Around the Globe 10.31.2013

U.S. jobless claims fall in better news for labor market | Reuters.

Initial Jobless Claims Through 10.26.2013

The mainstream financial enjoys reporting simplistic explanations for complex trends.  The MFP explanation of the month is the “shutdown.”  Negative data is explained away by the shutdown, while positive data is used to reinforce the recovery narrative.  A more nuanced reading of the data reveals two facts.  First, initial unemployment claims have dropped to business cycle lows.  Second, claims had begun rising in the beginning of September long before the latest government manufactured crisis.

The pace of layoffs has slowed throughout 2013 after remaining static through 2012.  it seems that initial claims have finally bottomed out over four years since the “end” of the recession, but hiring remains weak.  Last month a mere 148,000 jobs were created well under the 200,000 necessary to maintain pace with new entrants to the labor force.

Home prices are still affordable, says Shiller.

Housing Affordbability Index

 

 

Shiller does not believe that the country is in the midst of a housing bubble and this is his thinking:

“I define a bubble as a time when people have extravagant expectations, and the expectations are driving home price increases,” said Robert Shiller, Case-Shiller index co-founder and Yale University professor of economics, in an interview with CNBC. “We don’t have the mindset of earlier this century.”

What Shiller is saying is that price expectations are different now than in 2006.  This is true, but the background economic picture has also changed with these expectations.  In 2006, people believed that house prices will continue rising as rates remained low and consumer incomes were growing.  Today, people believe that house prices will continue rising despite rising rates and stagnant consumer incomes.  Isn’t today’s market just as irrational as 2006 once we take those facts into account?

These headwinds will buffet housing going forward resulting in declining sales.  Moreover, once investors realize that there is no money to be made in renting hundreds of single family home due to the lack of economies of scale in the sector, expect a housing correction to a lower sales pace at lower prices.

Germany Hits Back at U.S. Over Economic Criticism – WSJ.com.

U.S. Treasury Blasts Germany’s Economic Policies – WSJ.com.

America’s misplaced lecture to Germany | The World.

Euro Fair Value at 1.37

An unbalanced economy is a weak economy.  The old cliché is, “Neither a borrower or lender shall be,” not “A borrower shall not be, but lenders are fine.”

Export-driven economies rely on a weak currency to flood the market with their goods and thereby place two burdens upon their populations.  The cheap currency makes imports more expensive, so consumers in export-driven economies cannot afford as much.  Lower consumption levels equate to lower employment levels as the infrastructure of consumption remains lacking.

Prices for consumer goods are much higher in export countries.  In the U.S., you can buy a nice HDTV and a surround sound system for about $1500.  In Germany or the Netherlands, you couldn’t even buy the HDTV for that price.  As a consequence, the retail sector remains small and labor force participation rates remain low.

As the chart illustrates, Germany receives a very nice benefit from belonging to a currency zone with more  unproductive members, and those countries pay a steep premium to remain in the Eurozone.  Eventually, someone will figure out that he could reverse his country’s fortunes rapidly by reverting to its national currency.  Until then, the periphery will struggle, and breakup risk will persist.  He who exits first, exits best.

ECB easing hopes help stocks, bonds deflect Fed hit | Reuters.

Euro-Area Inflation Rate Falls to Four-Year Low – Bloomberg.

Fed-ECB Balance Sheet Ratio versus USDEUR

Draghi better fire up the printing press  before it is too late. The Eurozone “Recovery” has been led by a surge in exports from the periphery.  While the employment picture is still deteriorating, at least higher export orders were a bright spot.  Unfortunately, this brief upswing in exports is about to reverse course.  The Euro has been depreciating as the ECB neglects to match the Fed, the BoJ and the BoE in currency creation.  Our chart illustrates the relationship between the Fed and ECB balance sheets and the USDEUR exchange rate.  The present ratio indicates a rate of $1.54.  The strong euro has already begun to weigh on PMIs and will filter down to GDP in due course.

 

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Around the Globe 09.17.2013

U.S. Incomes Stabilize for First Time Since Recession – WSJ.com.

