Jumat, 16 Agustus 2013
Kamis, 15 Agustus 2013
Is Selling Bonds the Taste of Things to Come?
Treasury yields are on the rise as I have noted on numerous occasions recently.
The action has prompted the world’s largest hedge-fund manager, to throw in the towel on treasuries and inflation-linked TIPS.
Please consider Dalio Patched All Weather’s Rate Risk as U.S. Bonds Fell
Lovely. All Weather now has a mere 144 percent leverage? What happens if stocks, bonds, and commodities all take a dive?
Here's the deal: This selloff in treasuries may be over. Or it may not be. Anyone who thinks they know is fooling themselves.
What I do know is leverage works both ways. I also know that the Fed has so distorted the economic horizon that it is next to impossible to predict what's coming down the pike.
Stocks, bonds, and commodities other than gold all rose in union over the past few years. My bet is on an unwinding of that trade.
I see no value in treasuries, no value in corporate bonds, no value in equities, and no value in municipal bonds.
I do see value in gold, so that is where I am. Without leverage. Patiently waiting.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
The action has prompted the world’s largest hedge-fund manager, to throw in the towel on treasuries and inflation-linked TIPS.
Please consider Dalio Patched All Weather’s Rate Risk as U.S. Bonds Fell
As the bond market plunged in late June, Ray Dalio convened the clients of Bridgewater Associates LP, the world’s largest hedge-fund manager, to tell them that a fund designed to withstand a broad range of market scenarios was too vulnerable to changes in interest rates.Reflections on Leverage
Bridgewater, citing months of study, said it had underestimated the interest-rate sensitivity of various assets in its All Weather fund and was taking steps to mitigate the risk, according to clients who listened to or read a transcript of the June 24 call. By the end of the month, the Westport, Connecticut-based firm had sold off enough Treasuries and inflation-linked bonds to help reduce the fund’s most rate-sensitive assets by $37 billion, according to fund documents and data provided by investors.
The move, disclosed to investors five days after the Federal Reserve said it’s prepared to phase out its unprecedented bond purchases, was unusual for the fund. As its name suggests, All Weather is designed to produce returns in most economic environments and avoid altering asset allocations when the outlook changes. All Weather incurred a second-quarter loss of 8.4 percent that was primarily tied to its $56 billion portfolio of inflation-linked debt, said the clients, who asked not to be named because the fund is private. ‘A Foretaste’
The decline at All Weather and similar funds, including those run by Cliff Asness’s AQR Capital Management LLC and Invesco Ltd. (IVZ), shows Bridgewater’s pioneering strategy for allocating assets between stocks and bonds, known as risk parity, can leave investors overexposed to rising interest rates. The losses were amplified for some funds by a selloff in inflation-linked securities that also caught Bill Gross’s $262 billion Pimco Total Return Fund (PTTRX) off guard.
“This is just a foretaste of what is going to happen,” said Ramin Nakisa, a global asset-allocation strategist at UBS Investment Bank who co-wrote a March research report titled “When Risk Parity Goes Wrong.” Nakisa called June’s selloff in Treasuries and inflation-linked bonds “a dress rehearsal” for the volatility awaiting when the U.S. Federal Reserve actually begins to taper its bond-buying program, known as quantitative easing.
All Weather trimmed its use of leverage to about 144 percent of net assets at the end of June, according to the clients who requested anonymity. Gross exposures to different asset classes declined to about $116 billion from $138 billion in the quarter, while net assets stayed at $80 billion.
Lovely. All Weather now has a mere 144 percent leverage? What happens if stocks, bonds, and commodities all take a dive?
Here's the deal: This selloff in treasuries may be over. Or it may not be. Anyone who thinks they know is fooling themselves.
What I do know is leverage works both ways. I also know that the Fed has so distorted the economic horizon that it is next to impossible to predict what's coming down the pike.
Stocks, bonds, and commodities other than gold all rose in union over the past few years. My bet is on an unwinding of that trade.
I see no value in treasuries, no value in corporate bonds, no value in equities, and no value in municipal bonds.
I do see value in gold, so that is where I am. Without leverage. Patiently waiting.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Is Obamacare Really Responsible for Rise in Part-Time Employment? If So, Why Doesn't Average Weekly Hours Show Just That?
Inquiring minds are digging into average weekly hours of workers looking for Obamacare effects on which to place blame.
Average Weekly Hours Of Production And Nonsupervisory Employees
Since this data series began in 1964, the average weekly workweek has been trending lower.
Note the tendency following each recession. 1990-1998 is the only exception to the general rule that hours never recovered to the previous pre-recession level.
Last Five Observations
Lets' zero in to a tighter timeline for a closer look.
The second chart shows that in spite of Obamacare, average weekly hours has been bouncing between 33.6 and 33.8 for quite some time.
Several readers emailed such data is proof that Obamacare is not having the effect that I have repeatedly stated that it has.
They are wrong.
Just because hours have stabilized does not mean there is no Obamacare effect. It simply means some industries have not been impacted as much as others. You just have to know where to look.
Focus on Home Centers, General Merchandise, Services for Elderly
Jed Graham at Investor's Business Daily highlights select areas in his report ObamaCare Fuels Sharp Workweek Drop In 4 Industries, while coming to the proper conclusion.
Q: Why doesn't a chart of average weekly hours show the Obamacare effect?
A: It does. You just have to look in the right places.
Q: Is Obamacare responsible for the overall trend of declining workweek hours?
A: The workweek has been declining since the series began, so the answer must be no. However, Obamacare has indeed contributed to the trend as shown above.
Q: Is Obamacare to blame for rising part-time employment?
A: Yes
Obamacare Effects
For more on "Obamacare Effects", please see
As Jed Graham states "Anyone who insists ObamaCare employer penalties aren't having a meaningful impact on work hours simply hasn't looked closely at the evidence."
To which I would add ... the economic distortions go far beyond part-time employment.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Average Weekly Hours Of Production And Nonsupervisory Employees
Since this data series began in 1964, the average weekly workweek has been trending lower.
Note the tendency following each recession. 1990-1998 is the only exception to the general rule that hours never recovered to the previous pre-recession level.
Last Five Observations
- 2013-07: 33.6 Hours
- 2013-06: 33.7 Hours
- 2013-05: 33.7 Hours
- 2013-04: 33.7 Hours
- 2013-03: 33.8 Hours
Lets' zero in to a tighter timeline for a closer look.
The second chart shows that in spite of Obamacare, average weekly hours has been bouncing between 33.6 and 33.8 for quite some time.
Several readers emailed such data is proof that Obamacare is not having the effect that I have repeatedly stated that it has.
They are wrong.
Just because hours have stabilized does not mean there is no Obamacare effect. It simply means some industries have not been impacted as much as others. You just have to know where to look.
Focus on Home Centers, General Merchandise, Services for Elderly
Jed Graham at Investor's Business Daily highlights select areas in his report ObamaCare Fuels Sharp Workweek Drop In 4 Industries, while coming to the proper conclusion.
Anyone who insists ObamaCare employer penalties aren't having a meaningful impact on work hours simply hasn't looked closely at the evidence.Questions and Answers
In a private economy with 114 million workers clocking 34.4 hours a week on average, it's easy to miss important changes. What feels like a wave to modest-wage workers getting hit may appear to be a mere ripple from an altitude of 40,000 feet.
After all, 1.4 million workers could lose an 8-hour shift and it would shave just six minutes off the average workweek. But if one looks closely, it's not hard to find industry groups with an unprecedented drop in work hours since ObamaCare became law.
Among retail bakeries, home-improvement stores and providers of social assistance to the elderly and disabled, the workweek for nonmanagers has fallen to record-low levels — by far.
At general merchandise stores, department stores and discounters, the rate at which the workweek has fallen since early 2012 is way off the charts relative to prior data going back to 1990.
The White House pointed to hours worked in the restaurant sector to disprove an ObamaCare impact, but the data don't support the claim. Because average hours worked are already below 25 hours, part-timers hired for 28 hours would raise the average.
Q: Why doesn't a chart of average weekly hours show the Obamacare effect?
A: It does. You just have to look in the right places.
Q: Is Obamacare responsible for the overall trend of declining workweek hours?
A: The workweek has been declining since the series began, so the answer must be no. However, Obamacare has indeed contributed to the trend as shown above.
Q: Is Obamacare to blame for rising part-time employment?
A: Yes
Obamacare Effects
For more on "Obamacare Effects", please see
- Trends in Full and Part-Time Employment; Obamacare Job Double Counting and Other Economic Distortions
- Immigration Bill Incentivizes Employers To Fire Americans and Hire Amnestied Immigrants; Immigration and Obamacare’s Employer Mandate
- 22% Think Obamacare Will Make Their Situation Better, 42% Say Worse
- Obamacare Effects Hit Local Governments, Small Businesses, Temp Staffing Agencies; Chicago Dumps Retirees Into Obamacare
- Don't Worry, Trend Towards Hiring Temps is Only Temporary (And Not at All Related to Obamacare)
- Obamacare Premiums 47% Higher But Deductibles 27% Lower Than Grandfathered Health Plans; Obamacare Lies
- Opting Out of Obamacare (the Unaffordable Health Care Act); Not Even Labor Unions Want It
- Prepping for Obamacare, Olive Garden and Red Lobster Cut Workers' Hours; Are Other Companies Doing the same? Tip Sharing Lowers Minimum Wage; Like One, Like All?
- Is Obamacare Responsible for the Surge in Part-Time Jobs? What About Obama's Defense Layoff Suspensions?
As Jed Graham states "Anyone who insists ObamaCare employer penalties aren't having a meaningful impact on work hours simply hasn't looked closely at the evidence."
To which I would add ... the economic distortions go far beyond part-time employment.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Philly Fed Misses Expectations; Industrial Production Unchanged; Manufacturing Declines; Treasury Yields Soar Anyway
Philly Fed Misses Expectations
Bloomberg reports Manufacturing in Philadelphia Regions Expands for Third Month
Manufacturing in the Philadelphia region may be up, but overall manufacturing is negative while industrial production is unchanged for July.
Manufacturing is down month-over-month but only slightly. Let's look at some longer term trends in manufacturing and industrial production.
Industrial Production Percent Change From Year Ago
Manufacturing Percent Change From Year Ago
Trends are certainly weakening in manufacturing and industrial production.
Wal-Mart Cuts Profit Outlook
As noted earlier, Wal-Mart, Macy's, Kohl's Cut Profit Outlook; Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery.
With a weaker than expected Philly Fed, negative manufacturing, flat industrial production numbers, and a declining outlook at Wal-Mart and other retail stores, one might have thought treasury yields would drop.
Nonetheless, treasury yields rose, presumably on the assumption the Fed is still going to taper asset purchases starting next month and the economy will strengthen.
The first assumption is questionable, the latter is highly overoptimistic.
$TNX 10-Year Treasury Yield
$TYX 30-Year Treasury Yield
Yields Rise Significantly in Two Days
Curve Watchers Anonymous offers the following chart to help put things in proper perspective.
Yield Curve Historical Perspective
click on chart for sharper image
To understand the significance of this move higher in treasury yields, please see Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What's Next For Housing?
