Mish's Global Economic Trend Analysis

Currency Intervention Madness; Japan Intervenes to Weaken the Yen; Selected Quotes
59% of Canadians Live Paycheque-to-Paycheque; Implications of a Canadian Housing Bust; How Sound are Canadian Banks?
Retail Sales Rise .4% from July - How Far to Pre-recession Levels? Where to from Here?
Political Debate: What Should Congress do to Stimulate the Economy?
Shuffling the Commercial Real Estate Deck

Currency Intervention Madness; Japan Intervenes to Weaken the Yen; Selected Quotes

Posted: 14 Sep 2010 09:45 PM PDT

After months of attempting to talk the Yen down, Japan Intervenes First Time Since '04 to Rein in Yen.

Japan intervened in the foreign-exchange market for the first time since 2004 after a surge in the yen to the strongest against the dollar in 15 years threatened to stunt the nation's economic recovery.

Finance Minister Yoshihiko Noda confirmed the intervention, speaking to reporters today in Tokyo. He said Japan contacted other nations about the step, without specifying that today's measure was taken unilaterally. Chief Cabinet Secretary Yoshito Sengoku said the ministry considers 82 per dollar to be the line of defense, after it reached a high of 82.88 earlier today.

Japan hadn't intervened to sell yen in the foreign-exchange market since 2004, when the yen was around 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Noda didn't say how much was used in today's action, while that figure will be released at a later date.

U.S. Treasury Secretary Timothy F. Geithner declined to comment about the prospects for currency intervention in an interview last week, instead saying that Japanese officials should do what they can to help their economy grow.

Recent Japanese data have pointed to the expansion losing momentum. The government yesterday revised its July industrial output figures to show that output fell rather than increased from a month earlier. Japan's economy expanded at a 1.5 percent annual rate in the second quarter, less than half the pace of the previous period, and consumer confidence slid to a four-month low in August.

Is Currency Manipulation OK or Not?

Both China and Japan are intervening in the Forex markets for the same reason, to strengthen exports and stimulate the economy.

Pardon me for asking the obvious question but it needs to be asked: Why does Geithner give the green light for Japan to intervene in the currency markets but China is threatened with a currency manipulator label for doing the same thing?

Boosting the Dollar

Please consider a few select quotes from the New York Times article Japan Moves to Boost the Dollar

JOHN VAIL, CHIEF GLOBAL STRATEGIST, NIKKO ASSET MANAGEMENT

"Clearly the U.S. is not going to be too friendly towards it although they may not argue too much about it in that Japan is a big customer for its Treasury securities."

"I'm not sure we are going to see a major weakening of the macro statistics in Japan, but if we do that would obviously help weaken the yen, but exports were quite strong in July both on a nominal and real basis so it's a bit of a quandary for Japan."

"But the biggest problem for Japan is not the U.S. cross rates, it's the Korean won, and the Korean won has just been ridiculously weak. Yet G20 officials have yet to really pressure Korea on this at all, which I think is really to Japan's detriment."

Bang for the Yen

If Japan's exports have been strong, why does Japan need to weaken the Yen to boost exports?

If the Problem for Japan is the Korean won, what the heck is Japan doing buying dollars? It certainly would get a lot more bang for the Yen buying Won.

TAKAO HATTORI, SENIOR INVESTMENT STRATEGIST, MITSUBISHI UFJ MORGAN STANLEY SECURITIES

"The size of the currency market is no longer small enough for intervention to change the trend in the yen. I am interested in seeing how the government would announce its stance and its approach to support the economy.

"If they intervened, it was good for the government to show its strong stance but the market is too big for the intervention to change the yen's trend."

Sheer Madness

Takao Hattori says that the Forex market is too big for intervention to work but "it was good for the government to show its strong stance".

Excuse me for asking but how can it be good policy to take actions that cannot work?

Prior Currency Intervention Madness

Please consider Currency Intervention And Other Conspiracies.

.... Note those numbers. Japan spent hundreds of billions in 2003 starting in August, attempting to prop up the dollar.

Japan halted its currency intervention in March of 2004 according to the International Herald Tribune article EU officials soften stance on yen's weakness.

Yen vs. Japan's Intervention 2003-2004

click on chart for sharper image

If ever there was proof of the absurdity of currency interventions there it is. Ironically the Yen started plunging shortly after Japan stopped trying to force down the value of the Yen.

It has been proven time and time again that currency intervention does not work. Yet, somehow it is "good for the government to show its strong stance".

Line of Defense

click on chart for sharper image

Note that the "Line of Defense" is right near the 1995 high.

Intraday Intervention in Action

click on chart for sharper image

Some might think the above chart shows that intervention works. It doesn't except possibly in the very short term.

In 2008 the Fed intervened multiple time to support Fannie Mae. In one such move, the share price doubled from $7 to $15 in less than a week on a short squeeze. A couple months later Fannie Mae collapsed to a buck.

Central banks cannot change the prevailing trend.