Median Income Performance in the U.S. Since 2007

This article tries to show two sides to the news of stagnant median incomes.  First, the article draws a questionable conclusion from the data:

The Census report, viewed as a gauge of American prosperity, could mark a turning point for the recovery: It suggests consumers may soon start to feel the benefits of a steady, if sluggish, pickup in jobs…

The clause after the colon makes the assumption that a steady and sluggish pickup in jobs will create benefits, and this is false.  Strong, robust job growth is required to lift the boats of consumers, nothing less.  When the economy is creating new jobs at a rapid clip, the demand for labor outstrips the supply, raising wages for all workers in the process.

Today’s pace of job growth is enough to allow American consumers to tread water, and there is nothing in the data that suggests that attaining a state of stagnancy marks an inflection point signaling increasing incomes.  The true, parlous state of the labor market is revealed deeper in the article:

  1. Incomes remain 8% below 2007 peaks.
  2. 11 million Americans are still seeking work

The only thing you need to know is that 1 is a direct result of 2.

Consumer Prices in U.S. Rose Less Than Forecast in August – Bloomberg.

U.S. consumer prices muted, but rents and medical costs rise | Reuters.

U.S. Consumer Prices Rose 0.1% – WSJ.com.

US Inflation Rate YoY

When the economy is strong, increasing demand generally stokes inflation as can be seen above from Jan 2002 to 2008 during the post 9/11 recovery.  Today’s monetary easing is based on the theory that this process also works in reverse.  That is, printing more money to purchase bonds will stoke inflation leading to a pickup in economic growth.

Current theory does not account for the diminishing marginal returns of easy money.  Each successive round of monetary easing has  resulted in less benefits inuring to the American people:

Income Growth 99 vs 1

At one time, the Fed’s actions would be expected to lift the economy from its doldrums, but too many years of loose money have taken their toll.  Today, the best we can hope for from additional money printing is stagnancy, which is different from stability.

Home builder confidence hits a pause.

Home Builders Remain Confident, if Cautious – WSJ.com.

Homebuilder Confidence in U.S. Holds at Highest Level Since 2005 – Bloomberg.

Homebuilders Confidence Index

I selected an article each from the Wall Street Journal, Bloomberg.com and CNBC.com for this post about Homebuilder Confidence.  Note how each headline endows the news of a flat index with a positive spin.

The first headline, “Homebuilder Confidence Hits a Pause,” makes a very bullish assumption by characterizing the data as a “pause.”  By using this word, the headline implies that the index will resume its rise.

The WSJ gives a more accurate headline.  The data does tend to show that homebuilders are confident for future prospects but show their underlying caution by not increasing hiring, unfortunately, the article misses a chance to expound on the cognitive dissonance in the results: If homebuilders are really confident, then why aren’t they hiring new workers and expanding production at a faster pace?

The third headline highlights the fact that confidence remains as high as last month, but then this information is not placed into context.  The index remains at historical lows as compared to every other recovery since the 80’s.  This poor showing is despite the fact that this is the fastest, largest increase in the index since its inception.

Low rates spurred increased housing activity, but now that rates have risen the market will only be driven higher if consumer incomes rise, and the evidence indicates that this is a long way off.

Berlusconi postpones message on future after tax conviction | Reuters.

Italy 10yr Bond 09.17.2013

Today, the yield on Italy’s benchmark sovereign bond has once again dropped below Spain’s.  The reason is that Berlusconi is backing off threats to dissolve the government if he is expelled from the Senate.  His inner circle persuaded him that political discord would damage his media holdings.  I am not so sure that he will go away so easily.  He may lie low for a few months, but rest assured Bunga has something up his sleeve.

Around the Globe 09.16.2013

U.S. manufacturing sector regaining some momentum | Reuters.

U.S. Factory Output Picked Up in August – WSJ.com.

US Industrial Production Through August 2013

The latest manufacturing reports are being taken out of context to present a picture of “hope.” Industrial production did rise in August, but as we can see above gains in this sector have been trending downward since a robust recovery following the Great Recession.  August’s results do not reveal a manufacturing sector expanding at rapidly enough to significantly lower unemployment and raise wages.  Stagnant wages are what is holding the economy back at this juncture.

