above indicate the other two times that this has happened during the depression.  Neither decrease was sustained, and this one probably will not be either.  One-third of the rate drop can be attributed to people leaving the workforce, and the jobs created were temporary positions for the tourist season.  Moreover, the actual number of full-time jobs dropped 50,000.  The improvement in this one indicator belies a worsening Spanish economy.

Analysis: How much is Fed aid to U.S. corporate profits worth? | Reuters.

Fed Balance Sheet vs. SP500 07.2013

The answer to the question posed in the Reuters headline is “a lot.”  The chart above shows how the S&P 500 is closely tracking the expansion of the Fed’s balance sheet with both about 70% larger over the last four years.  Revenue growth has been rather lackluster, but profits have surged:

SP500 EPS 07.2013

All of that money printing has provided the cheap financing necessary for corporations to buy back shares.  Less shares means greater profits per share and higher share prices.  Profits per share have almost doubled since 2009 on revenue gains of about 12%.  All of this money has done little to improve the labor market, though the corporations and 1% continue to do very well for themselves thanks to Uncle Ben’s largesse.

GM profit beats Street on aggressive cost-cutting in Europe | Reuters.

GM Earnings: Car Maker Beats Views as Europe Improves –

EU New Car Registrations 07.2013

The Reuter’s headline is accurate, and the Wall Street Journal’s is basically hype.  Massive cost cutting has helped GM narrowed its losses in Europe, but the car market remains in a torpor as seen in the chart above.  In fact, while GM managed to cut costs, it could not sell more cars to Europeans, and both its market share and total sales fell.  Europe did not “improve.” GM improved its cost structure, and European continued to buy less cars.

Stalled Project Shows Why China’s Economy Is Wobbling –

China 7 Day Repo Rate 07.25.2013

China is having issues and will have to face the consequences of its growth at all costs policy.  In the meantime, the financial system remains under strain with the overnight repo rate slowing creeping back up to the 5% launch point.

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.