Assuming Japan was going to have a "line of defense", one near the 1995 is a spot where there would be technical resistance anyway. If the Yen does drop in a sustained way, it will not be because of the intervention, but rather because the Yen had outrun fundamentals and was simply ready to drop.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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59% of Canadians Live Paycheque-to-Paycheque; Implications of a Canadian Housing Bust; How Sound are Canadian Banks?

Posted: 14 Sep 2010 05:30 PM PDT

In today's Breakfast with Dave, Rosenberg notes "Most Canadians Still Living Like It's A Recession"

According to Statistics Canada, Canada's recession was short-lived, beginning in Q3 2008 and ending a year later in Q3 2009. But why doesn't it feel like that for nearly 60% of Canadians?

According to the Canadian Payroll Association, 59% of Canadians are living paycheque-to-paycheque and report they would be in trouble if their paycheques were delayed by a week. This is the same number of people that said they were stretched last year when this poll was conducted (and the economy was in a recession).

Risks to Canada's Economic Outlook

The OECD published an in-depth report on Canada. Before launching into the negative aspects of the report, it pays to stand back and appreciate that the world recognizes that Canada was able to weather the recession quite well due to "a sounder banking system, a less leveraged corporate sector and a relatively strong fiscal position".

Despite these strong fundamentals, there are significant risks to Canada's economic growth. Yesterday's release of the National Balance Sheet accounts was case in point, showing that the household debt-to-GDP ratio is now at a record high of 94.2% and debt-to-personal disposable income is at 146% (about 20 percentage points HIGHER than the U.S.), which the OECD says "implies a growing vulnerability to any future adverse shocks to any future adverse shocks."

As the OECD points out, most of the increase on household balance sheets has been through mortgage debt. They figure that "housing looks too overpriced on the basis of price-to-rent and price-to-income measures." Our models suggest Canadian home prices are about 10-20% overvalued, which would pose another negative risk to the economy.

How Big is that Bubble?

10-20% overvalued is overly optimistic. Vancouver in particular could easily see a 40% haircut if not much more.

Like Australia, it is more difficult in Canada to "walk away". See Australian Lenders Learn Nothing from US Housing Bust: Mortgage House offer 105% Mortgages, Westpack offers 97% Mortgages for a discussion.

Question of Soundness

The so-called "soundness" of Canadian banks stems from the fact that Canada's central bank is on the hook guaranteeing the vast majority of residential mortgages.

That Canadian banks do not have a skin in the game allows housing bubbles to build over a longer time period and get bigger than they otherwise would.

Is that a good thing? For who? The banks or the taxpayers?

The answers should be obvious: The ultimate setup is similar to US taxpayers bankrolling Fannie and Freddie for unlimited losses. Alternatively the Canadian Central Bank could print money and paper over the losses.

Neither setup is any good.

No Escape from Illiquid Greater Fool's Games

The most important question is "when will it matter?" There are signs now of hugely growing inventories and that is how a housing bubble always bursts.

Nonetheless, it will not matter until it does. When it does matter, it will be sudden and irreversible (as is typical of every illiquid Greater Fool's Game or Ponzi scheme). There will be no escape for underwater sellers, just as happened in the US, with the further restriction that Canadian borrowers simply cannot walk away.

The economic implications are enormous with so many living paycheque-to-paycheque already.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Retail Sales Rise .4% from July - How Far to Pre-recession Levels? Where to from Here?

Posted: 14 Sep 2010 11:59 AM PDT

Inquiring minds are investigating the Advance Monthly Retail Sales Report for August 2010, noting the discrepancy between what is reported and reality.

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for August, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $363.7 billion, an increase of 0.4 percent from the previous month, and 3.6 percent above August 2009.

Total sales for the June through August 2010 period were up 4.7 percent from the same period a year ago. The June to July 2010 percent change was revised from +0.4 percent to +0.3 percent .

Retail trade sales were up 0.5 percent from July 2010, and 3.7 percent above last year. Nonstore retailers sales were up 10.5 percent from August 2009 and gasoline stations sales were up 9.6 percent from last year.

As typical, Calculated Risk has some nice charts of the data.

Calculated Risk writes "This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline). Retail sales are up 8.4% from the bottom, but still off 4.3% from the pre-recession peak."

Although that is what the data says, I don't buy it. If retail sales were back to within 4.3% of the pre-recession peak, sales tax collections would be back towards the pre-recession peak, if not exceeding the pre-recession peak.

Why might they exceed the peak? Because of numerous state sales tax hikes.

The Slow Rebound - Very Slow

September 02, 2010: State Tax Revenues Slowly Rebound, But ...

The Nelson Rockefeller Institute reports State Tax Revenues Are Slowly Rebounding. However, as always, the devil is in the details. Let's take a look.

Preliminary tax collection data for the April-June quarter of 2010 show improvement in overall state tax collections as well as for personal income tax and sales tax revenue. However, revenue collections remain significantly below peak levels and are still weak in a number of states.