Summers Quit Fed Quest as Democrats Spurned Obama Favorite – Bloomberg.

Three reasons why the Fed needs to taper now.

Fed taper likely to be announced this week: El-Erian.

US Treasury Borrowing Needs

Everybody has a reason why the Fed will begin purchasing less bonds over the next few months, i.e. the taper.  These are often complex theories based on arcane points of monetary policy stuffed with jargon.  The real reason is that the Fed is depleting the existing bond supply.  At a rate of $65bn per month in U.S. treasury purchases, the Fed will purchase the entire projected issuance in the fiscal year ending in March of 2014.

The next Fed chairman will have a large mess to clean.  The taper will cause interest rates to rise in two ways.  The first is the adjustment of supply and demand for T-bills.  The reduced demand for treasuries will bump up rates, though at least some of this is dynamic is already priced in.

The second is that the Fed standing by with its mighty printing press has beaten risk out of the market.  As the big elephant reduces it bond intake, risk levels will begin rising prompting markets to reprice.

Over the next few months, the consequences of the wind down of bond purchases will become apparent much to the chagrin of the next chairman.

Employment gap between rich and poor highest on record.

Unemployment Rate vs. Education Attainment

There are two troubling trends apparent on our unemployment chart.  The first is just what the article is telling you; specifically, higher income groups have recovered much better since 2009 than lower income groups.  High school and college graduates have retraced about half the increase in unemployment from the recession while high school dropouts have gained only about a third of their losses back.

The second is that each successive recovery from the last three recession has become less robust.  Unemployment levels from the Obama recovery are higher than the lows from the Bush recovery, which are higher still than the low levels witnessed during the Clinton boom.  The marginal returns from additional credit creation from cheap money are diminishing over time, but this won’t stop the Fed from reversing the taper if markets swoon post-taper.

Analysis: Europe, waiting for Germany, could be disappointed | Reuters.

Bavarian Elections Deal Blow to Renewal of Merkel Coalition – WSJ.com.

Angela Merkel, courtesy of Armin Kübelbeck http://commons.wikimedia.org/wiki/File:Angela_Merkel_15.jpg

Angela Merkel, courtesy of Armin Kübelbeck http://commons.wikimedia.org/wiki/File:Angela_Merkel_15.jpg

Merkel is steaming towards victory in Germany’s elections Sunday.  While euro cheerleaders hope for Germany to change its eurocrisis fighting efforts after a new government is secure in the Bundestag, I think they will be disappointed.

The most significant message from German voters is that they do not want change, but more of the same.  Merkel can be counted on to maintain the euro for as little money as possible, which is exactly what Germans want.  What they don’t want are the inevitable consequences from kicking the can down the road umpteenth times.  Delaying the eurocrisis will just make it more severe when it eventually erupts.

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: Labor Day Weekend Edition 2013

Sunday:

China Factory Activity Hits 16-Month High – WSJ.com.

China official PMI hits 16-month high in August.

China official PMI hits 16-month high in August | Reuters.

HSBC China Flash PMI 08.2013

The PMI numbers from both HSBC and the Chinese National Bureau of Statistics are at 50.1 and 51 respectively.  These numbers indicate a slight amount of growth, but that is better than a contraction.  Has the Chinese economy gained momentum? Well, the last two trips above 50 were temporary respites from the contraction, not a second coming of the Chinese miracle.

Saturday:

Most Japan Experts Back Tax Hike: Economy Minister – WSJ.com.

Japan Prices Rise on Higher Energy Costs – WSJ.com.

Japanese Core Consumer Prices

Inflation is a sign of strength in a growing economy reflecting increasing demand. Current central bank dogma holds that the reverse is true.  By stoking inflation through increasing the money supply, central banksters believe that they can organically grow the economy.  This belief is akin to raising one’s body temperature through a hot bath or exercise so that the flu develops.

