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Tuesday, July 31, 2012 12:58 PM

ESM Banking License? Not Happening as Merkel Allies Harden Opposition

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So far it's been nothing but hot air and no action from ECB president Mario Draghi after he pledged to do whatever it takes to save the euro.

One of the highly-touted ideas as of late has been a ESM banking license. However, the idea is not really new, and has been shot down repeatedly already. Nonetheless eurocrats like Jean-Claude Juncker, chairman of the eurogroup, keep bringing the idea up as if the answer will change. 

It won't. Bloomberg reports Merkel Allies Harden Opposition to Granting ESM Bank License

German Chancellor Angela Merkel’s coalition rejected granting the permanent euro rescue fund access to European Central Bank liquidity via a banking license, as the Finance Ministry said it saw no need for any such move.

The rules of the European Stability Mechanism don’t provide for refinancing through the ECB, the ministry in Berlin said today in an e-mailed response to questions. The ministry isn’t holding talks on the topic nor are secret meetings taking place on such proposals, it said.

France and Italy are building support for a previously floated plan to allow the permanent backstop to wield unlimited firepower courtesy of the ECB, Germany’s Sueddeutsche Zeitung newspaper reported today, citing a European Union official it didn’t name. Leading ECB governing council members are among those who now back the idea, the newspaper said.

Lawmakers from all three parties in Merkel’s coalition immediately repudiated the suggestion. It is a “dangerous attempt” to bypass the ban on the central bank financing states directly, said Hans Michelbach of the Bavarian Christian Social Union. The Free Democratic Party’s Rainer Bruederle told Die Welt newspaper such a mechanism is a “wealth-destroying weapon,” while Norbert Barthle of Merkel’s Christian Democratic Union said it won’t happen.

“Those who try to circumvent their own rules through the back door lose their legitimacy in the eyes of the public,” Michelbach said in an e-mailed statement. “Financing debt by means of the printing press leads to growing inflation dangers.”
One would hope this message would sink through the thick heads of the eurocrats, but it probably won't.

 OK Mario, ball is in your court. What are you going to do?

Mike "Mish" Shedlock
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11:14 AM

100,000 Workers in Spain Will Not be Paid Because Regional Government of Catalona is Broke

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The crisis in Spanish regional governments continues to escalate. El Pais reports Catalona Will Not Pay Hospitals or Private Centers and 100,000 workers are affected.

This month, the Government of Catalona cannot tackle  payments owed to hospitals, schools, residences, social organizations, and children in care centers and workshops. These are the services provided by entities, public and private, funded by the Government but managed not depend on it.

The move affects up to 7,500 associations and some 100,000 workers, according to the third sector.

The news that the Government could not meet its commitments this month was confirmed on Monday after several days of negotiations with the affected entities. Sources from the Departments of Health and Welfare explained ten days ago it "could not meet the payments this month." Welfare, however, has ensured that other non-contributory pensions paid or the minimum income.

The federations that warn-grouped after an emergency meeting with Social Welfare that many of them are on the verge of "collapse" in a situation "unprecedented". And is that the default is added to other cuts that have affected the sector this year, as 56% of the budget on labor market policies.

The Catalan Association of Relief calculated that 63% of companies cannot meet the payroll this month. To alleviate this choke, Acra has asked for help from families, proposing that advance a couple of months of contributions.

This is not the first time that the Government is obliged to defer payment of the concerts. It happened last September when he could only address 65% of the amount and the rest was paid by the end of the year.
The idea that Spain can avoid a complete sovereign bailout seems pretty absurd at this point. The solution, of course, is a combination of default, a eurozone exit, work rule reform, and pension reform, but so far there is no rational discussion of those ideas at the highest levels.

Mike "Mish" Shedlock
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4:08 AM

Recent Gold Hype Sounds Like Grade-School Chant; Five Non-Hype Reasons to Own Gold

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Reader David emailed a link to GATA, SHAKA ZULU, And The Coming Gold/Silver STORM! with a note "please see fit to write about this!!!"

The article is by Bill Murphy, the Gold Anti-Trust Action Committee (GATA) chairman. Here are the key snips.

To get right to the point, three quality sources told me three weeks ago that the gold and silver markets were going to take off in August and I have been pounding the table on such ever since.

It is time for things to happen. As you know by now, I have been jumping up and down for fireworks to happen in August. We shall see. All I can say is that what has been brought to my attention over last three week period from the "best of" sources all points to the same conclusion. It will be nitty gritty time SOON. Perhaps that “soon” is “now” the way gold has traded the past three days.

If what I think I know is correct, it will be time to pour it on our adversaries and send them running for the hills.
Grade-School Chant

As I read that, I was wondering what exactly I was supposed to comment on. Murphy has three sources, all unnamed. 

Worse yet, Murphy will not even state what the news is. The entire posts smacks of the playground chant "I know something you don't know, a ha, and a hen, and a ho ho ho."

There is no story here, there is not even a rumor. There is only a rumor of a rumor. I am commenting because I was asked.


Murphy has at least one thing going for his call: seasonality. August is generally (but not always) a good time to buy gold.

If nothing happens, Murphy will be on his bull horn complaining of manipulation, singing the same tired chant about gold shorts suppressing the price of gold.


Is the gold market manipulated?  A better question is "what isn't?" Certainly the Fed manipulates interest rates. The LIBOR scandal proved banks acted to manipulate LIBOR. The rating agencies manipulated pure garbage into AAA rated securities.

Nearly everything is manipulated to some degree. However, I do not believe it is possible to manipulate prices for decades against the long-term trend.

If there has been an effort to suppress the price of gold it certainly has failed miserably. Gold has gone from $250 to $1900 and is now $1620.

Yet, every time gold declines the conspiracy clowns scream manipulation as if the price can never go down ever. Now they are singing playground chants.

Five Reasons to Own Gold

There are plenty of reasons to own gold without all the needless hype.

  1. Gold is a nice insurance policy against a currency crisis and I think one is coming. When or what country kicks things off that crisis, I don't know, but I suspect it is more likely to be the Japan, Italy, or some other country in Europe as opposed to the US.
  2. Gold, contrary to popular myth, is actually a great hedge against deflation in the senior currency (clearly the US dollar).
  3. Physical gold is a currency that is not someone else's liability and cannot be printed electronically.
  4. Central banks (not just the Fed) have been pouring on the liquidity as the global economy moves from one crisis to another. Odds strongly favor more coordinated central bank liquidity moves, and those liquidity moves tend to benefit gold in the long-haul.
  5. Should the world return to a gold standard with a 100% gold-backed dollar, $1600 an ounce will likely look like an extreme bargain. 

GATA would be wise to stop the needless hype and instead concentrate on fundamentals because "I know something but I ain't sayin' what" is sure a silly thing for anyone to be banking on.

Mike "Mish" Shedlock
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Monday, July 30, 2012 10:33 PM

Shades of 2006: That's What Australia Housing Bubble Looks Like From US Perspective

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The Australia housing market did not bust when it should of and the delay is going to be painful. The bigger the bubble, the bigger the crash, and the Australia bubble is bigger than we saw in the US.

On a timeline basis, Australia is about where the US was in 2006, essentially  a state of denial.

Developers are offering massive incentives such as cars, furniture, and vacations to move homes while chanting the ever-popular "now is a great time to buy a house" mantra.

Gifts Galore

The Age reports Gifts galore boost flagging unit sales

Developers are slashing apartment prices and handing out tens of thousands of dollars in incentives - including rebates, cars, furniture and holidays - to lure buyers into Melbourne's new-unit market.

While many industry players say the offers are good news for buyers, others worry that the discounting could fuel a "race to the bottom" that could harm property values.

"There's no question there are a lot of apartments under construction, so everyone's trying to attract attention to get people to inquire about theirs," said Robert Pradolin, general manager at developer Australand.

"It's probably a very good time to buy because there are a lot of incentives around, but buyers still need to be really careful that they are picking a place based on its location, quality and who the developer is."