The Rockefeller Institute's compilation of data from 47 early reporting states shows collections from major tax sources increased by 2.2 percent in nominal terms compared to the second quarter of 2009, but was 17.2 percent below the same period two years ago.

State Tax Collections

Sales tax collections increased by 5.9 percent in the second quarter of 2010 compared to the same quarter of 2009, but were still 5.4 percent lower than two years ago. With 42 of 45 sales-tax states reporting so far, only seven states reported declines in sales tax collections compared with the same quarter last year.

Sales Tax Collections Down 5.9% June 2010 vs. June 2008

In spite of numerous sales tax hikes, tax collections are still 5.9% lower than two years ago. Moreover, June of 2008 was not the pre-recession peak. November of 2007 was the pre-recession peak.

Bear in mind the Rockefeller reports are from June and Calculated Risk's charts are for August, but that would barely dent the comparison, if at all.

The proper conclusion is that retail sales are down 10% or more from the pre-recession peak, especially if one factors in tax hikes.

Many states look at the Census report trying to figure out why their sales are lagging the national averages. The problem is the Census Bureau national averages are a blatant distortion of reality. The key to the states' conundrum is Census Bureau sampling methodology does not take into consideration stores that have gone out of business. Sales tax collections obviously do. Closed stores make no sales and collect no taxes.

Major Revision Coming?

I wonder how long it will take the Census Bureau to do a major revision, but as it sits, the retail sales report data is totally screwed up and paints a much brighter image of the "recovery" than has actually occurred.

In a genuine recovery, new stores would be opening and the data would be off in the other direction, with sales tax collections expanding faster than reported by the Census Bureau.

Where to From Here?

The number of store closings has probably peaked and that will make census reporting a bit more accurate going forward.

Currently all sign point to a renewed consumer slowdown. Thus, I suspect state tax collections will soon start to drop. With census bureau year-over-year comparisons starting to get more realistic, I expect to see that drop show up in the Census reports as well, even though the Census charts will remain totally screwed up from all the store closings in 2008-2009.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Political Debate: What Should Congress do to Stimulate the Economy?

Posted: 14 Sep 2010 10:30 AM PDT

On the Department of Education

Opening Statements

Closing Statements

In 2010 voters have a choice:

David Price - Congressman David Price is a Political Science Professor, 22-year incumbent politician who supports government bailouts, social welfare programs, protecting the environment and Obama's Health Care reform. He votes with Nancy Pelosi more than any other congressman.

or

B.J. Lawson - William B.J. Lawson is a Constitutional Conservative, father, Medical Doctor, engineer and small businessman who supports reducing taxes, cutting spending and repealing unconstitutional legislation.

4th district voters will choose principle over Washington rhetoric this November.

Money is always welcome, but so is your time and energy! Please click here to Volunteer Time or Services to B.J. Lawson.

Please do what you can to support B.J. Lawson. He is of a rare Ron Paul mode, and we cannot afford to let any opportunities to elect such candidates slip through the cracks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Shuffling the Commercial Real Estate Deck

Posted: 14 Sep 2010 01:00 AM PDT

According to the Star Tribune the Minneapolis suburban office market suffers from 20 percent vacancy rates. Recent large deals have done nothing to dent that glut of inventory.

Please consider Deals don't make dent in the southwest metro's empty offices

Several high-profile office leases have been signed in the Twin Cities' key southwest submarket this year, grabbing headlines and generally giving the impression that things might not be as bad as they seemed in terms of vacancies.

Rasmussen College took 48,000 square feet in the Normandale Lake Office Park's 8300 Tower. Meanwhile at the next-door 8200 Tower, Plato Learning signed a lease for 27,400 square feet. But, given the fact that the southwest submarket was significantly overbuilt with new office space in the pre-recession boom times, the new leases have barely made a dent in the area's 20 percent vacancy rate.

Even with the new transactions, the "absorption" effect on the southwest's vacancy rate was minimal because companies are essentially making lateral moves, said Northco Senior Associate Heather Alderink.

"Every single deal that I did in the southwest submarket in the second quarter was a case of someone coming into new space from somewhere else in the area, rather than completely new companies coming in," she said. "It's been a lot of shuffling from one space to another. They may be taking a little more space in their new offices, but usually it's a little less space."

Indeed, a closer look at some of the recent big leases reveal why they aren't doing much to alleviate the southwest metro office vacancy crisis. Plato Learning vacated twice as much Class B space in Bloomington in its move to the 8200 Tower; Rasmussen's new digs in the 8300 Tower includes employees relocated from Eden Prairie and Lake Elmo; and the U.S. Bancorp move to Richfield involves shuffling 1,600 workers from its Shepherd Road facility in St. Paul.

Deflationary Pressures

Companies are moving at the drop of a hat to get better rates or a better location for the same price. The effect of this is of course deflationary, adding to price pressures and more commercial real estate defaults.

Remember that commercial real estate lags residential and residential real estate has not yet bottomed, and indeed may not bottom for years.

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

Mish's Global Economic Trend Analysis

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