While the mainstream media cheerleads the Bank of Japan’s successful efforts to create inflation, note that virtually all of the increase in the inflation rate are a result of higher energy prices, not increased demand.  Stripping out these prices reveals a Japanese economy still in the throes of deflation as illustrated in our chart above.

Higher energy prices simply mean that Japan is sending more of its hard-earned yen overseas to purchase oil.  This leaves less yen for Japanese consumers and businesses to spend on Japanese products. Note the deteriorating balance of trade:

Japan Balance of Trade

Berlusconi Threatens to Topple Letta If Expelled From Senate – Bloomberg.

LettaBerlusconi

Berlusconi had been issuing veiled threats about bringing the current government down for the last few months.  Then, he unveiled these threats during a television interview.  Later, he disavowed those threats saying that he wants the government to survive.  Bunga bunga.

From Monday’s Edition:

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

U.S. durable goods post largest drop in nearly a year | Reuters.

Durable-Goods Orders Drop 7.3% in July – WSJ.com.

US we have a problem, and its name is durable goods.

Durable Goods Shipments 08.2013

Orders are volatile by their nature, but economists use this data because it may reveal information about the future.  Changes in orders tip off changes in future production.  Durable goods orders plunged over 7% this month, but this is not an unusual result due to the volatility in this series.  What is concerning is the change in product shipments.  The downward trend in shipments has happened twice before in the last 13 years.  You can check for yourself to see what happened next.

From Tuesday’s Edition:

As investors shift, housing is the new stock market.

Home Prices in 20 U.S. Cities Increased at Slower Pace – Bloomberg.

Home Prices Increased in June – WSJ.com.

Case Shiller 20 City Index 08.2013

If you believe that these housing prices are sustainable, consult the first headline above and then examine the chart.  Home prices are rising at nearly the same pace as they were when the bubble was inflating in the mid-aughts, and CNBC is calling the housing market the “new stock market.” Moreover, Robert Shiller has called the current price increases meaningless as they reflect speculative activity.  Over 60% of the sales are all-cash deals.

Since the American worker is not earning enough to buy his own home, who will repurchase those speculators’ properties when they attempt to cash out? Don’t peddle fantasies about massive REITs holding thousands of rental homes.  There are virtually no economies of scale associated with single-family home rentals, and state landlord-tenant laws vary widely.  This is a nonstarter as a business, so the question remains: how will the speculators cash out?

From Wednesday’s Edition:

Fed’s Yellen, Husband Worth Up to $13.2 Million in 2012 – WSJ.com.

ThWealthy Recoverye Fed’s money printing has done little to stimulate the labor market but has created asset bubbles across the world from which the TBTF and the rich are profiting nicely.  Wall Street is doing fine, while Main Street struggles.

After all of that money printing, the Fed is telling us that the economy is strong enough to stand on its own.  While this seems like crazy talk, to those influencing monetary policy this narrative seems accurate. The net worth and salaries of top Fed officials places them squarely within the wealthiest 7% of the U.S.  That income group is doing so well that it raises the averages and medians of the country distorting the true view of the “recovery.”

The bottom 93% is experiencing a very different economy, particularly since this group derives most of its wealth from its toil:

US Household Income Performance Since 2000

Which brings us to the reason why the Fed will continue printing until a crisis forces it to change tack: too many rich and powerful people depend on their current level of wealth based on the suppressed rates and almost daily injections of  money of the Fed’s current policy.

The Fed will not change its policy, because it will lead to a market panic making all of those rich and powerful people just powerful.  If the market tanks, it will be the proverbial black swan doing its magic.

From Thursday’s Edition:

Exclusive: India might buy gold from citizens to ease rupee crisis | Reuters.

Gold in Rupees 08.29.2013

Let me get this straight.  Indians have realized that their currency is becoming worthless and have been purchasing gold to preserve their wealth.  The RBI’s genius plan is to offer to purchase this gold back from the people in exchange for that same currency.

RBI, the problem is that your citizens do not wish to hold your paper anymore.  If you want banks to buy gold back from consumers, then don’t offer rupees.  Pick another currency instead.  Ollie Rehn was just telling us how awesome the economy in the Eurozone will be in 2014, so maybe you could offer Indians euros.  Just a thought.

