Mish's Global Economic Trend Analysis

Union Hires Non-Union Workers at Minimum Wage to Protest a Company Hiring Non-Union Workers
Time for a Dollar Bounce
CPI Negative 3rd Consecutive Month; Selective Memory; Perverse Effect of Falling Energy Prices on Imputed Housing Costs
Financial Reform Bill was a Stunning Success
How to Deal With Unions
Six Fortune 500 Companies including Vale, Walt Disney and Kraft, Move Regional HQ to Shanghai

Union Hires Non-Union Workers at Minimum Wage to Protest a Company Hiring Non-Union Workers

Posted: 16 Jul 2010 10:48 PM PDT

Once again truth is funnier and stranger than fiction. Please consider To Protest Hiring of Nonunion Help, Union Hires Nonunion Pickets

Billy Raye, a 51-year-old unemployed bike courier, is looking for work.

Fortunately for him, the Mid-Atlantic Regional Council of Carpenters is seeking paid demonstrators to march and chant in its current picket line outside the McPherson Building, an office complex here where the council says work is being done with nonunion labor.

"For a lot of our members, it's really difficult to have them come out, either because of parking or something else," explains Vincente Garcia, a union representative who is supervising the picketing.

In California, one group is offering to pay $10 and up per hour to activists to hold signs in demonstrations against foam cups and plastic bags.

In Atlanta, Timothy Baker, a 40-year-old unemployed warehouse worker, says his money-making strategy has been to walk picket lines for $8.50 an hour for the Southeastern Carpenters Regional Council. "It's something to do until you find something better."

The union's Mr. Garcia sees no conflict in a union that insists on union labor hiring nonunion people to protest the hiring of nonunion labor.

He says the pickets are not only about "union issues" but also about fair wages and benefits for American workers. By hiring the unemployed, "we are also giving back to the community a bit," he says.

Look at the gall of these unions, hiring non-union picketers while cannibalizing members of their own union.

Read that hypocrite's last statement again "by hiring the unemployed we are giving back to the community".

We would not have as many pending state layoffs if the hypocrites were truly interested in helping unemployment or helping the community instead of preying on communities, incessantly whining for higher taxes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Time for a Dollar Bounce

Posted: 16 Jul 2010 12:41 PM PDT

The time for a dollar bounce is at hand. One reason I make that statement is the single best contrarian indicator on the US dollar has spoken.

Please consider Dollar Rout by Peter Schiff, July 15, 2010.

Peter Schiff has proven to be a huge contrarian indicator on commodities, on China, on foreign investments, and on the US dollar. I suspect this video will be no different.

In the video, Schiff makes a case that it was impossible to see these bounces coming. I disagree and have called for several of them.

Political Alignment vs. Investment Decisions

Politically I align with Peter Schiff. The financial sector bailouts were obscene, as are all of the stimulus efforts. There will be hell to pay for both.

However, investment-wise I cannot and do not agree with Schiff. His hyperinflationary rants are simply unfounded. The reason he cannot see the forest for the trees is he fails to consider the role of credit in a fiat-based credit world.

Credit dwarfs money supply. Much of that credit cannot and will not be paid back. Schiff got that part correct, in spades, predicting as many others did a collapse in housing. His mistake was in assuming the dollar would crash with it.

Think about that for a second. If the dollar crashed to zero, the number of dollars it would take to buy a house would be infinite. There has never been a hyperinflation in history where home prices crashed and barring some war-zone anomaly, I doubt it ever happens.

If hyperinflation was in the cards, the correct response would be to buy as much real estate as possible given real estate only requires 5% down. That amount of margin is hard to come by in any other play except derivatives.

Are we "Trending Towards Deflation" or in It?

For a recap on the inflation-deflation debate, please see Are we "Trending Towards Deflation" or in It?

One of us took into consideration the role of credit, one of us didn't.

Technical Euro Bounce

The reason for the recent bounce in the Euro is without a doubt a pledge by European governments to adhere to various austerity measures. Another reason is purely technical.

The Euro plunged nonstop, nearly straight down from 1.50 to 1.18. For currencies that is an enormous move in a short period of time.

Roughly half of that move has corrected. The time to be bullish on the Euro was at the 1.18 to 1.20 level, not now (although I suppose the Euro could bounce a bit higher still).