In one case, Maxx Apartments announced a "massive St Kilda apartments sale" in a series of large advertisements. The promotion saw $121,000 cut from the cost of a two-bedroom flat and the price of a $415,000 one-bedroom unit reduced by 18 per cent.

Late last year, a $65,000 Mercedes was offered to the first buyer of one of four luxury apartments that remained unsold in a Brighton development. Rubicon Pacific used the teaser despite already dropping prices by $150,000 to $200,000 on apartments first listed at up to $1.3 million.

Other developers have followed suit, launching campaigns that provided $5000 to $20,000 rebates on top of the $13,000 available to first home buyers before July 1. Some have tried to lure investors with offers of guaranteed rental income for up to five years.

Agency Castran Gilbert said the offer of a holiday for two to Palm Cove for buyers in the Brunswick West development Portez led to a 50 per cent spike in inquiries.
No Auction Bidders

Similar to the US condo bust in which bidders vanished overnight, The Age notes Empty auctions: 'op shop' listings
What if you put your house up for auction but nobody turned up? Not even the neighbours for a stickybeak?

Well, that happened at the weekend, with agents from Hocking Stuart and Buxton real estate left standing alone in the pouring rain.

Auctioneers put their hammers away for two houses in Elwood, with the owners deciding to cancel at the last minute due to no interest at all. In all, eight auctions were put off.

Inner west agent Craig Stephens, managing director Jas H Stephens, said it was "rare to have no one rock up" to an auction, but he has noticed an increasing number of buyers waiting to negotiate after auction.

"It's definitely a buyers market at the moment and those buyers are being a bit fickle," he said. "But good houses in good streets still sell and some property is being sold one or two weeks after auction."

He said many vendors were holding off, with a pick up in listings for auctions in late September and early October. "It looks as though there could be a pick up in supply in the second half of the year," he said.

Hocking Stuart agent David Sullivan said the owner of its property that had zero attendees did not want to comment. Buxton did not return calls.
This is how downturns major start: price wars, incentives, and still no bidders. Given that it's only 2006, Australia has a long way to the bottom.

Mike "Mish" Shedlock
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1:18 PM

Eurozone Retail Sales Sink 9th Month; 17th Month of Contraction in Italy; Margins Collapse in France; Germany Barely Above Contraction

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Eurozone retail sales continue to dive and not even Germany is immune. German manufacturing has been in contraction off-and-on, and retail sales are once again on the verge contraction as well.

Let's take a look at some reports.

Italy Retail Sales Slump Extends to 17th Month

Markit reports Downturn in retail sales continues in July


July data pointed to a further reduction in activity in the Italian retail sector, with sales down markedly both on the month and compared with levels one year ago. The rates of decline in employment, purchasing activity and inventories all accelerated, while profitability continued to deteriorate sharply. Cost pressures, however, eased to the weakest in 20 months amid stronger competition between suppliers.

The downturn in Italy’s retail sector extended to a seventeenth month in July. Furthermore, the rate of contraction in like-for-like sales accelerated from the previous month and was marked. This was signalled by the seasonally adjusted Italian Retail PMI® posting 40.7, down from 41.7 in June.

Italian retailers generally fell short of their targets set for July.

Employment levels continued to fall during July, extending the ongoing sequence of contraction to 55 months. Moreover, after slowing to the weakest in eight months during the preceding survey period, the rate of job shedding accelerated and was
marked overall.
Sales Fall Sharply in France

Markit France PMI shows Record Drop in Retail Margins

French retailers encountered another tough month in July. Sales fell at a sharper rate on both a monthly and an annual basis, while margins were squeezed to the greatest extent in the survey history. The pace of job shedding accelerated [fastest rate in nearly three years], while retailers scaled back their purchasing of goods and lowered their inventories.

The headline Retail PMI® remained below the 50.0 no-change mark for a fourth successive month in July. At 46.7, down from 48.9 in June, the index signalled an acceleration in the monthly rate of decline in sales.

Gross margins in the French retail sector continued to decline in July. Moreover, the latest fall was the sharpest in the history of the survey. Panellists indicated that margins were squeezed by the need to engage in substantial discounting and promotional activity in the face of an increasingly competitive trading environment.
German Retail Sales on Verge of Contraction

Markit reports German Retail PMI hits three-month low during July

The recent rebound in German retail sales faded in July, with like-for-like sales rising only marginally since the previous month. At 50.3, down from 52.4 in June, the seasonally adjusted Germany Retail PMI signalled the slowest expansion in the current three-month period of growth.

German retailers indicated that their actual sales fell short of their initial plans in July, and by the greatest margin since January. Anecdotal evidence mainly cited weaker than anticipated underlying consumer demand. July data indicated that retailers are downbeat about their prospects for reaching sales targets in one month’s time. The degree of negative sentiment was the most marked since that recorded in December 2009.
Eurozone Retail Sales Sink 9th Month

Markit reports Eurozone retail sales fall for ninth month running in July
Key points:

Revenue downturn continues at faster rate
Near-record drop in gross margins
Wholesale price inflation strengthens

Eurozone retail sales fell on an annual basis for the fourteenth successive month in July. The rate of contraction was little-changed from June’s sharp pace, and much faster than the long-run average for the survey. Sales fell rapidly in Italy, extending the current sequence of decline to two-and-a-half years. France also posted a steep fall, the fifth in successive months. Sales were up compared with a year earlier in Germany, and at the fastest rate since March.

Retailers cut back on staffing in July. The current period of job shedding now stretches to four months, and the rate of reduction accelerated to a 32-month record. French and Italian retailers reduced their workforces on average, with the steeper decline posted among the latter. Italian retailers have shed staff every month since January 2008. In contrast, German retailers raised headcounts for the twenty-sixth successive month.
Mike "Mish" Shedlock
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9:34 AM

51% of Germans Believe Germany Better Off Outside Eurozone, 71% Favor Greece Leaving; Implications on Constitutional Court Ruling

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A recent poll says 51 percent of Germans now believe Germany would be better off without the euro.

The Emnid poll for the Bild am Sonntag mass circulation weekly showed 51pc of Germans believed Europe's top economy would be better outside the 17-country eurozone. Twenty-nine percent said it would be worse off, AFP reports.

The survey also showed that 71pc of Germans wanted Greece to leave the euro if it did not live up to its austerity promises.

Economy Minister Philipp Roesler told Bild am Sonntag there were "considerable doubts whether Greece is living up to its reform promises."
Implications on Constitutional Court Ruling

That poll, with only 29% believeing the euro is a good thing, suggests that if the German constitutional court forced Merkel to put the euro to a referendum, that Germany would vote to leave the eurozone.

On September 12, the German constitution court is expected to rule on the ESM as well as the fiscal treaty chancellor Angela Merkel signed in March.

Is it any wonder ECB president Mario Draghi is loathe to do anything but talk before the court meets?

Should the court rule both are OK, eurocrats like Jean-Claude Juncker will immediately seek to change what the ESM can do, including the use of leverage.

Let Voters Decide

Given that Germany is better off outside the eurozone, and the eurozone is arguably better off without Germany, hopefully, the constitutional court will say it's time to put all of this to voters, including whether Germany should stay in the eurozone.

Unfortunately, I expect the court will OK both the ESM and the Merkozy treaty, but give further warnings to Merkel and the ECB that 500 million euros is the limit.

Mike "Mish" Shedlock
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Sunday, July 29, 2012 8:44 PM

JCPenney to Eliminate All Checkout Clerks, Instead Using RFID Chips and Self-Checkout; End of JCPenny? How Many Jobs At Risk?

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By 2014 JCPenney PLans to Eliminate All Check-Out Clerks, and instead use self-checkout machines and RFID chips.

Struggling retailer JCPenney is making some big changes that will affect customers and its clerks. The store is getting rid of its check-out counters.

CEO Ron Johnson said it will remove check-out counters in stores and replace them with a system that won't require clerks. It's all part of an effort to return the department store chain to profitability.