Indonesia Raises Interest Rate as India Aids Rupee – Bloomberg.

Bank Indonesia Hikes Interest Rates to Bolster Plunging Currency – WSJ.com.

USDIDR 08.29.2013
From Bloomberg

Volatility in emerging markets has been rising in the last two weeks or so, but I believe the trend will cease and retrace a bit after Labor Day when liquidity conditions improve.  Unfortunately, this will prove to be a temporary respite until Uncle Ben cranks up the magic money machine again.

From Friday’s Edition:

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.

Around the Globe 08.20.2013

Fear of Fed Retreat Roils India – WSJ.com.

India’s Economic Woes Spread to Southeast Asia – Businessweek.

India Central Bank Intervenes to Ease Liquidity – WSJ.com.

USDINR 08.20.2013

The Reserve Bank of India decided to ease liquidity issues by purchasing $1.5bn in rupee denominated bonds from the banking system.  While the bond purchase should provide sufficient liquidity for banks in the short-term, the RBI has paved the way for additional drops in the rupee.   India is moving towards a full-scale financial panic, and the RBI should raise interest rates before the situation runs away from it.

Greece will need third aid deal: German finance minister.

UPDATE 1-Greece will need third aid deal, German Finance Minister admits | Reuters.

Greece - with policy change

Greece does not require a 3rd bailout, because it has already had three.  The next will be the fourth.

The first bailout occurred in May of 2010, and everyone believed that the Greek problem was solved.  Within a year, this aid package proved to be short, so the troika approved a new bailout plan that most economists outside the official halls of central banks, governments and the IMF deemed insufficient from the get-go.  This plan, the second bailout, was eventually implemented in March of 2012.

By the summer, it was obvious that Greece was in need of more aid.  ELA approved by the ECB kept the Greeks afloat until a third bailout package could be arranged in November of 2012.  As you can see for yourself above, the same wildly optimistic projections of revenues from GDP growth and privatization doomed this plan from the start, but the troika’s goal here was not to save Greece but to keep it quiet until after German elections.  They failed, and I wrote

The 3rd Greek bailout was not designed to place Greek finances on a sustainable path; rather, the troika was primarily concerned with kicking the can down the road past German elections.  Once Angie was safely seated in the Chancellor’s throne, she could return to the Bundestag with a request for more German money to throw down the Hellenic Hole. (Greece Requires 4th Bailout | DARECONOMICS.)

The fourth bailout will occur sometime in the winter of 2013/2014.  Additional German money will be politically covered with a deposit tax à la Cyprus.  Anyone who is maintaining funds in a Greek bank deserves whatever happens to him.

Bubbles Bloom Anew in Desert as Buyers Wager on Las Vegas – Bloomberg.

Las Vegas Housing vs Unemployment Rate

Unemployment has remained high in Las Vegas at 2.4 points, about 33% greater than the national average.  Yet, look at that rise in housing prices. Since regular folk are not participating in the market, the increase has been caused by flippers buying and selling houses to each other.  Cash deals account for just about two-thirds of house transactions in the Las Vegas market.  Eventually, those flippers will need to sell their investments to regular people who require a home and realize that there aren’t any at the posted sales price.  Until that moment, the bubble will continue to inflate.

Dubai Sees Need for Tallest Office Tower Amid 45% Vacancy – Bloomberg.

Skyscraper Index Image

Amidst dizzying office vacancy rates approaching 50%, Dubai continues to add to its skyscraper inventory.  The longer cheap money is available, the higher the levels of malinvestment.  Not included in the image above are the Freedom Tower in New York and SkyOne in Shanghai.  When this bubble bursts, the central banks will not be able to ride to the rescue.  There is a decreasing marginal return with additional liquidity.  At this point in the cycle, new money is barely maintaining current levels of frothiness let alone causing another leg up.

Skyscraper Index

Norway Krone Slumps as GDP Data Revives Rate Bets – Bloomberg.