Fundamentals of Euro vs. Dollar

Looking ahead, a key question for the Euro is whether or not the European governments adhere to their austerity measures (I rather doubt it).

A second factor is the alarming rate at which the ECB is supporting Spain. How long can that continue?

Spain calls on ECB for record funding

Spanish banks have called on a record amount of funding from the European Central Bank (ECB) in June amid mounting volatility on financial markets as noted by the Telegraph article Spain calls on ECB for record funding

[Spanish banks] borrowed a total of €126.3bn (£105bn) from the ECB last month, which was a 48pc jump compared with May and the largest amount borrowed according to Bank of Spain records since 1999.

Spain followed Greece into the eurozone debt crisis as concerns over its deficit triggered credit downgrades from ratings agencies and forced the country to agree to tough austerity measures in an attempt to bring the nation's finances back under control.

US Has Problems, But Who Doesn't?

When it comes to the US dollar, it is very important to acknowledge problems elsewhere, something Schiff repeatedly does not do. There is also an enormous property bubble in China and insolvent Chinese banks that needs to be factored in.

In isolation, there is certainly there is no good fundamental reason to like the US dollar, just as Schiff says. However, one cannot view these problem in isolation and make any reasonable investment decisions out of them!

The fact is, there are fewer reasons (right now) to like the Euro. Most importantly, Europe has a huge structural problem of a currency union but no political union. There is a reasonable possibility the currency union dissolves.

With that structural overhang, the Euro is likely to have difficulty gaining traction.

What Matters Now?

Down the road, Schiff is correct that the problems facing the US dollar are enormous. However, investors must separate down-the-road conditions from what matters now.

What does matter now is the continued consumer credit implosion that dwarfs monetary printing and fiscal stimulus. That not only affects US stick prices but commodity prices as well, and in turn currency prices of commodity producing countries.

Factor that all in, and the possibility of the US dollar rising to 1.15 or even to parity vs. the Euro is not out of the question.

In the meantime, the US is back in deflation factoring in credit-marked-to market. Hyperinflation remains a pipe dream.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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CPI Negative 3rd Consecutive Month; Selective Memory; Perverse Effect of Falling Energy Prices on Imputed Housing Costs

Posted: 16 Jul 2010 11:26 AM PDT

As expected, as least as I expected, the Consumer Price Index for June shows the seasonally adjusted CPI was Negative 3rd Consecutive Month.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the index increased 1.1 percent before seasonal adjustment.

Similarly to April and May, a decline in the energy index caused the seasonally adjusted all items decrease in June. The index for energy decreased 2.9 percent in June, the same decline as in May, with a decline in the gasoline index accounting for most of the decrease. This more than offset an increase in the index for all items less food and energy, while the food index was unchanged for the second month in a row.

The index for all items less food and energy rose 0.2 percent in June after increasing 0.1 percent in May. A broad array of indexes posted increases, including shelter, apparel, used cars, medical care, tobacco, and recreation. These increases more than offset declines in the indexes for household furnishings and operations and for airline fares. The 12-month change in the index for all items less food and energy remained at 0.9 percent for the third month in a row.

One Month Change in CPI-U

12-Month CPI-U Change vs. Year Ago

Oil and the CPI

For, now the CPI (less food and energy) has been hovering near +1% for about a year. However, it is not really valid to exclude food or energy but the Fed does it to justify their inflationary policies (policies that clearly are not working now).

The jump in "all items" in the second chart reflects the rebound in oil prices in Spring-Summer of 2009 when crude soared from $35 a barrel to close to $80 a barrel.

Of course hyperinflationists were screaming every step of the way, conveniently ignoring the plunge from $140 to $35.

Selective Memories

When it comes to prices, people have selective memories. They remember every penny uptick in gasoline prices, but forget the times they drop. The same applies to most everything else, but energy is very noticeable because people are constantly filling up their tanks.

On average, prices have been going up over time, but not as fast as memory suggests.

Another factor is rising taxes. That is money out of your pocket and mine, siphoned off by government and wasted on needless or even mindless things like the wars in Iraq and Afghanistan, but rising taxes are not the same as rising prices.

Medical and Used Car Increases

Here is an interesting BLS statement from the report that bears a closer look: "A broad array of indexes posted increases, including shelter, apparel, used cars, medical care, tobacco, and recreation."