Shoppers will be able to use self check-out machines, similar to those found in grocery stores.

JCPenney is also planning to replace traditional bar codes on price tags with high-tech radio frequency identification, or "RFID" chips to make purchases faster.

Johnson told "Fortune" magazine he hopes to phase out check-out counters by 2014.
End of JCPenny?

My first thought was a question: Will this work?

A move to entirely self-service is a risky bet-the-company type of move.

Given that many large grocery stores have both self-checkout and manned checkout lanes, I suspect in reality that JCPenny will not go big-bang with this concept but instead will use a series if trials to see how customers respond.

How Many Jobs At Risk?

I personally loathe self-checkout but it's not my opinion that counts. If there are enough who think like me, and JCPenny does go big-bang, this move will the death of JCPenny.

However, If I am wrong, then note that JCPenny has 1100 stores so we are talking about the elimination of lots of jobs. Also note that if the move by JCPenny is successful, other stores will follow.

Finally, even if this ends up as a half-way measure, we are talking about the elimination of tens of thousands of jobs if other stores follow suit.

Mike "Mish" Shedlock
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11:13 AM

Foreigners Dump Nearly €80 Billion in Spanish Debt; Haircuts Come After More Dumping

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Through the first half of the year, foreigners reduced Spanish debt by Nearly €80 Billion as banks in Spain gobbled up more of the toxic garbage.

Foreign investment in Spanish public debt has decreased by €78.168 billion in the first six months of the year, standing at  €203.271 billion euros, compared to  €281.439 billion which reached the end of 2011. This is a break of 27.7% over last year.

The largest decreases were recorded in February and March, at nearly €25 billion each month.

Analysts note that Spanish financial institutions that are supporting strongly the Treasury issues and thus raising their level of debt thanks to interventions by the ECB.
Contrary to popular belief, the LTRO and other ECB financing programs that allowed Spain to accumulate more Spanish bonds is not a favor to Spain but rather a favor to foreigners who are now unloading the debt.

Just as happened with Greece, as soon as foreigners dump enough Spanish debt, haircuts on the bonds will come.

Mike "Mish" Shedlock
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Saturday, July 28, 2012 10:28 PM

Federal Bankruptcy Court Lets Stockton, California Cut Retiree Health Care Benefits; Flood of City Bankruptcies Coming

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In a welcome, common sense ruling, Court lets Stockton, Calif. cut retiree health care

A federal bankruptcy judge on Friday cleared the way for Stockton, California to cut health care benefits for retirees while it is in bankruptcy proceedings.

Stockton is seeking Chapter 9 protection from its creditors and said that it would cut retiree health benefits while it reorganizes. Retired employees sued to stop those cuts.

Judge Christopher Klein on Friday issued a temporary order denying the bid to stop the benefit cuts, and he said a formal decision was on its way.

Stockton's attorneys had argued that bankruptcy law gave the city wide latitude on how to spend its revenue while it prepares a plan to restructure its finances.

"For the reasons explained in the forthcoming decision of this court, the Application for Temporary Restraining Order and Preliminary Injunction or in the Alternative for Relief from Stay is DENIED," Klein wrote.
Flood of City Bankruptcies Coming

This is a good start for what needs to happen. The next step needs to be huge clawbacks on promised benefits, preferably top down, so that those with the highest pension benefits bear the brunt of the hit. 

As soon as cities realize this is the way out, a flood of bankruptcies will be on the way.

Mike "Mish" Shedlock
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11:49 AM

Schäuble Rejects ECB Help for Spain; Full Bailout Still Coming

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As any clear-thinking person should have expected, Schäuble rejects ECB help for Spain

Berlin - For days, it is speculated that the European Central Bank (ECB) is planning, together with the bailout fund EFSF Spanish government bond buy - so come back to Spain to cheaper capital. The "Sueddeutsche Zeitung" According to the euro countries willing to support this approach . Federal Finance Minister Wolfgang Schäuble (CDU), but has now dismissed the reports in an interview with the newspaper "Welt am Sonntag".

"No, at this speculation is not true," Schäuble said the newspaper. The Finance Minister said it was already a sufficiently large aid package for Spain have been laced.

The 100-billion-euro package to recapitalize Spanish banks also close an emergency aid of 30 billion €. "The short-term financial requirements of Spain is not so great", said Schäuble, "the painfully high interest rates - but the world will not, if you have to pay for some bond auctions a few percent more."
Full Bailout Still Coming

Schäuble is saying the right things. For starters, ECB backdoor bailouts of Spain are likely against the German constitution. Even if they weren't, why should German taxpayers accept the risk of any of these leveraged proposals that have been circulated, and recirculated?

It's important to understand that the near-7% current market rate does not affect interest on prior bonds (only the current value of them). However, high rates do reflect the interest Spain would have to pay to float new bonds or rollover existing ones.

Thus, high rates reflect extreme stress and are unsustainable for the long-term, but they are not an immediate killer for Spain.

Regardless, Spain is deep in recession and there is no way it can meet its deficit targets. A full bailout of Spain is a certainty.

Mike "Mish" Shedlock
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Friday, July 27, 2012 1:09 PM

Sharp Decline in Earnings and Revenue Estimates; Chart Explains Four Major Waves of Earnings Growth

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For the first time in three years, US Quarterly Earnings are Poised to Drop.

Third-quarter earnings of Standard & Poor's 500 companies are now expected to fall 0.1 percent from a year ago, a sharp revision from the July 1 forecast of 3.1 percent growth, Thomson Reuters data showed on Thursday.

That would be the first decline in earnings since the third quarter of 2009, the data showed.

Earnings in the tech sector are now expected to rise only 5.8 percent — less than half the forecast of 13.1 percent growth, according to an estimate at the start of the month, Thomson Reuters data showed.

The materials sector is forecast to see an earnings drop of 11.4 percent for the third quarter, worse than the forecast of a 3.3 percent decline at the start of July, Thomson Reuters data showed. Slumping commodity prices and reduced demand from China have hurt that sector.

Sales Look Worse Than Earnings

While earnings performance has held up so far for the second quarter — with results in from about half of the S&P 500 companies — revenue has looked much gloomier.

Just 41 percent of companies have beaten revenue estimates, the lowest since the first quarter of 2009 and only the fourth time in the past 10 years that the beat rate was under 50 percent.

Revenue growth is expected to have increased just 1.2 percent for the second quarter, Thomson Reuters data showed.
Don't Worry Companies Will Still "Beat the Street"

 In spite of those downgrades, history suggests corporations will still "Beat the Street".
even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works:

  • Corporations give analysts "tips" regarding profit expectations.
  • Those profit expectations are purposely low.
  • Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street".
  • If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary.
  • Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting.

Percentage of Companies that "Beat the Street"

click on chart for sharper image

The last time companies failed to "beat the street" was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to "beat the street".

The above chart from Understandings Earnings Estimates by James Bianco on the Big Picture Blog.

Corporate Profits

Inquiring minds may be interested in charts of corporate profits.

click on any chart for sharper image

Corporate After-Tax Profits As Percent of Real GDP

Four Major Waves of Earnings Growth

  1. A stunning rise in corporate profits as a percent of GDP started when Nixon closed the gold window, effectively ending the last semblance of the gold standard. In response, the trade deficit soared as did an exodus of manufacturing jobs. 
  2. A second massive rise in corporate profits began with the Greenspan Fed-sponsored internet bubble culminating in 2000 with a liquidity push out of misguided fears of a Y2K crash.
  3. The third big jump in corporate earnings started in 2001 when the Greenspan Fed (followed by the Bernanke Fed), ignited housing and debt bubbles of epic magnitude. Financial profits soared at the expense of the greater fool going deep in debt buying houses right before the housing bust.
  4. In 2009, the Bernanke Fed slashed interest rates across the board, clobbering those on fixed income, to bail out banks. A side-effect was lower interest rates on corporate bonds which also  added to corporate profits.