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Bloomberg reports Manufacturing in Philadelphia Regions Expands for Third Month
The Federal Reserve Bank of Philadelphia’s general economic index fell to 9.3 this month from a reading of 19.8 in July that was the highest since March 2011. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.Industrial Production Unchanged
The median forecast of 54 economists surveyed by Bloomberg called for a reading of 15. Estimates ranged from 7 to 23.
Manufacturing in the Philadelphia region may be up, but overall manufacturing is negative while industrial production is unchanged for July.
Industrial production in the U.S. was unchanged in July as a slowdown at factories overshadowed an increase in mining.Month-Over-Month Manufacturing Declines
The reading for output at factories, mines and utilities followed a 0.2 percent gain the prior month that was smaller than previously reported, a report from the Federal Reserve showed today in Washington. The median forecast in a Bloomberg survey of 82 economists called for a 0.3 percent rise in July.
Manufacturing, which makes up 75 percent of total production, declined for the first time in three months.
Manufacturing is down month-over-month but only slightly. Let's look at some longer term trends in manufacturing and industrial production.
Industrial Production Percent Change From Year Ago
Manufacturing Percent Change From Year Ago
Trends are certainly weakening in manufacturing and industrial production.
Wal-Mart Cuts Profit Outlook
As noted earlier, Wal-Mart, Macy's, Kohl's Cut Profit Outlook; Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery.
With a weaker than expected Philly Fed, negative manufacturing, flat industrial production numbers, and a declining outlook at Wal-Mart and other retail stores, one might have thought treasury yields would drop.
Nonetheless, treasury yields rose, presumably on the assumption the Fed is still going to taper asset purchases starting next month and the economy will strengthen.
The first assumption is questionable, the latter is highly overoptimistic.
$TNX 10-Year Treasury Yield
$TYX 30-Year Treasury Yield
Yields Rise Significantly in Two Days
- In the last two days Yield on the 30-Year long bond rose from 3.602% to as high as 3.837%, a rise of 23.5 basis points (nearly a quarter percentage point).
- Yield on the 10-Year treasury note rose from 2.552% to as high as 2.821%, a significant rise of 26.9 basis points (over a quarter percentage point).
Curve Watchers Anonymous offers the following chart to help put things in proper perspective.
Yield Curve Historical Perspective
click on chart for sharper image
- $TYX: 30-Year Treasury Yield - Green
- $TNX: 10-Year Treasury Yield - Orange
- $FVX: 05-Year Treasury Yield - Blue
- $IRX: 03-Mnth Treasury Yield - Brown
To understand the significance of this move higher in treasury yields, please see Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What's Next For Housing?
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Wal-Mart, Macy's, Kohl's Cut Profit Outlook; Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery
The earnings hit parade keeps on rolling, but not in the directions bulls wanted or expected. And with stocks priced well beyond perfection, today's reaction should hardly be a surprise. Yet, treasury yields soared once again in spite of poor earnings, and in spite of a flat industrial production report.
Wal-Mart, Macy's, Kohl's Cut Profit Outlook
Yahoo!Finance reports Wal-Mart cuts profit outlook on shopper worries
The Wall Street Journal reports Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Wal-Mart, Macy's, Kohl's Cut Profit Outlook
Yahoo!Finance reports Wal-Mart cuts profit outlook on shopper worries
Wal-Mart Stores Inc. cut its annual profit and revenue outlook Thursday as the world's largest retailer expects a tough economy at home and abroad to continue to squeeze its low-income shoppers through the rest of the year.Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery
Wal-Mart also reported second-quarter results that missed Wall Street estimates. The company's stock fell nearly 2 percent in premarket trading.
Wal-Mart's sober assessment of consumer spending adds to worries in earnings from Macy's Inc. and Kohl's Corp. Both lowered their expectations for the year after reporting disappointing results.
Wal-Mart said recent tax changes have further put pressure on its shoppers. Americans are dealing with a 2 percentage-point increase in payroll taxes that took effect Jan. 1. That means that take-home pay for a household earning $50,000 a year has been sliced by $1,000.
"The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending," Wal-Mart Chief Financial Officer Charles Holley said in a statement. He noted a "reluctance" among its customers to spend on discretionary items like flat-screen TVs.
The Wall Street Journal reports Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery.
Cisco Systems Inc. is once again tightening its belt, this time before bad news hits the bottom line.Cisco may be a mixed bag, but the outlook for retailers certainly is not. Wal-Mart accounts for a whopping 10 percent of nonautomotive retail sales, and its outlook is telling. And once again interest rates are up across the US treasury curve which certainly will not be good for housing or jobs.
The Silicon Valley network-equipment giant on Wednesday said it would cut 4,000 jobs, or 5% of its workforce, despite reporting an 18% jump in profit in the fourth fiscal quarter.
"What we see is slow steady improvement, but not at the pace we want," Mr. Chambers told analysts on a conference call.
While orders from customers in the Americas rose 5% in the fourth period, for example, orders from Asia declined 3%—and its business in China fell 6%.
Cisco, based in San Jose, Calif., is best known for hardware that helps pump data to and around the Internet, selling both to communications carriers as well as other classes of companies. The performance of those mainstay businesses was mixed.
Revenue in Cisco's biggest segment, switching equipment, rose 5%. But sales were flat in the company's original business of routing gear.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Rabu, 14 Agustus 2013
Interested In Buying Gold? Why Wait?
The title of this post is a play on the Yahoo! Finance video Wait for Further Pullback in which Jeff Macke asked Options Monster founder Jon Najarian if this rally was the "real deal".
Najarian says "gold is looking good". He also thinks "$1,425 is the next stopping point".
But low and behold, Najarian wants another pullback to $1300 first. Good grief. Why does anyone think they can time anything to that degree?
I suggest it cannot be done. If you think $1,425 is the next stopping point, does it matter that much if you buy at $1300 vs $1325?
Here's the deal: I do not know what the "next stop" is for gold, nor does anyone else. What I do know is that micro-managing entry points, hoping for a $25 pullback when you believe the price is headed $100 or more higher is silly.
By the way, I also think "gold is looking good" here, but I am talking my book as well as my belief. That aside, I am pleased to see all these wimpy bulls. One of these breakouts is going to hold, and I will not be hoping for a pullback when it happens.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Najarian says gold is looking good so far but it's still locked in a range. Where others see resistance in the $1,325 area, Najarian is more optimistic. "It was $1,425 in June of this year. I think that's the next stopping point."Gold "Looking Good" So Why Wait?
Najarian says the trade here is to chill and wait for a pullback. If it gives up the ghost again and drops below $1,300 he's a buyer. If not he's happy to let others chase.
Najarian says "gold is looking good". He also thinks "$1,425 is the next stopping point".
But low and behold, Najarian wants another pullback to $1300 first. Good grief. Why does anyone think they can time anything to that degree?
I suggest it cannot be done. If you think $1,425 is the next stopping point, does it matter that much if you buy at $1300 vs $1325?
Here's the deal: I do not know what the "next stop" is for gold, nor does anyone else. What I do know is that micro-managing entry points, hoping for a $25 pullback when you believe the price is headed $100 or more higher is silly.
By the way, I also think "gold is looking good" here, but I am talking my book as well as my belief. That aside, I am pleased to see all these wimpy bulls. One of these breakouts is going to hold, and I will not be hoping for a pullback when it happens.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What's Next For Housing?
Here are a couple of charts courtesy of Bankrate. The annotations are mine.
15-Year Fixed Rate Mortgages
30-Year Fixed Rate Mortgages
Explaining the Rebound in Housing
If you are looking for what fueled the rebound in home sales and the increase in home prices, look no further than the above chart.
In the two-year period from December 2010 until December 2012, the rate on popular 30-year mortgages fell from 4.97% to 3.42%, a decline of 155 basis points (1.55 percentage points). In April, rates were still near record lows at 3.56%.
Are Mortgage Rates Cheap?
From the record low in December 2012, 30-year fixed rate mortgages have risen 97 basis points to 4.39%.
While still low historically, it's the direction of the trend that is important, not the absolute number. A one percentage point increase in rates decreases housing affordability by 10-11%.
US Treasury Rates
Mortgage rates are generally tied to rates on 10-Year US treasuries. Here is a chart that explains the rise in mortgage rates.
click on chart for sharper image
The above chart from yesterday's post Treasury Yields Rise Following .2% Rise in Retail Sales; Fed Tapering Begins in September?
Treasury Yields and Housing Affordability
On June 24, in 10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability? I commented ...
From the latest Mortgage Bankers Association Weekly Application Survey ...
One week does not make a trend, but the trend looks ominous. The weekly application surveys show a decline in mortgage applications for the 13th time in 15 weeks.
What's Next For Housing?
Curiously, refinance applications although trending lower, still account for about 63% of applications.
I spoke with my friend Michael Becker, a mortgage broker at WCS Funding Group and he commented that he is still refinancing people with rates over 6%. Some people just now have the equity available to refinance.
Yet, with rising rates, the drop in affordability, the pent-up demand to buy declining, and the decline in the number of applications, don't expect too much more (if any), rise in home values. And don't expect mortgage applications to break this trend either.
OK Ben, you still going to taper?
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
15-Year Fixed Rate Mortgages
30-Year Fixed Rate Mortgages
Explaining the Rebound in Housing
If you are looking for what fueled the rebound in home sales and the increase in home prices, look no further than the above chart.
In the two-year period from December 2010 until December 2012, the rate on popular 30-year mortgages fell from 4.97% to 3.42%, a decline of 155 basis points (1.55 percentage points). In April, rates were still near record lows at 3.56%.
Are Mortgage Rates Cheap?
From the record low in December 2012, 30-year fixed rate mortgages have risen 97 basis points to 4.39%.
While still low historically, it's the direction of the trend that is important, not the absolute number. A one percentage point increase in rates decreases housing affordability by 10-11%.
US Treasury Rates
Mortgage rates are generally tied to rates on 10-Year US treasuries. Here is a chart that explains the rise in mortgage rates.
click on chart for sharper image
- $TYX: 30-Year Treasury Yield - Green
- $TNX: 10-Year Treasury Yield - Orange
- $FVX: 05-Year Treasury Yield - Blue
- $IRX: 03-Mnth Treasury Yield - Brown
The above chart from yesterday's post Treasury Yields Rise Following .2% Rise in Retail Sales; Fed Tapering Begins in September?
Treasury Yields and Housing Affordability
On June 24, in 10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability? I commented ...
Anyone who stretched to buy is no longer qualified unless they locked some time ago.Mortgage Applications Decline 13th Time in 15 Weeks
Refinancing will soon be dead in the water (anyone who has not already locked no longer has any incentive) and new home affordability has taken a big hit.
Mainstream media talking heads say this will not affect the housing recovery. Assuming this trend sticks (even if rates simply level off now), how can this bond revolt not affect housing?
From the latest Mortgage Bankers Association Weekly Application Survey ...
- Mortgage applications decreased 4.7 percent from the previous week
- The Refinance Index decreased 4 percent from the previous week
- The seasonally adjusted Purchase Index decreased 5 percent from the previous week
- The unadjusted Purchase Index decreased 6 percent compared with the previous week
One week does not make a trend, but the trend looks ominous. The weekly application surveys show a decline in mortgage applications for the 13th time in 15 weeks.
What's Next For Housing?