One of the reasons used car prices rose was the inane cash-for clunkers policy that destroyed productive assets. This is similar to FDR destroying crops in the great depression, on a much smaller scale of course.

Without a doubt, medical prices are rising as a result of inept government policy. The recently passed medical reform bill will not help any.

My point is one must distinguish between why prices are rising, not just note that prices are rising. For example, prices rising as a result of an expansion of money supply or credit are a true effect of inflation (inflation itself being the rise in money supply or credit). Prices rising because of inept government policy (or because of supply constraints like peak oil) do not constitute "inflation" nor can they be considered a result of "inflation".

Perverse State of Affairs with Housing and Owners' Equivalent Rent

Finally, in regards to housing, note that rental prices, specifically "owners' equivalent rent" is the single largest component of the CPI. Thus, the BLS does not include actual prices in their analysis but rather imputed rents.

Although rents have been falling the BLS reports rents are rising. Here is one possible explanation.

When natural gas and heating oil prices drop, imputed rents rise and when natural gas and heating oil prices rise, imputed rents fall. The reason for this apparent anomaly is the BLS assumes heating is part of rent and one is getting more value for constant rental dollars when energy prices rise.

Here is a chart of natural gas.

Natural gas prices are down in 2010 and that puts upward pressure on imputed rents.

I think the whole thing is silly, and the BLS needs to plug in home prices directly, using the Case-Shiller housing index as a guide.

Regardless, if gasoline prices continue to drop as I expect they will, the CPI will soon enough be in negative territory anyway.

As I said in Are we "Trending Towards Deflation" or in It? ....

Bernanke has failed. "It" has happened.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Financial Reform Bill was a Stunning Success

Posted: 16 Jul 2010 02:33 AM PDT

Quite a few people sent me eMails asking my opinion on the financial reform legislation just passed by Congress, legislation that will undoubtedly be signed with much fanfare by President Obama.

This may surprise some people but I think the bill exceeded the wildest of expectations. Moreover, I can prove it.

To fully appreciate how amazingly good this piece of legislation was, we must look at the pluses (what the bill accomplished), the minuses (objectives the bill failed to meet along with any damages done), and the critical issue (reasonable expectations as to what the bill might have accomplished). Let's start with the minuses.

Financial Reform Minuses

Glass-Steagall: Paul Volcker supported provisions that were hopelessly watered down, so much so that they can accomplish nothing. This was a complete failure.
Derivatives Reform: Banks successfully lobbied for derivative exceptions big enough to drive the planet Jupiter through. They succeeded. Derivatives reform is meaningless.
Too Big To Fail: The reform bill did absolutely nothing to rein in the widely recognized "too big to fail" policies of the Fed. This was a complete failure.
Preventing the Last Crisis: There is not a single thing in the bill that can possibly be construed to have prevented the last crisis. This was a complete failure.
Preventing the Next Crisis: There is not a single thing in the bill that can possibly do anything to prevent the next crisis. This too was a complete failure.

Financial Reform Pluses

None. The bill accomplished virtually nothing.

No doubt quite a few inquiring minds will be wondering how a financial reform bill that failed at 100% of its objectives while accomplishing virtually nothing can possibly be considered a "stunning success".

This is where it pays to consider the crucial point: reasonable expectations.

Reasonable Expectations

The best way I can explain reasonable expectations is via an analysis of the Medical Reform bill, promoted, passed, and signed by President Obama even though a majority of US citizens were dead against it.

Medical reform did nothing to promote competition between states, nothing on tort reform, nothing to allow drug imports from Canada that would lower prescription costs and most importantly, nothing on reducing costs any step of the way.

That's the positive side of medical reform.

The negative side of the balance sheet is that medical reform will cost a trillion dollars while increasing costs on small businesses at a time we can least afford to make that critical mistake. Furthermore, the bill panders to public unions and their luxury 100% paid for plans that put upward pressure on healthcare costs.

Medical Reform vs. Financial Reform

Medical reform not only accomplished nothing, it actually made matters substantially worse.

In sharp contrast to medical reform, I cannot come up with any financial reform provisions that make matters substantially worse.

Given the absolute best we could ever expect out of a major piece of legislation supported and promoted by Obama is nothing, and given that nothing was accomplished with no major detriments making matters much worse, the financial reform bill must be considered a stunning success.

Indeed, we should all be thrilled by it.