USDNOK 08.20.2013

When I originally selected this article for inclusion in today’s edition of Around the Globe, my thesis was that even Norway was feeling the effects of Europe’s malaise.  Then, I examined the figures and have come to conclusion that Norway is actually doing quite well for itself even though industrial production is not growing as quickly as some would like.

Around the Globe 07.23.2013

‘Walking Dead’ market: Why the rally keeps going.

Fed QE versus SP500 Through July 2013

The answer to the question why the rally keeps going is contained within the chart above and the chart below.  Unprecedented money printing by the world’s central banks has lifted markets throughout the world.  When the PBOC attempted to tighten in May and June, look what happened to the rally:

SPX 07.23.2013

Hungary May Slow Rate Cuts After Reduction to Record Low – Bloomberg.

Hungary Benchmark Interest Rate 07.2013

Hungarian unemployment is dropping and so is inflation, but the economy remains weak with six quarters in a row of contraction.  Hungary’s fortunes are tied to the Eurozone’s.  As long as the Eurocrisis continues, Hungary will struggle to grow its economy.

Turkey Raises Rates for First Time Since 2011 on Lira Slide – Bloomberg.

Turkey Inflation Rate 07.2013

Turkey is not as reliant as Hungary on the Eurozone for economic growth.  Its economy has managed to expand since the Eurozone recession began, but the growth rate has been cut dramatically:

Turkish GDP Performance

Inflation has remained stubbornly high despite a slowing economy prompting the Turkish central bank to raise its benchmark interest rate to defend the lira.  The rate increase will surely crimp future growth, which may lead to further civil unrest.

China cracks down on building projects in anti-graft move | Reuters.

China 7 Day Repo Rate 07.23.2013

China’s overnight repo rate is creeping up again, and rose above 4% for the first time since the first week of July.  The PBOC attempted to the crack down on shadow banking until it realized that the unintended consequence of its plan was a burgeoning financial panic.

As the new rulers of China begin cracking down on corruption, a real estate bubble and industrial overcapacity, perhaps they should ask what will replace the economic growth caused by these inefficiencies.  Like it or not, these dysfunctional practices support economic growth.  What sustainable economic practices will replace the unsustainable ones as they are eliminated by the government?

Acute property slump takes hold in bailed-out Cyprus: survey | Reuters.

Cyprus Property Index Through 2012

On top of the huge price decreases in Cypriot real estate from the 2009 peak to the end of 2012 as illustrated in the chart, the market is continuing to slump with further decreases through the first and second quarters.  The Cypriot economy still has a ways to tumble before growth resumes, which will limit bargain hunting in the sector.

The plunge in real estate prices will affect the bailout.  Loans must be marked down as the price of collateral decreases raising the bank’s capital needs.  The price tag to bail out the banks is rising, but nothing will be done about this until after German elections.

Investor alarm as India flashes amber – FT.com.

Indian Rupee 07.23.2013

This article mistakenly attributes the May and June sell-off to Bernanke’s tapering comments on May 22nd, but our handy chart shows that the swoon was well under way by that date.  The PBOC’s attempted tightening beginning in early May is what caused the sell off starting with the emerging markets and metastasizing throughout the world by June.

India’s currency is under control for now, but the RBI will be forced to raise rates a few more times between now and the end of the year in order to defend the rupee.

Housing Recovery Increasingly Prices Out First-Time Buyers – WSJ.com.

First Time Buyers

From the Wall Street Journal

First time buyers are what really drives economic growth from the housing market.  People upgrading their old residences already own much of the capital stock required to run a household, but new buyers must purchase lots of furniture and appliances to fill that new home.  This is just another factor among the many that will limit the U.S. to sub-2% growth for 2013.

Around the Globe 07.16.2013

Pimco’s El-Erian: Where does the Fed get its numbers?.

From ZeroHedge

From ZeroHedge

To attain the Fed’s forecast of 2013, growth must pick up significantly in the second half.  First quarter growth was 1.8%, and 2nd quarter growth will not be more than 1.5% so the economy must expand by over 3% in each of the last two quarters to achieve the forecast number.