Curiously, refinance applications although trending lower, still account for about 63% of applications.
I spoke with my friend Michael Becker, a mortgage broker at WCS Funding Group and he commented that he is still refinancing people with rates over 6%. Some people just now have the equity available to refinance.
Yet, with rising rates, the drop in affordability, the pent-up demand to buy declining, and the decline in the number of applications, don't expect too much more (if any), rise in home values. And don't expect mortgage applications to break this trend either.
OK Ben, you still going to taper?
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Egypt Police Storm Pro-Mursi Camps; Deadly Clashes; Stocks Lower, Market Closed Until August 18
Violence in Egypt took a turn for the worse as Police Storm Pro-Mursi Camps.
Bloomberg reports Egyptian Stocks Lower, Bourse Closed.
http://globaleconomicanalysis.blogspot.com
Egypt’s security forces stormed two sit-ins in Cairo where Islamist supporters of former President Mohamed Mursi have been protesting his overthrow. Bursts of gunfire rang out, and reports of casualties varied widely.Stocks Lower, Market Closed Until August 18
At least 15 people were confirmed dead as security forces moved into the camps at Rabaa and Nahda in the capital, according to Mohamed Sultan, head of the ambulance authority. State TV said the casualties included five police. An e-mailed claim, which couldn’t be independently verified, from a Muslim Brotherhood-led alliance that backs Mursi said more than 2,200 protesters were killed at Rabaa alone.
Image from El Watan/EPA
Protesters' tents burn as Egyptian security forces move in to clear one of the two sit-in sites of supporters of ousted president Morsi, near Rabaa Adawiya mosque, in Cairo, Egypt, on August 14, 2013.
“What happened isn’t the end of instability,” Ziad Akl, a senior analyst with Cairo-based Al Ahram Centre for Political and Strategic Studies. “Dispersing the sit-in just means the Muslim Brotherhood will seek other ways to protest and put pressure on the government.”
Economic Picture ‘Hideous’
“The economic picture remains hideous by any standards,” said Crispin Hawes, head of the Middle East program at the New York-based Eurasia Group, which monitors political risk. “One of the major pillars of the Egyptian economy is tourism. The longer that the violence goes on, the longer it will take for Egypt to recover the type of tourism revenues it was generating before the revolution in 2011. It has all the potential for a major disaster, so much can go wrong.”
Bloomberg reports Egyptian Stocks Lower, Bourse Closed.
All but two stocks on the index fell as police stormed the camps at Rabaa and Nahda in the capital, where Mursi supporters have congregated since he was overthrown by the military last month. The death toll reported by the Health Ministry was disputed by the Muslim Brotherhood, which claims hundreds were killed by security forces. The group and its allies had vowed to maintain demonstrations until Mursi is restored to office.Mike "Mish" Shedlock
“The biggest concern is things on the streets may be getting out of hand and no one knows what the consequences will be,” said Ashraf Akhnoukh, Cairo-based manager for Middle East and North Africa markets at Commercial International Brokerage Co. “For investors, it’s unclear whether this operation can be completed today or if it will be protracted into a street battle that results in a state of emergency or a curfew.”
Bourse Closing
The bourse’s decision to close tomorrow is the first since January 2011, the start of the revolt against former President Hosni Mubarak, when trading was suspended for almost two months. Trading will resume Aug. 18, the bourse said in a statement.
‘Much Worse’
“We now believe that things in Egypt have the strong potential of getting much worse, pushing through the positive aura that has comforted local investors hoping of a business-friendly environment and no MB in combination with pressured fundamentals,” Emad Mostaque, a strategist at Noah Capital Markets, said in the e-mailed note.
http://globaleconomicanalysis.blogspot.com
Selasa, 13 Agustus 2013
Tale of Colours, All in Denial; Assessing Merkel's Chances
The German federal election is on September 22, just over a month away. Merkel's CDU/CSU party will without a doubt receive the most votes. However, winning is not what matters unless there is an outright majority and CDU/CSU is not close to a majority.
The next chancellor will be the one who can put together a majority coalition. On that score, nearly every party is in denial about who they would be willing to form a coalition with.
For more background on the German political parties and what they stand for, please see Understanding German Politics.
Tale of Colours
Currently, not only is every political party short of a majority of votes, every likely coalition is short of votes. I have commented on this before, with input from reader Bernd (not AfD party chairman Bernd Lucke).
Today, the Financial Times has an update on that possibility in its report Germany’s election campaign becomes tale of colour coalitions.
There are two wildcards in the election.
Political parties need to garner 5% of the vote to be represented in parliament. FDP (Merkel's current coalition partner) is right on the bubble, polling close to 5%.
AfD is polling only 2%. However, Bloomberg quotes AfD chairman Bernd Lucke who said "We believe that we’re very close to the 5 percent hurdle". Of course no politician will ever deny hope.
Perhaps more realistically, Bloomberg notes "Allensbach, the company that most accurately predicted the 2009 election outcome, had the party edging up 0.5 percentage point to 3.5 percent support in a July 12 survey."
I have not seen a more recent poll other than unreliable online surveys, so it's hard to assess the chances.
In April, reader Bernd said it was likely AfD would get over 10%. I hopped on that bandwagon myself. But unlike the surge for Beppe Grillo in Italy, AfD just never caught on.
Still 5% is doable for AfD and less than 5% for FDP is also doable (if not likely). Should both happen, it will be even harder for any coalition to put together a majority.
As I have noted before, the price for forming a coalition might easily be the ouster of Merkel or perhaps an agreement that she will step down in two more years.
This election is a lot more open than Merkel supporters would have you believe.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
The next chancellor will be the one who can put together a majority coalition. On that score, nearly every party is in denial about who they would be willing to form a coalition with.
For more background on the German political parties and what they stand for, please see Understanding German Politics.
Tale of Colours
Currently, not only is every political party short of a majority of votes, every likely coalition is short of votes. I have commented on this before, with input from reader Bernd (not AfD party chairman Bernd Lucke).
Today, the Financial Times has an update on that possibility in its report Germany’s election campaign becomes tale of colour coalitions.
Although Angela Merkel is the most popular politician in Germany, and her Christian Democratic Union is the front-running political party, it would be an extraordinary upset for the CDU – with its Bavarian sister party, the Christian Social Union – to win an outright majority. It is currently earning steady 40 per cent support in opinion polls, some 6-7 per cent short of the threshold required to gain outright control of the Bundestag.Wildcards
At this point in the election campaign, however, the game politicians play is to deny they have any intention of taking part in any coalition other than their first preference.
So Ms Merkel is adamant that she wants to keep her present centre-right coalition with the liberal Free Democrats, although its record over the past four years has been very patchy. Constant bickering, especially between the FDP and the conservative CSU, has made the “black-yellow” coalition (named after the respective party colours) much less popular than its constituent parts.
On the left, the Social Democratic party (SPD) and the environmentalist Greens insist that a "red-green” coalition remains their absolute ambition, even though they are currently polling a combined 40 per cent, well short of the majority threshold.
The man who has now put the cat among the pigeons is Gregor Gysi, the sharp-witted and silver-tongued former Communist lawyer who leads the radical Linke – the Left party – in the election campaign. He declared last week that he would happily take part in a “red-red-green” alliance to replace Ms Merkel.
A “grand coalition” of CDU and SPD is the one most Germans (52 per cent in a recent poll) would favour – and most of the outside world. Mr Steinbrück admits it is what Washington, London and most of the rest of the EU would like to see. But he is flatly against it.
From the start of the campaign, he has said he would not serve under Ms Merkel in such a “black-red” alliance, although he was finance minister in the grand coalition she headed from 2005-09. He also fears it would split the SPD.
But if neither black-yellow nor red-green coalitions has a clear majority, what is the alternative?
The only potential coalition that might see Mr Steinbrück as chancellor would be a so-called “traffic light” coalition of SPD, Greens and FDP (red, green and yellow). If a grand coalition is out, and so is black-green and red-red-green, it might be the one workable option.
There are two wildcards in the election.
- FDP - Merkel's current coalition partner
- AfD - Alternative für Deutschland (Alternative for Germany) a eurosceptic party
Political parties need to garner 5% of the vote to be represented in parliament. FDP (Merkel's current coalition partner) is right on the bubble, polling close to 5%.
AfD is polling only 2%. However, Bloomberg quotes AfD chairman Bernd Lucke who said "We believe that we’re very close to the 5 percent hurdle". Of course no politician will ever deny hope.
Perhaps more realistically, Bloomberg notes "Allensbach, the company that most accurately predicted the 2009 election outcome, had the party edging up 0.5 percentage point to 3.5 percent support in a July 12 survey."
I have not seen a more recent poll other than unreliable online surveys, so it's hard to assess the chances.
In April, reader Bernd said it was likely AfD would get over 10%. I hopped on that bandwagon myself. But unlike the surge for Beppe Grillo in Italy, AfD just never caught on.
Still 5% is doable for AfD and less than 5% for FDP is also doable (if not likely). Should both happen, it will be even harder for any coalition to put together a majority.
As I have noted before, the price for forming a coalition might easily be the ouster of Merkel or perhaps an agreement that she will step down in two more years.
This election is a lot more open than Merkel supporters would have you believe.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Treasury Yields Rise Following .2% Rise in Retail Sales; Fed Tapering Begins in September?
The Census Bureau reports retail sales rose for a fourth consecutive month, up 0.2% in July. Retail sales missed economist expectations of a 0.3% rise, but June month was revised up.
Retail Sales vs. Previous Months
July 2013 Retail Sales vs. July 2012
I am not sure how much longer auto sales will lead retail sales, but sooner or later, a huge plunge is in store.
With mortgage rates generally tied to the 10-year treasury yield, housing is already under pressure from the rise in treasury yields.
Treasury Yields
Overall, retail sales were strong enough to push treasury yields back towards the July high.
The next three charts show treasury yields multiplied by 10. Shift the decimal point one digit to the left for an accurate read.
$TNX 10-Year Treasury Yield
$TYX 30-Year Treasury Yield
$FVX 5-Year Treasury Yield
Historical Perspective
Curve Watchers Analysis captured the following chart this morning.
click on chart for sharper image
Tapering Expectations
Bloomberg reports Bernanke Seen Slowing QE to $65 Billion in September.
Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed’s monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News.
Half of economists held that view in the July 18-22 survey, up from 44 percent in last month’s poll.
After today's rise in treasury yields, that number is likely more than 50% and/or the expected tapering amount greater than $20 billion.
It will be interesting to watch the Fed's reaction when housing and autos slump, the stock market takes a hit, and treasury yields continue to rise in the next few months.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Retail Sales vs. Previous Months
July 2013 Retail Sales vs. July 2012
I am not sure how much longer auto sales will lead retail sales, but sooner or later, a huge plunge is in store.
With mortgage rates generally tied to the 10-year treasury yield, housing is already under pressure from the rise in treasury yields.
Treasury Yields
Overall, retail sales were strong enough to push treasury yields back towards the July high.
The next three charts show treasury yields multiplied by 10. Shift the decimal point one digit to the left for an accurate read.