Importance of an Open Mind

However ... I am always suspicious that major legislation like this contains provisions that will sow the seeds of the next crisis. Thus I am ready, willing, and able to admit that I was wrong if someone can show me how this bill makes matters substantially worse than before. If so, I will retract my statement that this bill was a "stunning success" and instead claim it was "stunning success compared to health care" or some other appropriate statement.

Moreover, if someone can convince me this bill actually does something that is net positive in a major way, I am ready willing and able to scream "Hallelujah! Praise be Obama" three times at the top of my lungs in downtown Chicago.

Some nitpickers will point out that the bill includes new transparency rules regarding the Fed. However, I doubt the new transparency rules accomplish much, if indeed anything. As a counterbalance, I strongly suspect there are some minor negatives I missed.

I need be convinced there are major net pluses or minuses to scream in downtown Chicago or to issue a retraction.

Otherwise, I sit comfortably with my opinion that "Financial Reform was a Stunning Success", arguably the very best our wildest imaginations could ever have expected, given that it accomplished virtually nothing while doing no further major economic damage.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How to Deal With Unions

Posted: 16 Jul 2010 01:30 AM PDT

Congratulations to the building management at Century Centre Towers for doing exactly what needs to be done with unions: completely getting rid of them.

Here is an email from "VM" regarding the building he lives in.

Century Centre
Date: July 13, 2010
To: All Tenants at Century Centre Towers
From: The Office of the Buildings
Re: Janitorial company change

----------------- PLEASE READ IMMEDIATELY ----------------

In our efforts to keep all controllable costs within reason, the Landlord has determined that changing the janitorial company at Century Centre is the responsible thing to do. Our current company is bound by the Union and in May, the Union presented their substantial increase which in our opinion was inappropriate in today's economy.

We asked for proposals from seven different companies and made our selection. Starting August 16, our new janitorial company will be the Ritz Companies out of Irvine. The Ritz Companies is a non-union company, which means that more than likely the Union will strike at our property.

There is a very high probability that the Union will send over some people to picket. I do not know when they will show up but I have spoken to the Irvine Police Department and the picketers should be staying out on the sidewalk along Main Street and they are not allowed to block the entry. You may want to notify employees, guests and visitors of the potential picketers.

Should you have any questions, please don't hesitate to contact our office.

Cities and states need to deal with unions exactly the same way. Unions have a choice. They can be reasonable or they can lose their jobs.

If the union is stupid enough to picket, it will further entrench public attitudes against union members wanting wages and benefits others do not get.

This was a private union not a public one. If only it was as easy to get rid of public ones. Unfortunately public unions buy votes from corrupt politicians.

Please note that not a single job was lost by this. Instead, everyone in the building will benefit from lower assessments while the same janitorial work will be done by a different company who will need to staff up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Six Fortune 500 Companies including Vale, Walt Disney and Kraft, Move Regional HQ to Shanghai

Posted: 15 Jul 2010 11:23 PM PDT

When you have a tax policy that begs corporations to move workers and profits overseas, this is what you should expect: 24 multinationals move HQ to Shanghai

24 multinational companies, have decided to move their regional headquarters to Shanghai, including 6 Fortune 500 companies such as Vale, Walt Disney and Kraft Foods.

This will push the total number of companies with regional headquarters in Shanghai to nearly 300. Nearly 500 have regional research and development centers there.

Shanghai has been China's top destination, for multinationals. Even during the world economic slump, the city's foreign direct investment still increased. Data shows Shanghai's foreign direct investment has already surpassed more than 5 billion US dollars in the first half of this year.

US Tax policy allows deferral of taxes on corporate profits held overseas. Tax policy, in conjunction with global wage arbitrage, practically begs corporations to move jobs and profits overseas.

Meanwhile, small businesses struggling in the US face higher taxes and increased medical expenses thanks to the Obama administration. It's a lose-lose situation for small businesses vs. larger multinationals.

The worst part of this sorry situation is small businesses are the real economic driver for jobs.

For further discussion of small businesses, job creation, and our inept policies, please see Bleak Outlook for Small Businesses and Job Creation; Where Obama Went Wrong, and What to do About It.

Addendum

A couple people pointed out the word "Regional". Offices did not move out of the US.
True enough.
However, the likelihood those regional offices are bigger at the expense of US is high, but admittedly there is no way of knowing. However the underlying message on tax policy is valid regardless.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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