Optimism replaces realism when it comes to economic forecasts.  The chart above shows how economic forecasts are scaled back as we approach the event horizon.  It’s either time to throw out those pre-2008 economic models or the economists who continue to use them.

Real Wages Still Below June 2009 Level – Real Time Economics – WSJ.

Real Wage Growth Since 2009

From the Wall Street Journal

For the vast majority of Americans who work for a living, there has been no economic recovery.  In fact, the chart reveals an ongoing labor recession.  Unearned income will never be spent on houses, cars, clothes, food and other goods.  The real story of the recovery is that there isn’t one.  Cheap money has inflated asset prices primarily benefiting corporations and the 1% while not promoting a turnaround in the job market.

Home builder confidence soars despite rising rates.

From ZeroHedge

From ZeroHedge

The mainstream media loves it housing recovery narrative.  It is very excited that various measures of housing sentiment have reached their 2006 bubble highs while omitting what happened afterwards from its reports.  Today’s Chart of Truth illustrates how rising rates are quickly making housing less affordable.  Sales will drop precipitously shortly, but the housing recovery narrative will live on.

Consumer inflation stabilizing, industrial output up | Reuters.

Industrial Production in U.S. Rises by Most in Four Months – Bloomberg.

Surging gas prices fuel jump in consumer prices.

US Industrial Production 07.16.2013

From Bloomberg

There is much excitement in the air because industrial production jumped the most in four months, but this is not saying much.  Production actually decreased in two of those four months and five out of the past twelve.  Moreover, high energy prices are stoking dormant inflationary pressures.    The bottom line is that economic indicators are mixed with corporations and rich faring well while the U.S. worker remains stuck in a labor recession.

Europe Car Sales Slump as German Sentiment Wanes: Economy – Bloomberg.

Euro-Zone Exports Slump in May – WSJ.com.

EU New Car Registrations 07.2013

From ACEA.be

The auto industry is a huge driver of economic growth in Europe.  There will not be a recovery in the Eurozone without a a recovery in auto sales, and the chart indicates that this is not in the cards.  Furthermore, Eurozone exports have been falling for the last three months.  If Europeans are not buying products, like cars, from each other and foreigners are buying less European exports, then what will spur the much-hyped recovery in the second half of the year? Sorry, that’s a trick question.  There will be no recovery, just a continued recession and a lot of talk.

Coke profit falls on wet weather, weak economy | Reuters.

Coca Cola 07.16.2013

From Yahoo Finance

The effect of the Eurozone recession is creeping into the results of American multinationals.  Coca Cola’s European sales dropped 4% in the second quarter.  The soft-drink purveyor blamed the weather rather than the real culprit, the Eurozone’ recession.  Why? Because the weather will change, but the recession is here to stay.  How else can you forecast stronger sales in the second half without the underlying economic fundamentals?

Analysis: Low rates pledge buys time but builds risk for fragile banks | Reuters.

Wealth Products Threaten China Banks on Ponzi-Scheme Risk – Bloomberg.

China 7 Day Repo Rate 07.16.2013

The Chinese financial system has reached the Ponzi stage.  Banks are desperately seeking more capital to keep the game going, also known as “extend and pretend.” Chinese banks create these wealth management products to maintain extra capital.  Since most of these securities lack bank guarantees, they bolster bank liquidity more than demand deposits.  In exchange for higher rates, Chinese savers are taking on a lot of risk while believing that they have old-fashioned, insured bank accounts.  This did not turn out well for Spain, and it won’t end well here either:

Spain Bank Sub Bondholders Try to Sell – WSJ.com | DARECONOMICS.

 

Rupee Hits More Than Two-Week High – WSJ.com.

USDINR 07.16.2013

From Yahoo Finance

India just surreptitiously raised its key lending rate.  While there was no change in the 7.25% rate discount rate, the Reserve Bank of India limited the amount of funds available for overnight loans to 750bn rupees.  This move has helped the rupee rally, but it still remains at inflation rates around 60 to the greenback.  In order to strengthen its currency, the RBI must raise rates, but it will try to avoid this as long as possible so it does not crimp already tepid economic growth.