$TNX 10-Year Treasury Yield
$TYX 30-Year Treasury Yield
$FVX 5-Year Treasury Yield
Historical Perspective
Curve Watchers Analysis captured the following chart this morning.
click on chart for sharper image
- $TYX: 30-Year Treasury Yield - Green
- $TNX: 10-Year Treasury Yield - Orange
- $FVX: 05-Year Treasury Yield - Blue
- $IRX: 03-Mnth Treasury Yield - Brown
Tapering Expectations
Bloomberg reports Bernanke Seen Slowing QE to $65 Billion in September.
Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed’s monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News.
Half of economists held that view in the July 18-22 survey, up from 44 percent in last month’s poll.
After today's rise in treasury yields, that number is likely more than 50% and/or the expected tapering amount greater than $20 billion.
It will be interesting to watch the Fed's reaction when housing and autos slump, the stock market takes a hit, and treasury yields continue to rise in the next few months.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Senin, 12 Agustus 2013
I Can't Get No Satisfaction
Following several months of 30% readings (not that 30% is anything to brag about), U.S. Satisfaction Sinks to 22% in August
Regardless, it's time for a musical tribute.
Link if video does not play: Rolling Stones: "Satisfaction!"
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
U.S. satisfaction suffered a setback this month, after a two-month upswing. Twenty-two percent of Americans say they are satisfied with the direction of the country, down from 28% in July and 27% in June. Three-quarters of Americans are now dissatisfied with the nation's course, up from 68% in July.Gallup expressed the opinion the drop in satisfaction levels was political rather that economic. I suggest otherwise, but it's hard to say given the up and down fluctuation this year.
In general, are you satisfied with the way things are going in the Unites States at this time?
Given the decline, America's mood is now on par with the lowest readings seen since early 2012, including March of this year, when 21% were satisfied.
Democrats maintain higher satisfaction than either political independents or Republicans, a pattern seen throughout President Barack Obama's White House tenure. Nevertheless, their satisfaction fell seven percentage points this month (from 44% to 37%), consistent with the six-point drop among Republicans (from 14% to 8%), and slightly greater than the four-point drop among independents (from 25% to 21%).
Regardless, it's time for a musical tribute.
Link if video does not play: Rolling Stones: "Satisfaction!"
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Finding Hope When It's Hopeless
The New York Times reports Greek Economy Shrinks for 20th Straight Quarter
Allegedly GDP improving from negative 4.6% to the target of negative 4.2% provides a glimmer of hope.
Please be serious. This is what the Greek unemployment rate looks like.
Youth unemployment is about 65%. Let's assume the Greek economy improves steadily over the next two years and by 2015 Greece does even better than expected and achieves 0% growth.
Three Questions
Hope is an illusion provided by economists who think Greece should stay committed to the Euro even as the cancer of unemployment spreads and numerous structural problems remain unsolved.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
The Greek economy posted its 20th consecutive quarterly decline in the three months through June, government data showed on Monday, but a slower pace of contraction provided a glimmer of hope for beleaguered Greeks.Illusion of Hope
Gross domestic product shrank by 4.6 percent in the second quarter compared with the same three months a year earlier, the official Hellenic Statistical Authority said. That was an improvement from the first quarter of 2013, when the economy contracted 5.6 percent compared with a year earlier.
Ben May, an economist in London with Capital Economics, said the latest number was “encouraging, as it looks like the quarterly pace of decline is slowing.” An analysis of the second-quarter figure suggested that G.D.P. might have ticked up by about one-tenth of a percent from the first quarter, he said.
“The troika’s forecast for a 4.2 percent annual decline in 2013 looks achievable,” Mr. May said.
But it remains “plausible,” he said, that the Greek economy will continue shrinking into 2015. He forecast a 2 percent decline in G.D.P. for next year, followed by a 0.5 percent contraction in 2015.
Allegedly GDP improving from negative 4.6% to the target of negative 4.2% provides a glimmer of hope.
Please be serious. This is what the Greek unemployment rate looks like.
Youth unemployment is about 65%. Let's assume the Greek economy improves steadily over the next two years and by 2015 Greece does even better than expected and achieves 0% growth.
Three Questions
- Can Greece suffer through another two years of rising unemployment and stay committed to the Euro?
- What will the unemployment numbers look like in two years?
- How fast will the unemployment rate drop when growth does return?
Hope is an illusion provided by economists who think Greece should stay committed to the Euro even as the cancer of unemployment spreads and numerous structural problems remain unsolved.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Minggu, 11 Agustus 2013
How Fast Can China Grow? Not as Fast as Most Analysts Think
Via Email, Michael Pettis at China Financial Markets quantifies various growth and investment scenarios. Pettis maintains 6% or higher growth is not plausible and that even 3-4% growth may be optimistic. What follows is from Pettis ...
Consumption and Investment Growth Under Rebalancing
Under specified rebalancing assumptions for China it is possible to calculate arithmetically the annual growth rate for consumption and investment under different GDP growth scenarios. This allows us to decide whether these scenarios are plausible or not.
Table: GDP, consumption, and investment growth in a rebalancing China
To read the table, let us start by assuming, as an example, that we believe the average GDP growth rate over the ten-year period will be 6%. For China to do a minimal amount of rebalancing that gets consumption to 50% of GDP and investment to 40% of GDP, we can quickly figure out what the corresponding growth rates of consumption and investment must be. Consumption must grow by 9.9% a year and investment must grow by 4.5% a year to get us there.
Notice the reason why I do it this way rather than the “normal” way most other economists would. Instead of estimating what I expect the growth rates in consumption and investment will be, and then calculating the implicit GDP growth rate from those numbers, I start with an assumed GDP growth rate and then calculate what the implicit growth rates in consumption and investment must be in order for rebalancing to take place. I am not making predictions, in other words. I am simply working out logically what any GDP growth rate must imply in terms of consumption and investment growth rates in order for China to rebalance.
This allows me to make statements like this: If you think that China’s GDP will grow by 7% a year over the next decade, and if you expect a minimal amount of rebalancing, then you are implicitly predicting that consumption will grow by 10-11% a year for ten years and that investment will grow by 4-5.5%. If you believe these two implicit predictions are plausible, then your 7% prediction is also plausible.
I want to state again that these numbers are not predictions. They are simply the arithmetically necessary growth rates that are consistent with our assumptions. To return to the interpretation of the table, let us assume again that China does the minimal amount of rebalancing so that in ten years household consumption is 50% of GDP and investment is 40% of GDP, what are the investment and consumption growth rates consistent with, say, 6% GDP growth, and are they plausible?
It turns out that average GDP growth rates of 6% require, as an arithmetical necessity, that household consumption grow by 9.9% a year over the next ten years and that investment grow by 4.5%, after many years of high double digit growth and more recently growth in the low double digits. Is this plausible?
I would argue that positive investment growth rates for another ten years are highly likely to result in our reaching debt capacity constraints well before the end of the decade, so I am skeptical about the investment implications of this scenario. By the way some analysts have mischievously pointed to the very poor construction quality in China to argue that investment growth rates have to stay high just in order to account for higher-than-estimated depreciation costs, and that this suggests that China can grow faster than what we might otherwise assume.
This of course is nonsense. The fact that buildings and infrastructure are poorly constructed means that China is worse off, not better off, and the investment projects will ultimately be required to generate sufficient returns to pay off even more debt than originally estimated. Because it is debt capacity constraints that constrain investment, anything that creates debt without creating additional productivity to service the debt cannot possibly be a solution. Higher-than-expected depreciation increases debt relative to debt-servicing capacity.
I would also argue, more importantly, that if annual investment growth drops to 4.5%, and GDP growth to 6%, it will be very difficult, without significant and politically painful transfers from the state sector to the household sector, for consumption to grow at anywhere close to 9.9% a year for ten years. Consumption growth is, after all, positively correlated with investment growth, especially in the internal provinces upon which a lot of useless investment has been lavished.
In order to get Chinese households to increase their consumption by nearly 10% every year, I would argue that household income would have to grow at that rate, which means that wages, interest rates, and the value of the renminbi should in the aggregate increase rapidly to get consumption to rise fast enough, and of course since it is precisely low wage growth, low interest rates, and an undervalued currency that goose GDP growth, reversing them is not consistent with high GDP growth.
Can consumption grow at close to 10% for ten years while household income grows much more slowly? Yes, of course it can, if the household savings rate declines, but as China’s economy slows and as concerns about debt rise, it seems to me a tad optimistic to assume that the household savings rate will decline sharply. Rising income and rising uncertainty both suggest that we should expect higher, not lower, household savings rates, which in turn imply that household income must grow faster, not slower, than household consumption.
All of this suggest to me that while 6% GDP growth for the next ten years might not be impossible, it is extremely unlikely because it requires what are to me implausible assumptions about the ability to maintain and increase already-high levels of investment without increasing the debt burden unsustainably and about the rise in the growth rate of household income as both GDP and investment growth drop sharply. This is why even 6% annual GDP growth rates, which are still lower than most current growth projections for China, are implausibly high, in my opinion.
What about if you believe that reducing investment is a much more urgent priority than raising consumption? In that case you might argue that China can grow at 6% while the household consumption share of GDP rises to 50% and the investment share of GDP declines to 35%.
In that case you are implicitly assuming that household consumption will grow on average by 9.9% a year for ten years while investment grows by 3.1% a year. Is this possible? Of course it is. Is it plausible? Again, only if you believe that investment growth can drop sharply while the growth in household consumption rises to nearly 10% a year for ten years.
So what is plausible? My working assumption, which I acknowledge is probably still optimistic, is that somehow or the other Beijing can keep household consumption growing at around 7-8% a year, even with a sharp decline in the investment growth rate and with the pressing need to clean up the banking system (and remember that traditionally, in China and elsewhere, cleaning up the banking system always means finding ways of getting the household sector to pay for the losses).
I know many consider assumption this to be a little optimistic, but if Beijing is worried about the social implications of adjustment, this is probably the target it will need to meet, and Beijing can do so even with much slower GDP growth if the leadership implements mechanisms that transfer wealth from the state sector to the household sector. I discuss why this is the right growth rate for to target in more detail in a recent piece published on the Carnegie Endowment website and in an OpEd piece in the Financial Times.
The table above shows that if China is to do the minimal amount of rebalancing, which requires that the world accommodate for another ten years large Chinese trade surpluses, and that debt can continue to grow – quickly but at a lower rate than in the past – for another ten years without pushing China up against its debt capacity constraints, 7-8% growth in household consumption is consistent with roughly 3-4% growth in GDP. It is also consistent with more or less no growth in investment, which would after ten years bring the investment level down to 35% of GDP.
These numbers are, I think, plausible if still a little optimistic. This is something, in other words, that I think Beijing can reasonably pull off – if it is able to manage political opposition from the domestic elite – because they can transfer resources from the state sector to the household sector at a pace necessary to keep the growth rate of household income and household consumption fairly high. However GDP growth rates significantly above 3-4%, I would argue, require assumptions that are unlikely to be met unless Beijing is able radically to transform its attitude to state ownership and the power of the elite, and so embark on a major transfer of assets from the state to the household sector.
This is why I have argued since 2009 that that 3-4% average GDP growth for a decade is likely to be the upper limit once Beijing seriously begins to rebalance the Chinese economy, and if the administration of President Xi and Premier Li is able to pull this off, it would be a huge accomplishment. China would rebalance substantially, the problem of debt would have been managed relatively well, and the income of average Chinese households will have nearly doubled over the decade. The key assumption, of course, is that in the face of a sharp drop in investment, Beijing is nonetheless able to maintain current high levels of consumption growth.