Bubbles Don't Benefit Real Economy

Government sponsored repatriation tax holidays along the way also added to corporate profits, as did the Fed paying interest on Excess reserves now sitting at about $1.5 trillion parked at the Fed.

Little of this benefited the real economy or produced any lasting jobs. Housing and finance jobs collapsed in the global financial crisis and are not coming back. Nor is another internet boom on the horizon.

With each crisis, the shrinking middle class has suffered at the expense of banks and corporations able to export jobs and capital. Small US Corporations not able to get the same tax benefits as GE, Apple, Google, Microsoft, etc., have not benefited from Fed policy.

Four Solutions

  1. End fractional reserve lending
  2. Return to the gold standard
  3. End the Fed and its bubble-blowing policies 
  4. Revise corporate tax policy so as to not give breaks to corporations that export jobs and hold profits overseas. US-based small manufacturers are at a huge disadvantage to corporations like GE that pay negative tax.

Regarding point number 2, please consider Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited

Mike "Mish" Shedlock
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12:48 AM

Housing Headwinds: US Birthrate Lowest in 25 Years as Twenty-Somethings Postpone Having Babies

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Boomer demographics and postponement of marriage on account of student debt and poor finances are two of the key reasons that I long-ago stated the housing recovery would be slow for a decade.

Declining birthrates now show that is indeed what is happening.

First, please consider a short snip from my July 25 post "Actual" New Home Sales First 6 Months of 2012 vs. Prior Years; Reflections on the Housing Recovery

Reflections on the Housing Recovery

Even with today's reported decline, new home sales have likely bottomed on an annual, cumulative-total basis.

However, don't expect much in terms of recovery.
Debt overhang is immense, and student debt is particularly problematic. Lack of jobs coupled with high student debt is capping family formation. Kids out of college are deep in debt and holding off getting married, starting families, and therefore buying houses.

Moreover, home sizes will trend lower and price recovery will be anemic because of boomer demographics. Retired boomers looking to downsize have few buyers able or willing to buy.

Bank-owned real estate (REOs) and shadow inventory are hugely underestimated. That too will pressure prices and sales.

The good news is home sales will add to GDP.

The more realistic news is structural headwinds are immense, demographics are poor, and job prospects for college graduates are poor. The bottom in new home sales may be in, just don't expect anything close to a normal housing-led recovery, because it's not going to happen.
Twenty-Somethings Postpone Having Babies

USA Today picked up on that theme in their article Americans put off having babies amid poor economy
Twenty-somethings who postponed having babies because of the poor economy are still hesitant to jump in to parenthood — an unexpected consequence that has dropped the USA's birthrate to its lowest point in 25 years.

As the economy tanked, the average number of births per woman fell 12% from a peak of 2.12 in 2007. Demographic Intelligence projects the rate to hit 1.87 this year and 1.86 next year — the lowest since 1987.

The less-educated and Hispanics have experienced the biggest birthrate decline while the share of U.S. births to college-educated, non-Hispanic whites and Asian Americans has grown.

The effect of this economic slump on birthrates has been more rapid and long-lasting than any downturn since the Great Depression.

Many young adults are unemployed, carrying big student loan debt and often forced to move back in with their parents — factors that may make them think twice about starting a family.

"The more you delay it, the more you delay the possibility of a second or third child," says Stephanie Coontz, director of research and public education at the Council on Contemporary Families. "This is probably a long-term trend that is exacerbated by the recession but also by the general hollowing out of middle-class jobs. There's a growing sense that college is prohibitively expensive, and yet your kids can't make it without a college degree," so many women may decide to have just one child.
Unexpected by Whom?

I am amused by the phrase "unexpected consequence" in the opening paragraph of the above article. I have to ask "unexpected by whom?"

Flashback January 11, 2010:
Reflections on Boomer Demographics, Household Formation, the Hoax Economy, Dead Batteries
Effect On Household Formation

Think of the effect on household formation if people under 30 will continue to suffer disproportionately higher joblessness. How pray tell will student loans be paid back let alone anyone start buying homes?

We will not only have structurally high unemployment for a decade, but we will have structurally low household formation. More people in their early to mid-30's will be living at home, sharing homes or sharing apartments.

The impact on home prices and demand for goods to furnish those homes is surely not priced into any existing economic models on housing starts, home prices, or the stock market.
Harsh Reality of Structurally High Unemployment
2010 was not the first time I used student debt, household formation, and structural unemployment in that context.

Indeed, my post Structurally High Unemployment For A Decade dates back to August 18, 2009.  Here is a key snip.
In the Incredible Shrinking Boomer Economy I noted a harsh reality quote of Bernanke:

"It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate."

Pray tell what happens if GDP can't exceed 2.5% for a couple of years? What about a decade (or on and off for a decade)?

If you have come to the conclusion that we are going to have structurally high unemployment for a decade, you have come to the right conclusion.
US Birthrate

click on chart for sharper image 

Economists were surprised by that chart but they should not have been. If anything, the surprise should have been that it's not worse. Looking ahead, it probably will be.

Mike "Mish" Shedlock
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Thursday, July 26, 2012 9:30 PM

Results, Results, Results

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The word of the day today quite obviously is "results".

When the second-in-command of top-ranking eurocrats threatens Greece with expulsion unless results are produced, it's long past the time to consider the Troika is not only ready to pull the plug, but hoping to do so.

The top-ranking eurocrat is of course "lie when it's serious" Jean-Claude Juncker. The second-ranking eurocrat is José Manuel Barroso, European Commission president.

Today the Financial Times reports Barroso pushes Greece to show results

José Manuel Barroso has urged Greece to accelerate reforms after two years of foot-dragging if it wants to stay in the eurozone, saying Athens needed to show “results, results, results”.

The European Commission president, making his first visit to Greece since it sought assistance from the EU and International Monetary Fund in 2010 to avert a sovereign default, stressed that delays in implementing agreed measures had undermined the country’s credibility with its partners, adding: “Actions are more significant than words.”

Mr Barroso’s strongly-worded message, delivered after a two-hour meeting with premier Antonis Samaras, came after leaders of the three-party coalition government endorsed in principle a €11.5bn package of spending cuts for 2013-14 that were agreed with creditors six months ago but kept on hold during two successive election campaigns.

The troika is not due to return until September to decide whether enough progress has been achieved to disburse a €31.2bn loan tranche from the country’s second bailout, already overdue since June.

By then it may be clear whether Greece has a chance of making the bailout work, without seeking an extension of the 2014 deadline and extra financing from European partners, or faces a second debt restructuring and a looming threat of being forced out of the eurozone.

The new package targets pensions rather than wages, with staggered reductions in pensions above €1,000 a month and an overall monthly cap of €2,000-€2,200 aimed at securing annual savings of €2bn or one percentage point of national output.

Thousands of higher-paid workers in local government and state-controlled corporations would also face salary caps, losing seniority pay and special allowances allocated by senior politicians in past years without consulting the finance ministry.

“Pensioners are not in a position to lead violent street protests against the cuts … while setting ceilings gives meaning to the coalition’s pledge to enact social justice,” said an Athens-based economist.
Lie When It's Serious

Flashback May 14, 2012: Mr. "Lie When It's Serious" Juncker Tells Another Whopper: "I Don’t Envisage, Not Even for One Second, Greece Leaving the Euro Area"
Those looking for a bit of humor in the European debacle can find it in statements from Jean-Claude Juncker, head of the eurozone finance ministers.

Juncker says "I don’t envisage, not even for one second, Greece leaving the euro area. This is nonsense. This is propaganda. We have to respect Greek democracy."

Bear in mind this statement comes from the same man who said "When it becomes serious, you have to lie."

Also bear in mind Juncker's support for a Troika installed puppet government in Greece, after Greek Prime Minister George Papandreou proposed putting bailout measures to a vote.
Juncker and others have proven lies are the norm.
Anyone who could not envision Greece leaving the eurzone is a liar or an idiot.  Jean-Claude Juncker is both and the same applies to his lap-dog Barroso.