Before closing it is worth pointing out that many analysts have told me that they do not think it is possible for household income growth to exceed GDP growth for many years. But why not? After all state income growth exceeded household income growth for many years, and if Beijing reverses the mechanism that accomplished this – albeit with political difficulty – it can reverse the relative growth rates. More importantly, Japan did just this after 1990, when GDP grew by around 0.5% annually but household income and household consumption grew by between 1% and 2%. The US did this too in the early 1930s when, if I remember correctly, household income and household consumption dropped by a lot less than GDP (around 35%) and investment (around 90%).
But notice these two examples. One occurred under conditions of no growth and the other under conditions of negative growth. Severely unbalanced systems always rebalance in the end, but the process of rebalancing is rarely easy.
End Pettis
Michael Pettis stresses his table is not a series of predictions, but rather a mathematical model of what is probable or not. I agree with his model. If correct, a slow-growth China is baked in the cake, and that is going to catch nearly every economist off guard. Every country will be impacted, but especially the commodity exporters like Australia and Canada.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Consumption and Investment Growth Under Rebalancing
Under specified rebalancing assumptions for China it is possible to calculate arithmetically the annual growth rate for consumption and investment under different GDP growth scenarios. This allows us to decide whether these scenarios are plausible or not.
Table: GDP, consumption, and investment growth in a rebalancing China
To read the table, let us start by assuming, as an example, that we believe the average GDP growth rate over the ten-year period will be 6%. For China to do a minimal amount of rebalancing that gets consumption to 50% of GDP and investment to 40% of GDP, we can quickly figure out what the corresponding growth rates of consumption and investment must be. Consumption must grow by 9.9% a year and investment must grow by 4.5% a year to get us there.
Notice the reason why I do it this way rather than the “normal” way most other economists would. Instead of estimating what I expect the growth rates in consumption and investment will be, and then calculating the implicit GDP growth rate from those numbers, I start with an assumed GDP growth rate and then calculate what the implicit growth rates in consumption and investment must be in order for rebalancing to take place. I am not making predictions, in other words. I am simply working out logically what any GDP growth rate must imply in terms of consumption and investment growth rates in order for China to rebalance.
This allows me to make statements like this: If you think that China’s GDP will grow by 7% a year over the next decade, and if you expect a minimal amount of rebalancing, then you are implicitly predicting that consumption will grow by 10-11% a year for ten years and that investment will grow by 4-5.5%. If you believe these two implicit predictions are plausible, then your 7% prediction is also plausible.
I want to state again that these numbers are not predictions. They are simply the arithmetically necessary growth rates that are consistent with our assumptions. To return to the interpretation of the table, let us assume again that China does the minimal amount of rebalancing so that in ten years household consumption is 50% of GDP and investment is 40% of GDP, what are the investment and consumption growth rates consistent with, say, 6% GDP growth, and are they plausible?
It turns out that average GDP growth rates of 6% require, as an arithmetical necessity, that household consumption grow by 9.9% a year over the next ten years and that investment grow by 4.5%, after many years of high double digit growth and more recently growth in the low double digits. Is this plausible?
I would argue that positive investment growth rates for another ten years are highly likely to result in our reaching debt capacity constraints well before the end of the decade, so I am skeptical about the investment implications of this scenario. By the way some analysts have mischievously pointed to the very poor construction quality in China to argue that investment growth rates have to stay high just in order to account for higher-than-estimated depreciation costs, and that this suggests that China can grow faster than what we might otherwise assume.
This of course is nonsense. The fact that buildings and infrastructure are poorly constructed means that China is worse off, not better off, and the investment projects will ultimately be required to generate sufficient returns to pay off even more debt than originally estimated. Because it is debt capacity constraints that constrain investment, anything that creates debt without creating additional productivity to service the debt cannot possibly be a solution. Higher-than-expected depreciation increases debt relative to debt-servicing capacity.
I would also argue, more importantly, that if annual investment growth drops to 4.5%, and GDP growth to 6%, it will be very difficult, without significant and politically painful transfers from the state sector to the household sector, for consumption to grow at anywhere close to 9.9% a year for ten years. Consumption growth is, after all, positively correlated with investment growth, especially in the internal provinces upon which a lot of useless investment has been lavished.
In order to get Chinese households to increase their consumption by nearly 10% every year, I would argue that household income would have to grow at that rate, which means that wages, interest rates, and the value of the renminbi should in the aggregate increase rapidly to get consumption to rise fast enough, and of course since it is precisely low wage growth, low interest rates, and an undervalued currency that goose GDP growth, reversing them is not consistent with high GDP growth.
Can consumption grow at close to 10% for ten years while household income grows much more slowly? Yes, of course it can, if the household savings rate declines, but as China’s economy slows and as concerns about debt rise, it seems to me a tad optimistic to assume that the household savings rate will decline sharply. Rising income and rising uncertainty both suggest that we should expect higher, not lower, household savings rates, which in turn imply that household income must grow faster, not slower, than household consumption.
All of this suggest to me that while 6% GDP growth for the next ten years might not be impossible, it is extremely unlikely because it requires what are to me implausible assumptions about the ability to maintain and increase already-high levels of investment without increasing the debt burden unsustainably and about the rise in the growth rate of household income as both GDP and investment growth drop sharply. This is why even 6% annual GDP growth rates, which are still lower than most current growth projections for China, are implausibly high, in my opinion.
What about if you believe that reducing investment is a much more urgent priority than raising consumption? In that case you might argue that China can grow at 6% while the household consumption share of GDP rises to 50% and the investment share of GDP declines to 35%.
In that case you are implicitly assuming that household consumption will grow on average by 9.9% a year for ten years while investment grows by 3.1% a year. Is this possible? Of course it is. Is it plausible? Again, only if you believe that investment growth can drop sharply while the growth in household consumption rises to nearly 10% a year for ten years.
So what is plausible? My working assumption, which I acknowledge is probably still optimistic, is that somehow or the other Beijing can keep household consumption growing at around 7-8% a year, even with a sharp decline in the investment growth rate and with the pressing need to clean up the banking system (and remember that traditionally, in China and elsewhere, cleaning up the banking system always means finding ways of getting the household sector to pay for the losses).
I know many consider assumption this to be a little optimistic, but if Beijing is worried about the social implications of adjustment, this is probably the target it will need to meet, and Beijing can do so even with much slower GDP growth if the leadership implements mechanisms that transfer wealth from the state sector to the household sector. I discuss why this is the right growth rate for to target in more detail in a recent piece published on the Carnegie Endowment website and in an OpEd piece in the Financial Times.
The table above shows that if China is to do the minimal amount of rebalancing, which requires that the world accommodate for another ten years large Chinese trade surpluses, and that debt can continue to grow – quickly but at a lower rate than in the past – for another ten years without pushing China up against its debt capacity constraints, 7-8% growth in household consumption is consistent with roughly 3-4% growth in GDP. It is also consistent with more or less no growth in investment, which would after ten years bring the investment level down to 35% of GDP.
These numbers are, I think, plausible if still a little optimistic. This is something, in other words, that I think Beijing can reasonably pull off – if it is able to manage political opposition from the domestic elite – because they can transfer resources from the state sector to the household sector at a pace necessary to keep the growth rate of household income and household consumption fairly high. However GDP growth rates significantly above 3-4%, I would argue, require assumptions that are unlikely to be met unless Beijing is able radically to transform its attitude to state ownership and the power of the elite, and so embark on a major transfer of assets from the state to the household sector.
This is why I have argued since 2009 that that 3-4% average GDP growth for a decade is likely to be the upper limit once Beijing seriously begins to rebalance the Chinese economy, and if the administration of President Xi and Premier Li is able to pull this off, it would be a huge accomplishment. China would rebalance substantially, the problem of debt would have been managed relatively well, and the income of average Chinese households will have nearly doubled over the decade. The key assumption, of course, is that in the face of a sharp drop in investment, Beijing is nonetheless able to maintain current high levels of consumption growth.
Before closing it is worth pointing out that many analysts have told me that they do not think it is possible for household income growth to exceed GDP growth for many years. But why not? After all state income growth exceeded household income growth for many years, and if Beijing reverses the mechanism that accomplished this – albeit with political difficulty – it can reverse the relative growth rates. More importantly, Japan did just this after 1990, when GDP grew by around 0.5% annually but household income and household consumption grew by between 1% and 2%. The US did this too in the early 1930s when, if I remember correctly, household income and household consumption dropped by a lot less than GDP (around 35%) and investment (around 90%).
But notice these two examples. One occurred under conditions of no growth and the other under conditions of negative growth. Severely unbalanced systems always rebalance in the end, but the process of rebalancing is rarely easy.
End Pettis
Michael Pettis stresses his table is not a series of predictions, but rather a mathematical model of what is probable or not. I agree with his model. If correct, a slow-growth China is baked in the cake, and that is going to catch nearly every economist off guard. Every country will be impacted, but especially the commodity exporters like Australia and Canada.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Sabtu, 10 Agustus 2013
Obama's Cream Puff Plan to Reform US Surveillance Program
On Friday, president Obama announced a plan to reform NSA surveillance.
Don't expect much of anything to come out of it. It's a dog and pony show designed to make people feel better as opposed to any solid measures as to how much data government collects on everyone.
Here are excerpts from the above article with my comments interspersed.
Independent: President Obama told a packed room of journalists at the White House Friday afternoon that he will work to reform Section 215 of the Patriot Act - the provision which currently allows the federal government’s intelligence agencies to collect domestic phone data.
The President also said that he will work to increase oversight with regards to the Foreign Intelligence Surveillance Court - the secretive judicial body that authorizes the government to collect data on communications coming in and out of the United States.
Obama said the reform will be accompanied with the roll-out of a new website which will provide Americans and people around the world the ability to learn more about the surveillance programs.
Obama: "The US will “make public as much information about these programs as possible.”
Mish: Expect to discover that the only thing "possible" is a bunch of government propaganda designed to purposely mislead the public about the extent of government data gathering activities.
Independent: Obama said he is forming an outside advisory panel to review the surveillance programs, assigning a privacy officer at the National Security Agency and creating an independent attorney to challenge the government’s spy policies in court.
Mish: The NSA advisory panel will have as much say as an advisory panel of ants at an anteater convention.
Obama: "No, I don’t think Mr. Snowden was a patriot,” Obama said. “I called for a thorough review of our surveillance operations before Mr. Snowden made these leaks. My preference, and I think the American people’s preference, would have been for a lawful, orderly examination of these laws. A thoughtful, fact-based debate that would then lead us to a better place."
Mish: Snowden is a hero.
Obama: "So the fact is that Mr. Snowden has been charged with three felonies,” added Obama. “If in fact he believes that what he did was right, then like every American citizen he can come here, appear before a court with a lawyer and make his case. If the concern was that somehow this was the only way to get this information out to the public, I signed an executive order well before Mr. Snowden leaked this information that provided whistleblower protection to the intelligence community for the first time. So there were other avenues available for someone whose conscious was stirred."
Mish: There were no other avenues that would have done anything about the blatantly illegal data gathering other than making everything public.
Obama: "If you are outside of the intelligence community, if you are the ordinary person, and you start seeing a bunch of headlines saying, ‘US, Big Brother looking down on you, collecting telephone records, etc.,’ well, understandably people would be concerned. I would be too if I wasn’t inside the government. It's not enough for me to have confidence in these programs. The American people have to have confidence in them as well."
Mish: Obama has confidence in something blatantly illegal, and he has the gall to insist you should have equal confidence.
Obama: "The question is: How do I make the American people more comfortable?”
Mish: The answer is: Stop the spying on US citizens and stop the spying on our allies as well.
Obama: "I am comfortable that the program is currently not being abused"
Mish: Even if one foolishly believes spying on US citizens is constitutional, Snowden proved without a doubt the program was repeatedly and purposely abused. And that makes the president a blatant liar.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Don't expect much of anything to come out of it. It's a dog and pony show designed to make people feel better as opposed to any solid measures as to how much data government collects on everyone.
Here are excerpts from the above article with my comments interspersed.
Independent: President Obama told a packed room of journalists at the White House Friday afternoon that he will work to reform Section 215 of the Patriot Act - the provision which currently allows the federal government’s intelligence agencies to collect domestic phone data.
The President also said that he will work to increase oversight with regards to the Foreign Intelligence Surveillance Court - the secretive judicial body that authorizes the government to collect data on communications coming in and out of the United States.
Obama said the reform will be accompanied with the roll-out of a new website which will provide Americans and people around the world the ability to learn more about the surveillance programs.
Obama: "The US will “make public as much information about these programs as possible.”
Mish: Expect to discover that the only thing "possible" is a bunch of government propaganda designed to purposely mislead the public about the extent of government data gathering activities.
Independent: Obama said he is forming an outside advisory panel to review the surveillance programs, assigning a privacy officer at the National Security Agency and creating an independent attorney to challenge the government’s spy policies in court.
Mish: The NSA advisory panel will have as much say as an advisory panel of ants at an anteater convention.
Obama: "No, I don’t think Mr. Snowden was a patriot,” Obama said. “I called for a thorough review of our surveillance operations before Mr. Snowden made these leaks. My preference, and I think the American people’s preference, would have been for a lawful, orderly examination of these laws. A thoughtful, fact-based debate that would then lead us to a better place."
Mish: Snowden is a hero.
Obama: "So the fact is that Mr. Snowden has been charged with three felonies,” added Obama. “If in fact he believes that what he did was right, then like every American citizen he can come here, appear before a court with a lawyer and make his case. If the concern was that somehow this was the only way to get this information out to the public, I signed an executive order well before Mr. Snowden leaked this information that provided whistleblower protection to the intelligence community for the first time. So there were other avenues available for someone whose conscious was stirred."
Mish: There were no other avenues that would have done anything about the blatantly illegal data gathering other than making everything public.
Obama: "If you are outside of the intelligence community, if you are the ordinary person, and you start seeing a bunch of headlines saying, ‘US, Big Brother looking down on you, collecting telephone records, etc.,’ well, understandably people would be concerned. I would be too if I wasn’t inside the government. It's not enough for me to have confidence in these programs. The American people have to have confidence in them as well."
Mish: Obama has confidence in something blatantly illegal, and he has the gall to insist you should have equal confidence.
Obama: "The question is: How do I make the American people more comfortable?”
Mish: The answer is: Stop the spying on US citizens and stop the spying on our allies as well.
Obama: "I am comfortable that the program is currently not being abused"
Mish: Even if one foolishly believes spying on US citizens is constitutional, Snowden proved without a doubt the program was repeatedly and purposely abused. And that makes the president a blatant liar.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Jumat, 09 Agustus 2013
French Egg Producers Smash 300,000 Eggs and Demand Government Action to Raise Prices
Farmers in France are on an egg-smashing rampage in protest of low prices.
The farmers want the government to "do something" such as put a quota on eggs or create a "special site where eggs can be destroyed".
If that is not bureaucratic insanity, what is?
Rather than receive €4.50 for 100 eggs, the farmers would rather receive nothing. Actually, the farmers should be fined for cleanup costs so they should receive less than nothing for smashing their production in public places, creating a smelly mess in the process.
I have a simple solution.
If you do not like the price, don't produce the eggs. Selling eggs for €4.50 when it costs €7 to produce them is not smart business. Nor is it smart economics to force everyone to pay more for eggs for the benefit of a few egg producers to the detriment of everyone else.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Farmers in northwest France have vowed to escalate an egg-smashing rampage they began this week in protest at low prices and rising production across the EU.Collective Insanity
The protesters say a 2012 European directive, which obliges egg producers to improve the wellbeing of hens by increasing the size of their cages, has forced them to invest millions of euros to cover the upgrade.
On Tuesday night masked members of the informal collective vented their frustration by dumping 100,000 eggs – about 5 per cent of their output – from the backs of vehicles in the small Brittany town of Ploumagoar.
A day later, they descended on Carhaix. On Thursday, it was the turn of Morlaix, where they left 100,000 smashed eggs outside the tax office. Residents were quick to complain about the smell.
The producers have called on the government to help co-ordinate a 5 per cent reduction in the country’s production, and to designate a special site where eggs can be destroyed.
On Friday, Sébastien Salliou, a local producer, said that prices had sunk so low that he was now selling 100 eggs at €4.50, even though his break-even price was €7. He also said that the European directive had forced him to spend about €2m on infrastructure adjustments for his business of 100,000 hens.
The farmers want the government to "do something" such as put a quota on eggs or create a "special site where eggs can be destroyed".
If that is not bureaucratic insanity, what is?
Rather than receive €4.50 for 100 eggs, the farmers would rather receive nothing. Actually, the farmers should be fined for cleanup costs so they should receive less than nothing for smashing their production in public places, creating a smelly mess in the process.
I have a simple solution.
If you do not like the price, don't produce the eggs. Selling eggs for €4.50 when it costs €7 to produce them is not smart business. Nor is it smart economics to force everyone to pay more for eggs for the benefit of a few egg producers to the detriment of everyone else.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
When Will Spanish Banking System Collapse?
The question on my mind today is "When will the Spanish banking system collapse?" Spain's exposure to Portuguese sovereign debt and unrealized losses on real estate loans are two reasons a collapse in inevitable.
The Spanish banking system passed a so-called "stress test" in 2012, but sovereign government bonds are are not included in the evaluation.
We saw how well that worked with Greece (over and over again), and with Cyprus as well. It was Cypriot exposure to Greek bonds that collapsed the Cypriot banking system.
With that backdrop, please consider Will Portugal Bring Down the Spanish Banking Sector?
Recall that seven banks that now make up Bankia collapsed over bad real estate loans. Exposure to Greek bonds was not even the issue with Bankia, and the banks allegedly passed stress tests. Bankia needed a bailout, then another. And it is going to need another.
Also recall that Greek bonds suffered thru round after round of haircuts which in turn caused a collapse in the Cypriot banking system. Sometime down the line, the same thing is going to hit Spanish banks.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
The Spanish banking system passed a so-called "stress test" in 2012, but sovereign government bonds are are not included in the evaluation.
We saw how well that worked with Greece (over and over again), and with Cyprus as well. It was Cypriot exposure to Greek bonds that collapsed the Cypriot banking system.
With that backdrop, please consider Will Portugal Bring Down the Spanish Banking Sector?
At its peak in the second quarter of 2008, France’s exposure to Greece totaled $86 billion. That exposure has since plummeted, partly because French banks took advantage of the ECB’s Securities Market Programme (SMP) during 2010-11 to fob off Greek bonds, effectively forcing a eurozone mutualization of the debt. SMP was terminated in September 2012.Stress-Free Tests
What is much less widely known is that Spanish bank exposure to Portugal today, as shown in our Geo-Graphic, is higher than French bank exposure to Greece in early 2010, despite the fact that the Spanish banking sector is only 40% the size of the French. Spanish bank stress tests in 2012 suggested that the capital hole was more manageable than widely feared, but those tests looked only at the domestic lending books; foreign assets were excluded.
A restructuring of Portuguese sovereign debt similar to the one completed by Greece, which involved haircuts of over 50%, could wreak havoc on Spain’s banking system. Yet delaying restructuring, as Greece is showing, may simply drag down Portugal—whose debt-to-GDP ratio is expected to approach 125% next year—faster and further, worsening creditor losses.
Without an SMP to mutualize Spanish bank exposure to Portugal, the way it mutualized French bank exposure to Greece, delaying a Portuguese restructuring will also do nothing to help Spain weather the shock. The euro area has already lent Spain €41.3 billion to recapitalize its banks, but finding a politically palatable way to convert that debt into mutualized eurozone equity may be a necessary cost of sustaining the European single currency.
Recall that seven banks that now make up Bankia collapsed over bad real estate loans. Exposure to Greek bonds was not even the issue with Bankia, and the banks allegedly passed stress tests. Bankia needed a bailout, then another. And it is going to need another.
Also recall that Greek bonds suffered thru round after round of haircuts which in turn caused a collapse in the Cypriot banking system. Sometime down the line, the same thing is going to hit Spanish banks.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Ambrose Evans-Pritchard's Disingenuous Strawman "Defend Europe, If You Still Dare"
Inquiring minds are reading the Telegraph article "Defend Europe, If You Still Dare" by Ambrose Evans-Pritchard.
Yes, Ambrose, the Monetarist and the Keynesians did indeed warn Brussels. The Austrians warned Brussels as well. So did the eurosceptics. So stop pretending Keynesian or Monetarist policy was the right response.
The problems in Europe are structural and many. The euro is a structural problem, the "one size fits Germany" interest rate policy by the ECB is a structural problem, trade deficit settlement via Target 2 mechanisms is a structural problem.
Work rules, pensions, and unions are a structural problem of varying magnitude in various countries, with Greece, Italy, Spain, and France at the top of the list.
European policymakers are indeed "like the generals of Verdun, the Somme, and Passchendaele, sending their youth straight into the barbed wire".
However, spending money countries do not have can hardly be a solution to those structural issues! Pray tell Ambrose, what good would it do? What problems does it fix?
The same applies to monetarist idiocy of printing more money and having all of it sit as excess reserves at banks.
It is the Austrian-eurosceptics that have it right. The eurozone needs to break up. Greece, France, Italy, Spain, and Portugal are in serious need of work rule reform, pension reform, and public sector reforms of all sorts.
Instead you pour it on as if the Keynesians and Monetarists had something other than can-kicking exercises in mind. They don't and you don't either which is quite sad given you were one of the original euroscpetics.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
The youth jobless rate in Greece has just reached 64.9pc.Message to Ambrose
Little to add. This is pure policy error. Europe has needlessly pushed the whole EMU bloc into a deep double-dip recession, and the longest unbroken contraction since World War Two.
Keynesians warned them. Monetarists warned them. Anbody with any common sense warned them, but no, they believed in their quack theories of expansionary fiscal contraction — even when conducted without the anaesthetic of monetary stimulus.
European policymakers are like the generals of Verdun, the Somme, and Passchendaele, sending their youth straight into the barbed wire.
Europe's leaders still blame this crisis on America. You can only laugh or cry.