Mike "Mish" Shedlock
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9:19 AM

Is Global Trade About To Collapse? Where are Oil Prices Headed? A Chat with Mish

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Last week, I agreed to do an interview on OilPrice.Com. The initial interview was conducted over the phone, with follow-up emails.

The interview first appeared on OilPrice and is repeated below.


As markets continue to yo-yo and commentators deliver mixed forecasts, investors are faced with some tough decisions and have a number of important questions that need answering. On a daily basis we are asked what’s happening with oil prices alongside questions on China’s slowdown, which commodities or instruments will provide safety in the current environment, will the Euro-zone split in the future and what impact the presidential election is going to have on the economy and markets?

In the interview, Mish discusses:

• Why global trade will collapse if Romney wins
• Why investors should get out of stocks and commodities
• Why we have been oversold on shale gas and renewable energy
• Why oil prices will likely fall in the short-term
• Why the Eurozone is doomed
• Why there may soon be an oil war with China
• How government interference is ruining the renewable energy sector
• Why we need to get rid of fractional reserve lending
Oilprice.com: With oil prices now in the high 80's and news out of Europe getting worse every day, do you expect prices to stay in this range, or do you see them dropping in the short term?

Mish: There are two conflicting forces here. One of them is oil prices over the long-term and the other is oil prices over the short-term.

Even in the short-term you will find there are conflicting forces at play. For example, stress in the Middle-East puts an upward pressure on oil prices. However, economic problems in Europe, a slow-down in Asia and a slow-down in the United States put downward pressure on oil prices. New orders are falling at a staggering rate across the board in Asia, China, Japan, Europe, and the United States which also puts further downward pressure on oil prices.

Long-term, forces such as peak oil and population growth in China are putting pressures to the upside.

One needs to balance all of those factors out when they are about ready to give a prediction on oil prices. My opinion is that over the short to mid-term, oil prices will go down. Long-term, energy is a good place to invest.

Oilprice.com: If your prediction is correct and oil prices do go down – what sort of impact do you see this having on the U.S. economy, if any?

Mish: That's an interesting question. However, the question puts the cart before the horse.

Looking at prices in a vacuum is a mistake. One also has to look at why prices are doing what they're doing. For example, falling oil prices that happen when supply shocks are alleviated are a positive thing. Falling oil prices because of falling demand is another. You seldom see this kind of distinction in mainstream media.

Right now, oil prices are primarily falling because of falling demand, and that is in spite of geopolitical tensions. That is not a healthy sign for the economy.

Oilprice.com: As we have seen with the recent oil workers strike in Norway and subsequent rise in oil prices. Geopolitical risks always remain to keep the markets off balance. Apart from Iran are there any other geopolitical risks you think people should be aware of?

Mish: A key geopolitical risk in the long-term is that China cannot continue at its expected rate of growth. For years, the mantra has been "China, China, China," and many thought China could maintain its 8% to 10% per year growth going forward. That's not going to happen.

I agree with Michael Pettis at China Financial Markets, that China is more likely to see 2% growth than 8% or even 6% growth over the next decade.

2% growth is a shocking reduction, even from the lowered expectations that we've seen regarding China. The implication is commodity prices, especially base metals, are going to be under extreme pressure because of China stockpiles. For further discussion please see "China Rebalancing Has Begun"; What are the Global Implications?

Oilprice.com: What are your longer term projections for oil prices – say 3-5 years out?

Mish: I think it's a fool’s game to make such projections. Most of the projections on the price of gold, silver and oil are ridiculous. They are designed to sell newsletters. The bigger the hype, the greater the sales. On occasion, I will make a call. For example, when crude hit $140+ in the summer of 2008, and others called for $200, I said oil prices would drop to the $45.00 - $50.00 range or so. Oil went to $35.
Moreover, those predicting $200.00 never bothered to think what that would do to the global economy. We saw the same thing in natural gas. People were predicting $25. Look at prices now, at roughly $3.00 NG fell all the way to $2.20, lower than even this staunch deflationist thought.

I'm not willing to go out on the same limb and predict energy prices three years in advance. The reason is we really don't know for sure how central bankers are going to respond. China is particularly important. If there's universal printing of money everywhere, I would expect a lot of that to flow back into prices of gold, perhaps of silver, and perhaps energy, but we really don't know what they're going to do. We don't know when or how the Euro Zone is going to break up. I think it will, but how is as important as when.

In the US, we don't know the results of tax hikes following the 2012 election. Heck, we don't even know who the next president in the United States is going to be. Will it be Republican? Will it be Democrat? Numerous political and economic forces are pulling and tugging in different ways.

I don't believe there's anyone out there that can predict, with any kind of accuracy, what oil prices are going to do. Which is why I believe trying to predict oil prices in the midst of all of these possibilities is a fool's game.

Oilprice.com: What are your views on inflation and hyperinflation.

Mish: Hyperinflation is a complete collapse in currency. It is a political event that kicks off hyperinflation, not a monetary one. Hyperinflation talk hit an extreme when oil prices hit $140. Such talk was silly then, and it is still silly now.

Hyperinflationists in general fail to understand the role of collapsing demand for credit. The total credit market is over $54 trillion. Base money supply is $2.6 trillion and excess reserves are about $1.5 trillion. Seems to me we had huge expansion in credit and Bernanke is struggling to reignite demand. I suggest he will not succeed.

The idea the US$ will suddenly go to zero is ridiculous. The US is the world’s largest holder of gold reserves, and that alone would stop it. Also note that Bernanke, as misguided as his policies are, is still beholden to the banking system. As such he has no desire for it to collapse.

As far as inflation goes, I am still widely misunderstood. I view inflation as an increase in money supply and credit, with credit marked to market. Deflation is the opposite. If one insists that inflation is about prices, then we are in a state of inflation with 10-year treasury rates below 1.5%.

For those who woodenly view inflation in terms of prices, well, prices may or may not rise. Price have generally risen, but credit is the key behind housing prices, family formation, hiring, and in fact everything driving the economy. So, where is credit going? Demographics and student debt suggests nowhere. Indeed, credit has gone nowhere in spite of heroic efforts by Bernanke.

Oilprice.com: You just mentioned that we don’t know who the next president is going to be and sticking to this topic how big an impact do you see energy prices having on this year's presidential elections?

Mish: I don’t think energy prices are what's on people's minds. What's on people's minds right now are jobs. Oil prices have kind of stabilized and in the very short-term they are likely to stay stable unless there are some dramatic results in the Mid-East or a dramatic slowdown in the US economy.  Both are possible, but a major US slowdown is arguably more likely. Regardless, I think energy prices are going to be a minor election issue.

Oilprice.com: The message on peak oil seems to be confused. Many are adamant that peak oil is the largest threat to ever face humanity, whilst others believe that with new technologies and new fields being found, peak oil is a myth and we are actually swimming in oil. What are your thoughts?

Mish: The idea that we're swimming in oil is preposterous. Moreover, abiotic oil is a ridiculous pipe-dream. That said, the idea that the global economy is going to come grinding to a halt in the next year or two because of oil is also preposterous (discounting a geopolitical Mid-East shutdown). In general, I would side with the peak oil folks, noting that a global recession will likely pressure prices more than anyone thinks, barring a breakout of war or supply disruptions in the Mid-East.

Long-term, 8% growth in China is mathematically not going to happen. People really need to get a grip on exponential math and the implications thereof. If China does attempt to grow at 8-10% as some people have predicted, there's going to be an oil war of some kind between the United States and China because there's simply not enough oil.

For a good discussion on the limits of exponential growth, please see Calpers Pension Plan Reports 1% Return; Stunning "What If" Charts at Various Compound Annualized Rates-of-Return Going Forward

Oilprice.com: Shale gas has been generating a great deal of headlines recently. Do you believe it could be the solution to America’s energy challenges? We are also seeing developments in oil & gas extraction technologies. Have we been oversold on such possibilities?