Is anybody on this comment thread really willing to defend EMU any longer?
Yes, Ambrose, the Monetarist and the Keynesians did indeed warn Brussels. The Austrians warned Brussels as well. So did the eurosceptics. So stop pretending Keynesian or Monetarist policy was the right response.
The problems in Europe are structural and many. The euro is a structural problem, the "one size fits Germany" interest rate policy by the ECB is a structural problem, trade deficit settlement via Target 2 mechanisms is a structural problem.
Work rules, pensions, and unions are a structural problem of varying magnitude in various countries, with Greece, Italy, Spain, and France at the top of the list.
European policymakers are indeed "like the generals of Verdun, the Somme, and Passchendaele, sending their youth straight into the barbed wire".
However, spending money countries do not have can hardly be a solution to those structural issues! Pray tell Ambrose, what good would it do? What problems does it fix?
The same applies to monetarist idiocy of printing more money and having all of it sit as excess reserves at banks.
It is the Austrian-eurosceptics that have it right. The eurozone needs to break up. Greece, France, Italy, Spain, and Portugal are in serious need of work rule reform, pension reform, and public sector reforms of all sorts.
Instead you pour it on as if the Keynesians and Monetarists had something other than can-kicking exercises in mind. They don't and you don't either which is quite sad given you were one of the original euroscpetics.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Kamis, 08 Agustus 2013
Reflections on "Paper Reserves" of Central Banks; Gold and the Tapering Disconnect
In Fed Balance Sheet vs. Stock Market; Will QE Cause Inflation? I posted an interesting chart by reader Tim Wallace of the stock market vs. Fed asset holding (repeated below for convenience).
Fed Balance Sheet vs. Stock Market
But what about foreign central bank assets, especially China and Japan?
Reflections on "Paper Reserves" of Central Banks
Hugo Salinas Price covers the topic in an excellent article Some Thoughts on 'International Reserves'
It should be crystal clear this "game" cannot possibly continue forever. Yet, the doves on the Fed, notably Janet Yellen (who amazingly is even more dovish than Bernanke), act and talk as if it can.
Is any "tapering" going to occur? Certainly the Fed is not going to hike rates, even if some small amount of tapering does occur.
This setup should be good for gold, but it sure hasn't.
Curiously, the stock market acts as if no tapering is coming, but gold acts as if the Fed is actually about to tighten, not just taper.
As with perpetually rising trade deficits, this disconnect will not go on forever, but I cannot say when it ends, and nor can anyone else.
For more on the balance of trade problem and how to permanently fix it, please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Fed Balance Sheet vs. Stock Market
But what about foreign central bank assets, especially China and Japan?
Reflections on "Paper Reserves" of Central Banks
Hugo Salinas Price covers the topic in an excellent article Some Thoughts on 'International Reserves'
International reserves, excluding gold, as reported by Bloomberg, courtesy of Doug Noland at www.prudentbear.com on July 26, 2013, stood at $11.167 Trillion dollars.Gold and the Tapering Disconnect
International reserves, excluding gold, are mainly made up of dollar and euro holdings.
On August 1, 2011, holdings amounted to $10.063 Trillion dollars. One year later, holdings had increased to $10.450 Trillion dollars, an increase of $387 billion dollars.
In the most recent twelve months, holdings have increased by $717 billion dollars, to the present level of $11.167 Trillion dollars.
International reserves increase when importing countries cannot pay for their imports with exports; in other words, when the importing countries have “trade imbalances” and make up the trade imbalance by sending (mainly) either dollars or euros to the exporting countries.
The increase in “International Reserves Excluding Gold” from 1971 to the present - 42 years – has been spectacular.
It is important to note that “International Reserves” are invested in diverse Bonds, prima facie evidence that trade imbalances have not been settled since 1971. Settlement happens when a debt is paid. If a country owns Bonds, it is a holder of debt and has not been paid. Had the trade imbalances been settled, International Reserves would be not much different from what they were in 1971.
“International Reserves” thus represent credit which the exporting countries of the world have granted to the importing countries which use dollars and euros as money; when these countries tender dollars or euros in “payment”, they are not settling any debt; they are simply running up more debts with the exporting countries. $11.167 Trillion dollars and counting. The Reserves earn interest – they are invested in Bonds – and so the Reserves must also grow, as interest earned accumulates.
When and how will this increase in the debt of the importing countries to the exporting countries find a limit?
10 days, 10 weeks, 10 months, 10 years – nobody knows. But this game is going to end, someday, and its ending will be painful. When the dust settles, a whole new world will replace the present one. We have no idea what it will look like, but it will be here, populated by humanity who will not cease to wonder: “What were they thinking?”
It should be crystal clear this "game" cannot possibly continue forever. Yet, the doves on the Fed, notably Janet Yellen (who amazingly is even more dovish than Bernanke), act and talk as if it can.
Is any "tapering" going to occur? Certainly the Fed is not going to hike rates, even if some small amount of tapering does occur.
This setup should be good for gold, but it sure hasn't.
Curiously, the stock market acts as if no tapering is coming, but gold acts as if the Fed is actually about to tighten, not just taper.
As with perpetually rising trade deficits, this disconnect will not go on forever, but I cannot say when it ends, and nor can anyone else.
For more on the balance of trade problem and how to permanently fix it, please see Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
300 Tons a Day of Nuclear Waste from Japan's Fukushima Nuclear Plant Pours Into Ocean
Officials in Japan hid the fact that the Fukushima nuclear plant has been pouring hundreds of tons of nuclear waste water into the ocean every day and that a containment barrier has been breached.
Here are a few links.
On Tuesday the BBC reported Fukushima Radioactive Leak a New Emergency
On Wednesday, Reuters announced Japan says Fukushima leak worse than thought, government joins clean-up
The Huffington Post Has additional details as well as a video and slideshow in Fukushima Leak Is An 'Emergency,' Watchdog Official Says
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Here are a few links.
On Tuesday the BBC reported Fukushima Radioactive Leak a New Emergency
Japan's nuclear watchdog has said the crippled Fukushima nuclear plant is facing a new "emergency" caused by a build-up of radioactive groundwater.Last Friday, Energy News reported "Contaminated underground water may have moved above ground" at Fukushima plant
A barrier built to contain the water has already been breached, the Nuclear Regulatory Authority warned.
This means the amount of contaminated water seeping into the Pacific Ocean could accelerate rapidly, it said.
NHK, August 3, 2013: [...] TEPCO admitted during the [Friday] meeting that contaminated underground water may have moved aboveground along seawalls that were solidified to stop leakages. TEPCO’s proposals include construction of a new facility to gather underground water flowing toward the seaside of the plant and begin pumping water in late August. Experts in the group urged TEPCO to implement the measures ahead of schedule, citing the seriousness of the problem. [...]300 Tons a Day of Nuclear Waste Water Per Day
Asahi Shimbun, August 3, 2013: [...] The immediate concern is radioactive water seeping along the seaward side of the No. 1 to No. 3 reactors and spilling into the sea. [...] the water level in observation wells has risen sharply to about 1 meter from the ground’s surface, [...] the walls can only be built with their tops at 1.8 meters beneath the surface. That means the water levels in the observation wells have already risen above the top edges. If such a situation continues, the completed barriers will be unable to prevent the water from reaching the ocean. In addition, calculations show that if the water levels continue to rise at the current pace, contaminated water will flood the surface in about three weeks. [...]
On Wednesday, Reuters announced Japan says Fukushima leak worse than thought, government joins clean-up
Highly radioactive water from Japan's crippled Fukushima nuclear plant is pouring out at a rate of 300 tonnes a day, officials said on Wednesday, as Prime Minister Shinzo Abe ordered the government to step in and help in the clean-up.Fukushima Nuclear Plant Video, Slide Show
The revelation amounted to an acknowledgement that plant operator Tokyo Electric Power Co (Tepco) has yet to come to grips with the scale of the catastrophe, 2 1/2 years after the plant was hit by a huge earthquake and tsunami. Tepco only recently admitted water had leaked at all.
The leak from the plant 220 km (130 miles) northeast of Tokyo is enough to fill an Olympic swimming pool in a week. The water is spilling into the Pacific Ocean, but it was not immediately clear how much of a threat it poses.
As early as January this year, Tepco found fish contaminated with high levels of radiation inside a port at the plant. Local fishermen and independent researchers had already suspected a leak of radioactive water, but Tepco denied the claims.
"We think that the volume of water (leaking into the Pacific) is about 300 tonnes a day," said Yushi Yoneyama, an official with the Minister of Economy, Trade and Industry, which oversees energy policy.
Tatsuya Shinkawa, a director in METI's Nuclear Accident Response Office, told reporters the government believed water had been leaking for two years, but Yoneyama told Reuters it was unclear how long the water had been leaking at the current rate.
Shinkawa described the water as "highly" contaminated.
Tepco and the industry ministry have been working since May on a proposal to freeze the soil to prevent groundwater from leaking into the reactor buildings.
Similar technology is used in subway construction, but Chief Cabinet Secretary Yoshihide Suga said that the vast scale of Tepco's attempt was "unprecedented in the world."
The technology was proposed by Kajima Corp, , a construction company already heavily involved in the clean-up.
Experts say maintaining the ground temperatures for months or years would be costly. The plan is to freeze a 1.4 km (nearly one mile) perimeter around the four damaged reactors by drilling shafts into the ground and pumping coolant through them.
"Right now there are no details (of the project yet). There's no blueprint, no nothing yet, so there's no way we can scrutinise it," said Shinji Kinjo, head of the task force set up by the nuclear regulator to deal with the water issue.
The Huffington Post Has additional details as well as a video and slideshow in Fukushima Leak Is An 'Emergency,' Watchdog Official Says
Tokyo Electric Power Co. (TEPCO), the plant's operator, admitted last month that contaminated water from Fukushima had leaked into the underground water system and reached the sea. The company gave its first estimate of the extent of the leak this weekend.There is no credibility from TEPCO or the Japanese government on the extent of the real disaster, its effects, the ultimate cleanup costs, or how many years fish in the area will be contaminated. In addition, contaminated fish may turn up anywhere within their normal swimming range with obvious implications.
According to AFP, TEPCO estimates between 20 trillion and 40 trillion becquerels of radioactive tritium have spilled into the ocean.
UPI explains a becquerel is a unit of radioactivity, "the quantity of radioactive material in which one nucleus decays per second."
TEPCO long denied radioactive water had been leaking into the ocean, the AP notes, despite reports that biologists had found traces of radioactive cesium in fish. The operator eventually admitted to both the leak and having postponed acknowledgment the crisis.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Rabu, 07 Agustus 2013
US Consumer Spending Flat Since March - Gallup
A Gallup Poll headline says "U.S. Self-Reported Spending Flat Since May"
However, the charts show stagnation since March. Let's take a look.
Survey Question
The survey question was "Not counting the purchase of a home or vehicle or your normal household bills, how much money did you spend or charge yesterday on all other types of purchases you may have made such as at a store, restaurant, online, or elsewhere?"
In simple terms, Gallup was checking up on self-reported consumer discretionary spending.
Conclusions
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
However, the charts show stagnation since March. Let's take a look.