Mish: I think we're oversold on everything. We're oversold on the idea of cheap energy, of free energy, of green energy, of clean energy. We're oversold on the stock market. We're oversold on what Obama can deliver. We're oversold on what Mitt Romney can deliver. We're oversold in so many areas, I can't even mention them.

In regards to new technologies, how much water will it take to extract these reserves in the midst of these droughts? What are we going to do with the contamination, how do we get rid of the waste byproducts? These kinds of projects look good on paper, but are they truly scalable in practice?

I hope I am wrong.

Oilprice.com: What is the role of government in alternative energy sources?

Mish: The role of government should be to get the hell out of the way and let the free market work. If peak oil really is a problem (and I think it is), the free market will come up with a solution if left alone.

Instead, the government is trying to pick winners. Look at the results. President Obama backed solar panel manufacturer Solyndra and the DOE loan guarantee scheme blew sky high.

Our ethanol program is a total disaster. By government mandate, corn has been diverted to ethanol production smack in the midst of a drought. Corn is not an efficient way to produce ethanol, even if there was not a drought.

Governments seldom back winners. Instead, government bureaucrats back companies that contribute to their campaigns. This is worse than it looks because such activities deprives companies with real solutions a chance at funding.

We need to get government out of the energy business completely and let the free market work.

Oilprice.com: Sticking with the renewable energy theme, do you see them making a meaningful contribution to global energy production over the next 10 years?

Mish: Adding to my previous answer, government subsidies of unviable products and unviable ideas gets in the way of the free market actually producing viable products and viable ideas. Simply put, the more government interferes, the less likely we are going to see advances in the actual direction of a true solution.

Oilprice.com: In regards to presidential elections, how do you think energy will fare under Obama and under Romney? Which sectors will benefit, and which will suffer?

Mish: Mitt Romney has declared that if he’s elected he is going to label China a currency manipulator and increase tariffs on China across the board. That's something that I believe he might be able to do by mandate. If he's elected and he does follow through, I think the result will be a global trade war the likes of which we have not seen since the infamous Smoot-Hawley Tariff Act compounded problems during the Great Depression. Simply put, I think that global trade will collapse if Romney wins and he follows through on his campaign promises.

Unfortunately, campaign rhetoric now is heating up to the point where President Obama and Mitt Romney are trying to outdo each other on who's going to do more to China. Thus, we may very well see a global trade war regardless of who wins.

As an aside, Mitt Romney is pledging to increase military spending. Given Romney’s statements on Iran, it's more likely he would start a war with Iran than Obama. Note that the U.S. military is one of the biggest users of petroleum worldwide and oil price shocks could be devastating.

None of this is any good for the world economy at all. I believe that Romney will do what he says. I believe he's more likely to start wars than Obama, but that doesn't make Obama any good. This is the worst slate of candidates in U.S. history running for president, and I'm writing in Ron Paul.

Oilprice.com: As the global economy slows, where do you see the best investment opportunities available to investors?

Mish: At this point, the best thing to do is wait for better opportunities. I am talking my book, but something like 70-80% cash (or hedged equities) and 20-30% gold seems reasonable. I'm telling people, "Get out of the stock market. Get out of commodities except gold and perhaps a bit of silver."

A global slowdown is underway. Actually, I made a Case for US and Global Recession Right Here, Right Now.

Although nothing is certain, central bankers worldwide are highly likely to pump up money supply hoping to counteract the slowdown. If so, I think gold is going to be one of big beneficiaries. Silver may be a huge beneficiary, and I like it here. However, silver is also an industrial commodity, so gold is safer.

Bear in mind, I may seem like a broken record on this thesis given cash and gold has been my call for the last year and a half or so.

In spite of calling the global economy exceptionally well, I've simply been wrong about U.S. equities. They have risen far more than I thought, but I still caution that risk is high.

I'm going to repeat my general message here, that another slow-down, and another big downturn in the stock market is highly likely. Equities are quite overvalued at this point, cash is not trash, and staying liquid now, with a percentage in gold, is a good idea.

Oilprice.com: I was hoping you could tell us your thoughts on the Euro. You mentioned previously, that you think the E.U. will split in the future, why do you think this will occur, and what will the economic and political implications be?

Mish: I think it's pretty clear that the euro's going to split because no currency union in history has ever survived without there being a corresponding fiscal union in place. Right now we're in a situation where Germany’s Chancellor Angela Merkel says that "There should be no fiscal union until there's a political union." Francois Hollande said, "There should be no political union until there's a banking union," and the German Supreme Court will not allow a political union or a fiscal union, nor a banking union without a German referendum.”

I did a post on this, and it's called, "It's Just Impossible."

If politicians could not get agreements when times were good, how are they going to get these agreements now, when they're bickering over every little thing, including the amount of the ESM, whether or not the bailout of Spain should be via the ESM or the EFSF, and whether or not the Spanish government should be backstopping this loan.

They can't get an agreement on anything, and the German Constitutional Court is hanging like a Sword of Damocles over the entire thing.

For these reasons, the Euro is going to bust up. What happens to the price of the Euro depends on how it busts up. If the breakup is piecemeal and disorderly, it means one thing. If it's orderly and prepared in advance with Germany leaving and the northern states leaving, it's a completely different scenario. Any point along that line is possible, but piecemeal seems more likely. How disorderly remains to be seen.

For example, if Germany exits the Euro and goes on the deutschmark, the value of the deutschmark will soar, whilst the value of the Euro will decline.

Instead, if we see a break-up by Spain leaving, by Greece leaving, by Italy leaving, and the bulk of what's left is Germany and the northern States, then the value of the Euro can soar. Those are the two conflicting possibilities here. The market has not decided which one of those is more likely.

Meanwhile, the Euro is in a low 1.20 range to the U.S. dollar. A breakout or a breakdown might be a signal that the market is expecting one of those possibilities over the other.

We are in uncharted territory and everyone is guessing.

Short-term I am neutral on the US dollar at this level because the euro is a bit oversold, the idea of a Greek exit is no longer unfathomable, and the Fed is likely to initiate QE3 at some point. This is a change from my previous US dollar bullish stance.

Oilprice.com: We mentioned China earlier, and I was wondering what you think the future holds for China, both politically and economically.

Mish: A regime change in China is coming up. The current regime has been focused on growth. However, I think the next Chinese government already understands that the growth at any cost of the current regime is not sustainable. If so, we're going to see a major shift away from an export-driven production model dependent on investment on roads, on bridges, and more production, to a consumption-driven model. That shift will be one of the major forces in the global economy.

If I'm correct on this, then it's going to be a painful adjustment, regardless of what China does. For example, a Chinese slow-down towards consumption would increase the value of the renminbi, would decrease their exports, would help the balance of trade between China and the United States and Europe, and would put intense pressure on commodity prices. In turn, asset prices and currencies of the commodity producing countries, like Australia, Brazil, and Canada will come under heavy pressure.

Oilprice.com: Mark Faber is not a fan of the Federal Reserve, blaming them for the current US economic situation. He said, “Usually under a gold standard you have a bubble under one sector of the economy but you don’t have it across the board globally and that’s really what the Federal Reserve has done over the last couple of years.” Do you agree? Is the Fed to blame? And what can be done to avoid this in the future?

Mish: I agree with part of it, if not most of it. However, the idea that the gold standard itself causes bubbles is fallacious. The gold standard does not cause huge bubbles. The real culprit is fractional reserve lending. Historically, problems happened when banks lent out more money than there was gold backing it up.

The gold standard did one thing for sure. It limited trade imbalances. Once Nixon took the United States off the gold standard, the U.S. trade deficit soared (along with the exportation of manufacturing jobs).

To fix the problems of the U.S. losing jobs to China, to South Korea, to India, and other places, we need to put a gold standard back in place, not enact tariffs.

Oilprice.com: Mish, thank you for your time this has been a very enjoyable and enlightening conversation for us.