U.S. self-reported daily consumer spending was $89 in July, unchanged from the $90 of June and May. The relatively flat spending levels of the past five months are consistent with the weak GDP reports of the past three quarters and the lack of improvement Gallup finds in its Payroll to Population employment rate over the past couple of years.
Trend in Self-Reported Spending
Spending began the year at $80 in January and $83 in February. Consumers opened their wallets some more in March, spending an average of $89, reflecting the normally expected seasonal spring increase in sales.
However, consumer spending has remained basically at that level since -- in the face of what are normally positive seasonal factors such as warmer weather, home improvement projects, and spring and summer travel. Longer-term, Americans' self-reported spending is much stronger than it was from late 2008 to late 2011, but continues to trail early 2008, before the recession gained momentum.
Spending Across Income Levels Also Relatively Flat
Upper-income spending inched up to $158 in July, from $143 in June and $150 in May. But the upper-income spending data tend to be more volatile due to the smaller sample sizes involved, and the overall trend seems to be essentially flat over the past five months -- with a peak of $166 in March and a low of $140 in April.
Lower- and middle-income spending averaged $78 per day in July, similar to the $77 per day in June and May, and the $75 in March. Spending by this group in 2013 has been in a relatively narrow range, from a high of $78 last month to a low of $70 in January.
Survey Question
The survey question was "Not counting the purchase of a home or vehicle or your normal household bills, how much money did you spend or charge yesterday on all other types of purchases you may have made such as at a store, restaurant, online, or elsewhere?"
In simple terms, Gallup was checking up on self-reported consumer discretionary spending.
Conclusions
Even as Wall Street is reaching new record highs, questions remain about the strength of the Main Street economy. Gallup's self-reported spending results for July suggest the underlying economy remains fragile at best. This aligns with recent weak GDP reports, the lack of increase in full-time jobs with employers, the slight decline in economic confidence, and Friday's mixed, but also relatively weak, Bureau of Labor Statistics jobs report.I agree with the above conclusions, written by Dennis Jacobe, Chief Economist for Gallup.
The reason spending hasn't in fact declined over the past several months may be that the Federal Reserve's efforts to flood the economy with money have not only been supportive of Wall Street, but also bolstered durable goods values in general, including housing and autos.
Still, at this point, Gallup's economic data do not support the idea of a significantly improving U.S. economy in the second half of the year. In turn, this suggests retailers may be disappointed with the Back-to-School spending season.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Fed Balance Sheet vs. Stock Market; Will QE Cause Inflation? US in a Minsky Bubble? About to Go Japanese? Looming Credit Crunch?
In response to Japan Near Stagnation Following 9 Months of Growth; Service Sector Prices Back in Deflation; Spotlight on Abenomics My friend "BC" writes ...
Japan M2
Japan M3
Japan GDP
Fed Balance Sheet vs. Stock Market
The above chart from reader Tim Wallace.
US in a Minsky Bubble?
John Hussman had a thought-provoking article this week on the The Minsky Bubble
Inflationists and hyperinflationists have a watchful eye on the rise in treasury yields. Forget about it. I explained why in Message to 5.7 Million Truck Drivers "No Drivers Needed" Your Job is About to Vanish; Time Marches On, Fed Resistance is Futile.
John Hussman offers a similar take in The Price of Distortion
Let's wrap up the discussion with a look at Another Looming Credit Crunch?
Four Questions Four Answers
Here is a short recap of all the questions asked and answered above
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
With little or no bank lending growth, decelerating wage growth, and trend growth of real GDP per capita at 0% to negative implies the 3- and 5-year change rates of US M2+ will decelerate from 2-3% to 0-1% in the next 5-6 years as occurred during the early to late '00s in Japan.
We're not turning Japanese because we want to, and we have convinced ourselves that we won't, even though the too-big-to-fail banks and Fed are responding in precisely the manner one would expect as we, in fact, turn increasingly Japanese.
The S&P 500 is ~200% overvalued in this context in a classic "Minsky Bubble".
Japan M2
Japan M3
Japan GDP
Fed Balance Sheet vs. Stock Market
The above chart from reader Tim Wallace.
US in a Minsky Bubble?
John Hussman had a thought-provoking article this week on the The Minsky Bubble
What’s fascinating about QE is that it has no transmission mechanism to the real economy except as a weak can-kicking exercise - and even then only by creating enormous distortions in pursuit of minute "wealth effects." The risk premiums of risky securities have become unsustainably compressed in the process, and the Fed's balance sheet has metastasized to $3.5 trillion - a level that would currently require a nearly $800 billion contraction just to normalize short-term interest rates by a quarter of one percent.Will QE Cause Inflation?
The central effect of QE is not on the real economy, but on financial speculation. The Fed purchases Treasury and mortgage securities, and creates new base money (currency and bank reserves) as payment. This results in a huge pool of zero-interest assets that someone in the economy has to hold at any given point in time. This zero-interest money is a “hot potato” that creates discomfort and encourages a tendency to “reach for yield” in more speculative assets. Undoubtedly, the universal attention to Fed actions has already created a mob psychology where, to use Kindleberger’s words, “virtually each of the participants in the market changes his or her views at the same time and moves as a herd.”
It’s worth observing that the 10-year Treasury yield is also well above the weighted average interest rate since 2010 (weighting by the quantity of Fed purchases), which means that the Fed is underwater on its holdings. Bernanke himself noted at his recent Humphrey-Hawkins testimony that the recent rise in interest rates had wiped out all of the Fed’s unrealized gains, though he feigned ignorance about how much the Fed would lose if interest rates increased by 100 basis points. The math is easy enough, so let’s do it for him. At $3.5 trillion in assets having an estimated duration of about 8 years, against only $55 billion in capital, a 100 point increase in interest rates would wipe out the Fed’s capital five times over. The Fed would probably show an insolvent balance sheet today if its holdings were actually marked-to-market.
The boom of the Minsky model is fueled by the expansion of credit. Minsky noted that ‘euphoria’ might develop at this stage. Investors buy goods and securities to profit from the capital gains associated with the anticipated increases in their prices. The authorities recognize that something exceptional is happening and while they are mindful of earlier manias, ‘this time it’s different,’ and they have extensive explanations for the difference.
“The continuation of the process leads to what Adam Smith and his contemporaries called ‘overtrading.’ This term is not precise and includes speculation about increase in the prices of assets or commodities, an overestimate of prospective returns, and ‘excessive leverage.’ Speculation involves buying assets for resale at higher prices rather than for their investment income. The euphoria leads to an increase in optimism about economic growth and about the increase in corporate profits.
“A follow-the-leader process develops as firms and households see that speculators are making a lot of money. ‘There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich.’ Unless it is to see a non-friend get rich.
“Investors rush to get on the train even as it accelerates. As long as the outsiders are more eager to buy than the insiders are to sell the prices of the assets or securities increase. As the buyers become less eager and the sellers become more eager, an uneasy period of ‘financial distress’ follows. Other words used to describe the interval between the end of euphoria and the onset of what classic writers called revulsion and discredit (or crash and panic) are uneasiness, apprehension, tension, stringency, pressure, uncertainty, ominous conditions, fragility.
We’ve learned all too well that each round of QE has at least enough impact to kick the can down the road for a couple of quarters at a time, at the cost of greater distortions. As thoughtful economists like Lakshman Achuthan and value investors like Jeremy Grantham and Seth Klarman know, this has temporarily made fools out of geniuses and geniuses out of fools. So refraining from any forecast of what will happen in the near term, it’s sufficient to observe that the economic data is not nearly as strong as widely perceived, and the impact of QE on stock prices does nothing to improve the underlying cash flows. The advance of recent months has only made the prospect for dismal long-term equity returns even worse. QE has no ability to improve that situation. At this point, it can only elevate the distortion and thereby worsen the outcome. It’s doubtful that investors who are enjoying the thrill of recent highs will actually realize the benefit of these prices.
Inflationists and hyperinflationists have a watchful eye on the rise in treasury yields. Forget about it. I explained why in Message to 5.7 Million Truck Drivers "No Drivers Needed" Your Job is About to Vanish; Time Marches On, Fed Resistance is Futile.
John Hussman offers a similar take in The Price of Distortion
With respect to monetary policy, the Fed has now pushed the size of the monetary base to over 20 cents per dollar of nominal GDP. We know from a century of data that short-term interest rates are tightly linked to the monetary base.Another Looming Credit Crunch?
Essentially, as the Fed creates more zero-interest money (relative to nominal GDP), cash becomes a "hot potato" and holders of cash seek alternatives, which drives down competing yields, particularly on "near-money" like Treasury bills. At present, the Fed is pushing on a string, and the entire force of Fed policy is based on the attempt to drive investors to hold securities of greater and greater risk in return for lower and lower prospective returns. All this despite decades of data that reject the notion of a material "wealth effect" from stock values to economic activity. People consume from their view of "permanent income" and do not respond to changes in the value of volatile assets - this is well established in both theory and evidence.
Note how far we have pushed the string. The Fed would have to reduce its portfolio by well over half to raise interest rates to 2%. So even if the Fed was to completely terminate new purchases of Treasury securities, that action would not be expected to raise short-term interest rates. This underscores the fact that reducing the pace of quantitative easing is not the same thing as raising the Fed’s policy rates. But it should also underscore how far the Fed’s policy has already gone, and how difficult it will be to normalize over time.
Frankly, I view the present course of monetary policy as reckless - not because it threatens inflation (which I don't think it will for several years), but because it diverts scarce capital away from productive investment and toward speculative activities; because it fails to act on any economic constraint that is actually binding here, so has little hope of providing the economic "support" that it purports to offer; because decades of historical evidence provide no basis to expect a material "wealth effect" from stock values to the economy; because the policy lowers hurdle rates and encourages borrowing for unproductive purposes - including stock buybacks at record highs (and there is no evidence that buybacks are a good indication of value); because it punishes the elderly on fixed incomes; because it perpetuates a bubble-bust cycle created by Fed intervention, which is not the medicine but the very poison itself; and because moving to the left on the liquidity preference curve will likely be as painful as moving to the right has been pleasant. Meanwhile, we’ll continue along a studied, disciplined course over the remainder of this market cycle, considering a broad ensemble of evidence that has been validated across market cycles throughout history. Our views will change as that evidence does.
Let's wrap up the discussion with a look at Another Looming Credit Crunch?
Thanks to an over-flowing cup of Fed liquidity, corporate debt maturities have not only been pushed out in time but have risen in their nominal outstandings as cheap financing was too good to ignore (especially for those firms on the bubble of failure). The problem these firms face now is, with the Fed set to Taper (and indeed tighten on rates in the next few years); the outlook of much higher bond yields will have a major impact on firms that levered up and used this period to 'survive'.
As is clear from the chart above, debt maturities [rollovers and refinancing needs] will once again surge in 2-3 years. The message once again appears to be - there's no free lunch as the Fed has merely dragged forward exuberance at the expense of dystopia in the not so distant future.
Four Questions Four Answers
Here is a short recap of all the questions asked and answered above
- US in a Minsky Bubble? Yes - And one of huge magnitude as well
- About to Go Japanese? Yes - Fed policies ensure that outcome
- Will QE Cause Inflation? No - Not any time soon
- Another Looming Credit Crunch? Yes - Corporations will not be able to roll over debts at such low rates again
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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