Mike "Mish" Shedlock
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9:12 AM

Market Soars on "Whatever It Takes" Mush From Draghi; Another "Saved Again" Moment

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ECB President Mario Draghi commented in a speech today that the ECB was "ready to do whatever it takes" within its mandate to preserve the single currency.

I have to ask, is that even news? Apparently it it to the stock market which has gapped up over a percent. Bond yields in Spain also reacted to the non-news.

Yield on the 10-year Spanish bond fell all the way (drum roll please) to 6.95%. Is that really anything to be giddy about?

Let's take a look at additional Draghi comments as reported in the Financial Times article Draghi hints at return of ECB bond buying

The euro strengthened on Thursday after Mr Draghi said the ECB was “ready to do whatever it takes” within its mandate to preserve the single currency. “Believe me, it will be enough,” Mr Draghi told a conference in London.

“To the extent that these premia have to do not with factors inherent to my counter party, they come into our mandate, they come within our remit, Mr Draghi said. “To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate.”

“The ECB appears to be keen to increase the threat of the SMP being woken from its hibernation period,” Mr Wattret wrote in a note. “Are the latest comments a signal that the ECB’s strategy is changing and the SMP is about to be used? Or is it merely a threat to act, designed to put some two-way risk back into markets?

“Our inclination is towards the latter conclusion, though today’s comments from Mr Draghi suggest the former now looks more plausible.”

The comments from the ECB president may also increase speculation about other “unconventional” measures the central bank could take. This week Ewald Nowotny, head of Austria’s central bank, said there were arguments for equipping the eurozone’s forthcoming bailout fund with a banking licence so it could tap the ECB for more funds if needed – although he also said the idea was not being actively discussed by the ECB.
Saved Again? Not

How long this round of "we are saved" euphoria lasts over non-comments remains to be seen, but I suspect not long.
Mike "Mish" Shedlock
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Wednesday, July 25, 2012 4:51 PM

UK GDP Disaster Far Worse Than It Looks; UK Growth in 2012 "inconceivable"

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The global recession picked up steam today with news of a UK GDP Shock.

The economy shrank by 0.7pc in the second quarter – far more than the 0.2pc fall expected, as record rainfall and the Jubilee holiday added to pressure from austerity cuts and the eurozone debt crisis.

It marks the third successive quarter of contraction, leaving Britain in its longest double-dip recession in more than 50 years.

The Office for National Statistics showed broad-based weakness across the private sector, with construction output down 5.2pc, industrial production down 1.3pc and services output – which accounts for 77pc of the economy – falling 0.1pc. Only public-sector services output, and business services registered any growth.

“I think it’s inconceivable that there’ll be positive growth this year,” said Gerard Lyons, chief economist at Standard Chartered, forecasting a 1.3pc fall in GDP.

Victoria Clarke, economist at Investec, said the economy would now have to grow by 1.2pc in both the third and fourth quarters for the economy to expand by just 0.1pc in 2012 overall.

In March, the Office for Budget Responsibility, the government’s independent fiscal watchdog, forecast 0.8pc growth this year, which now looks wildly optimistic.
UK GDP Disaster Far Worse Than It Looks

A drop of .7% might not seem that shocking in the US, but that's because the US uses annualized reporting while most of the rest of the world does not.

I asked Doug Short at Advisor Perspectives to show UK GDP as it would be presented in the US.

UK GDP Quarter-by-Quarter Annualized

click on chart for sharper image

Presented that way, UK GDP does look like a disaster. Of course the results were a disaster regardless of how presented, but the US peculiar method of reporting may not be obvious to US readers following European news.

Mike "Mish" Shedlock
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12:42 PM

"Actual" New Home Sales First 6 Months of 2012 vs. Prior Years; Reflections on the Housing Recovery

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New home sales unexpectedly plunged today, with the biggest drop in over a year.

New U.S. single-family home sales in June fell by the most in more than a year and prices resumed their downward trend, suggesting a set back for the budding housing market recovery.

The Commerce Department said on Wednesday sales tumbled 8.4 percent to a seasonally adjusted 350,000-unit annual rate, the lowest rate in five months. The percent decline was the largest since February 2011.

May's sales pace was revised up to 382,000 units from the previously reported 369,000 units, taking some of the sting from the report.

Economists polled by Reuters had forecast sales at a 370,000-unit rate last month. Compared to June last year, new home sales were up 15.1 percent.
Actual New Home Sales

Reader Tim Wallace provides a look at actual new home sales, six-month running totals, not seasonally adjusted, not annualized, vs. prior years.

click on chart for sharper image

Reflections on the Housing Recovery

Even with today's reported decline, new home sales have likely bottomed on an annual, cumulative-total basis.

However, don't expect much in terms of recovery.

Debt overhang is immense, and student debt is particularly problematic. Lack of jobs coupled with high student debt is capping family formation. Kids out of college are deep in debt and holding off getting married, starting families, and therefore buying houses.

Moreover, home sizes will trend lower and price recovery will be anemic because of boomer demographics. Retired boomers looking to downsize have few buyers able or willing to buy.

Bank-owned real estate (REOs) and shadow inventory are hugely underestimated. That too will pressure prices and sales.

The good news is home sales will add to GDP.

The more realistic news is structural headwinds are immense, demographics are poor, and job prospects for college graduates are poor. The bottom in new home sales may be in, just don't expect anything close to a normal housing-led recovery, because it's not going to happen.

 Mike "Mish" Shedlock
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10:53 AM

ESM Banking License? Rumors of Non-Solution Send Sovereign Yields Lower; Purposeful Non-Elaboration

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The mantra of eurocrats is quite obvious: When times get tough, roll out already discarded rumors and hope they stick for a while.

Earlier today yield on 2-year Spanish bonds hit 7.14%. The yield now is a still unsustainable 6.42%.

What happened?

The answer is another silly rehash of something the German constitutional court probably would not allow, and is not even being seriously discussed at the moment anyway: a banking license that would allow the ESM to use leverage

European Central Bank council member Ewald Nowotny said there are arguments in favor of giving Europe’s rescue fund a banking license, reviving the debate on bolstering its firepower as leaders face the prospect of a full- scale Spanish bailout.

“I think there are pro arguments for this,” Nowotny, who heads Austria’s central bank, said in an interview in his office in Vienna yesterday. “There are also other arguments, but I would see this as an ongoing discussion,” he said, adding he’s “not aware of specific discussions within the ECB at this point.”

Granting a banking license to Europe’s permanent bailout fund, the European Stability Mechanism, would give it access to ECB lending, easing concerns that its 500 billion-euro ($602.5 billion) cash pot won’t be enough if Spain or Italy require aid. While ECB President Mario Draghi said on May 24 that such a move amounts to the central bank financing governments, which is prohibited by European Union law, publicly-owned credit institutions such as the European Investment Bank are exempt.

“It is not something that is only in the field of monetary policy, so this is part of a broad discussion,” Nowotny said. He declined to elaborate.
Purposeful Non-Elaboration

Declining to elaborate was a good move from the standpoint of politics. The more that is said about rehashed ideas, the less believable the rumor is. Note that the ECB has already rejected this idea, so has the German central bank and numerous German politicians.

Moreover, no one really wants to discuss this issue now anyway, fearing it might impact a German constitutional court ruling coming up in September.

The game plan, if there is one (other than obvious BS), is to sneak this idea in later, after a favorable court ruling. However, if Merkel really supported this idea, it would have happened already.

It is quite possible the constitutional court picks up on this chatter, and puts an end to the idea even if it approves the ESM. Let's hope so.

Regardless, leverage will not solve anything, anyway. This rehash of a discarded idea might calm the markets for a few days, but that is likely it.

Mike "Mish" Shedlock
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1:49 AM

Spain 2-Year Treasury Yield Tops 7%, Inversion Between 5 and 10 Year Yields; Spain Sovereign Debt Restructuring Coming Up

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Those wondering when the yield on Spain's 2-year government bond would exceed 7% now have an answer. Today is the day.

Note: the lines on the charts below reflect yesterday's close. The numbers in green accurately reflect today's price movements.

Spain 2-Year Government Bond Yield

Of further interest please note the inversion at the long end of the curve. The yield on 5-year treasuries now exceeds that on the 10-year treasury.

Spain 5-Year Government Bond Yield

Spain 10-Year Government Bond Yield


2-Year Yield + 36.5 basis points to 7.007%
5-Year Yield + 12.5 basis points to 7.717%
10-Year Yield + 2.7 basis points to 7.648%

The inversion is slight but the massive yield increase on the shorter end is significant. If this action continues, and I expect it will, the market is pricing in a sovereign debt restructuring of Spain, including bond haircuts.

Mike "Mish" Shedlock
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Tuesday, July 24, 2012 2:18 PM

Record Low Yields Once Again on US Treasuries

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Curve watcher's anonymous is noting record low yields across most of the US Treasury yield curve.

US Treasury Curve 2012-07-24

click on chart for sharper image

The above image is just off the absolute lows. The 30-year touched 2.45% and 10-year 1.39%.


  • Brown: $IRX 3-Month Treasury Bill Discount Rate
  • Blue: $FVX 5-Year Treasury Note Yield
  • Orange: $TNX 10-Year Treasury Note Yield
  • Green: $TYX 30-Year Long Bond Yield

Mike "Mish" Shedlock
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10:28 AM

Germany in Recession: Private Sector Sees Fastest Falls in Output and New Business Since June 2009; New Export Orders Collapse

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The vaunted German export machine is sinking into the abyss. The Markit Flash Germany PMI® shows German private sector sees fastest falls in output and new business since June 2009.

Key Points

  • Flash Germany Composite Output Index(1) at 47.3 (48.1 in June), 37-month low. 
  • Flash Germany Services Activity Index(2) at 49.7 (49.9 in June), 10-month low. 
  • Flash Germany Manufacturing PMI(3) at 43.3 (45.0 in June), 37-month low. 
  • Flash Germany Manufacturing Output Index(4) at 42.8 (44.8 in June), 37-month low.


The seasonally adjusted Markit Flash Germany Composite Output Index fell for the sixth month running in July, to 47.3 from 48.1 in June. The index has posted below the 50.0 no-change value in each month since May, and the latest reading signalled the fastest pace of private sector contraction since June 2009.

Manufacturers suffered a sharper drop in business activity than service providers during July, as well as a greater loss of momentum relative to the situation in June. The latest reduction in manufacturing production was the steepest for just over three years, while new orders received in the sector dropped at the fastest pace since April 2009. Service providers recorded only a marginal decrease in business activity, although the rate of contraction was the joint-fastest in three years.

Across the private sector as a whole, new business intakes fell at the quickest rate since June 2009, with manufacturers and service providers both recording much sharper declines than during the previous month. Lower levels of new work have been recorded in the service economy during each month since April, and the latest reduction was the fastest for exactly three years. Meanwhile, in the manufacturing sector, new export orders declined at the steepest rate since May 2009, which contributed to a thirteenth successive monthly fall in total new business volumes.

July data pointed to a sharp and accelerated fall in outstanding business across the German private sector. ....
Flashback January 09, 2012: Dimwit Comment of the Day: Christine Lagarde, IMF Director says "Europe May Avoid a Recession This Year"
In what is likely the silliest comment of the year so far, Christine Lagarde says Europe may avoid recession this year
Flashback January 12, 2012: German Economy Contracts in 4th Quarter; Spain's Industrial Output Plunges 7%; UK Trade Deficit Widens; European Banks Wisely Hoard Cash
If Europe heads into a prolonged recession (and it has already started), Germany cannot help but get sucked into it. Approximately 28 percent of German GDP is derived by exporting goods to EU countries and Switzerland.

Think German exports to the rest of Europe are going to rise forever? Think again, starting with a look at the Eurozone's 4th largest economy. ...
Flashback February 23, 2012: Don't Worry, It's Only a "Mild Recession"
The economic clowns in the EU have finally acknowledged something that was blatantly obvious at least six months ago (and a lot longer if one factored in the likely effects of multiple austerity programs in numerous countries).

However, the economists' new conclusion is about as silly as the "no recession" call that preceded it. The new forecast: there will be a recession in the eurozone but not the EU and it will be "mild".
Such nonsense went on for months actually. Economists were behind the curve every step of the way even though it should have been blatantly obvious what was about to happen.

Global Recession Revisited

On July 6 I wrote Plunging New Orders Suggest Global Recession Has Arrived

Clearly I am not changing that prognosis although I do wish to reiterate the definition of "global recession as per my post Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears?
Contrary to popular myth, recession does not mean two consecutive quarters of economic contraction. Rather, two consecutive quarters of economic contraction is a sufficient, but not necessary condition.

In the US, the NBER is the official designator of recession start and end points. Many recessions have started with GDP still growing.

The "Conditions for Global Recession" are even looser. "The International Monetary Fund (IMF) considers a global recession as a period where gross domestic product (GDP) growth is at 3% or less. In addition to that, the IMF looks at declines in real per-capita world GDP along with several global macroeconomic factors before confirming a global recession."
Mike "Mish" Shedlock
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2:20 AM

Mish on Capital Account: Discussion of Social Media Panic in Italy, Soaring Yields in Spain, and the Upcoming 20th Euro Summit, Bound to be Another Failure

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I had the pleasure of being back on Capital Account with Lauren Lyster on Monday for a discussion of social media panic in Italy, soaring yields in Spain, and the end of the line for Greece.

I come in at about the 18 minute mark, but positioned the video to automatically start play at the 17:15 mark, which is the start of the segment.

That way you can hear a brief introduction from Lauren.

For detailed information about the discussion in the above video, please see...

Mike "Mish" Shedlock
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Monday, July 23, 2012 10:22 PM

Spanish Finance Minister in Germany Pleads for Temporary Credit Line to Halt an "Imminent Financial Collapse"

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Spain faces a bond rollover of €28 Billion in October and is rightfully scared about 2-year bond rates of 6.5%.

El Economista notes the Spanish economy minister is at a meeting in Berlin to discuss Government Request for a Credit Line to Save the Year and forestall an imminent financial collapse.

This is a heavily Mish-modified translation from the article ....

Luis de Guindos will meet with Wolfgang Schäuble to negotiate measures noting the ECB is already 19 weeks without buying debt.

Eeconomy minister, Luis de Guindos, now travels to Germany for talks with German Finance Minister, Wolfgang Schäuble. The appointment is key because Spain is running out of time. With the 10-year bond about 7.5% and the risk premium on the 632 basis points, Guindos nevertheless insisted that Spain will not have to ransom all for a full sovereign bailout.

Instead, he asks for the European Central Bank (ECB) to resume purchases of Spanish bonds in the market.

Guindos believes Mario Draghi is not the problem. Rather, bond purchases have stopped primarily because Germany is opposed. To mutate this position and to convince Schauble to give permission to his emissaries at the ECB, Jörg Asmussen, and Jens Weidmann, Luis de Guindos traveled to Germany

Analysts are unanimous: An imminent financial collapse is at stake. If pressure on Spanish bonds continues and Treasury loses its access to the bond market, Spain cannot cope with the massive debt maturity that awaits him in October, close to the 28 billion euros. Amounts may be even greater if Spain has to funnel money to the regions requesting the help of special liquidity fund.

Therefore, sources close to the government have admitted they are considering other alternatives. For example, the negotiation of a temporary line of credit with which to address the maturity of its debt, and perhaps even financial assistance for Spain's regional governments.

This option is based on a premise well known in the eurozone, of buying time. A credit line would serve to dampen fears today, waiting for the agreements reached at the June summit, including the implementation of a single banking supervisor and an operational Stability Mechanism.
For starters, when it comes to these bailouts, there is no such thing as "temporary". Regardless, I believe Germany will reject the request, thereby forcing Spain into a full sovereign bailout.

Mike "Mish" Shedlock
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