Mish's Global Economic Trend Analysis

Spanish Revenues Collapse by 16.8%, GDP Misses Target; Is a Bailout of Spain in the Cards?
Housing Adjusted CPI, Gold, and the Deflation Grand Supercycle Theory
Imported Food Cost Up 20% From Year Ago, Biggest Increase Since 1977; Other Imported Goods Up More Than Expected

Spanish Revenues Collapse by 16.8%, GDP Misses Target; Is a Bailout of Spain in the Cards?

Posted: 10 May 2011 01:34 PM PDT

Every day I get emails from a friend Bran who lives in Spain. Today Bran writes ...

Hello Mish

The big news here today is with government accounts. GDP is lower than expected, and revenue are down way more than expected (down 16.2% compared with a predicted drop of 12.8%).

Therefore, the government is looking at another few billion in borrowing this year and its schedule of deficit targets is thrown out of line.

Spain's budget is already tight after spending cuts and salary reductions, so the article suggests higher taxes might be need to get back on target.

All the best, Bran.

For those who can read Spanish, here is the link Bran sent: Zapatero, abocado a una subida de impuestos por no cumplir el crecimiento

Google offers a rough translation Zapatero, heading to a tax increase for failing to meet growth from which it is easy to glean a few more facts.

The deficit compromises growth objectives for 2012 through 2014.
Staff reductions are increasingly difficult.
Spain is in a very problematic situation.
Personal income taxes are down 19.4%
Corporate incomes taxes are down 42.7%
VAT collection is down 22.4%
Excise duties are down 40%

Judging from the above, I am wondering how overall revenues are down only 16.2%. I am also wondering how soon the interest rates in Spain soar as they did in Greece, then Ireland, then Portugal.

Spain 10-Year Government Bond Yield

click on chart for sharper image

If the Spanish economy continues to deteriorate (and I believe it will), don't expect that "low" yield to last.

"Low" is in comparison to Greece where 10-year government bonds yield 15.4% as opposed to Germany where 10-year bonds yield a mere 3.12%.

Is a bailout of Spain in the cards, or is Spain simply too big to bail? We will have our answer in due time.

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

Housing Adjusted CPI, Gold, and the Deflation Grand Supercycle Theory

Posted: 10 May 2011 10:11 AM PDT

I am a firm believer that housing prices belong in the CPI. I have discussed this at length before, and in light of reported inflation (as measured by prices but certainly not credit), it's time to take another look at a CPI adjusted for housing prices.

Here are a couple of chart from my friend "TC" that show the relation between the CPI, a Case-Shiller adjusted CPI, and the Fed Funds Rate. For more on the rationale behind the following charts please see What's the Real CPI?

Case-ShillerAdjusted CPI (CS-CPI) vs. CPI Less Food and Energy

click on chart for sharper image

That chart is for comparison purposes only. I do not mean to imply as Bernanke does, that one can exclude food and energy prices to make things appear benign when they aren't. Moreover, I certainly do not think the Fed should ignore housing prices as the Fed did from 2002-2006.

CS-CPI vs. CPI-U vs. Fed Funds Rate

click on chart for sharper image

Huge Inflation? When?

Those screaming inflation have a point, provided they are talking about 2002-2006.The lines to pay attention to are the lines in red and green. The Fed Funds Rate was above or identical to CS-CPI until January 2002. At that point housing prices shot up, along this the stock market, commodities, and everything else until late 2007.

As measured by CS-CPI, the Fed Funds rate went negative to the tune of 6% or so at various spots on the curve.

Fed Sponsored Housing Bubble

Normal Fed policy would be for the Fed Funds Rate to be a couple points higher than the CPI. With real interest rates running at -6%, is it any wonder the housing bubble got as big as it did?

Thus, Fed policy sponsored a housing bubble that Greenspan then Bernanke ignored every step of the way. Finally, when the bubble did bust, the Fed cut rates to zero in a series of panic moves hoping to stop the housing crash.

The Fed failed. Factoring in home prices, CS-CPI dipped to -6% in January of 2009.

Deflationists Got It Correct

Not only was there a credit bust, there was nearly 1.5 years of CS-CPI deflation, and near a year of CPI-All Items (CPI-U), deflation.

Whether you define deflation in terms of credit, in terms of purchasing power of the dollar, in terms of the CPI, or in terms of the Case-Shiller CPI, to the complete consternation of screaming hyperinflationists, those predicting deflation got it correct.

Where to From Here?

Should we get another credit crunch, and I think that is likely, I foresee another round of deflation. Thus my prediction has been and remains, the US will go in and out of deflation for a number of years. I see no reason to change that forecast.

Please note that I do not buy into the grand supercycle theory of deflation where the DOW drops to 1000 and the S&P 500 to 200 or lower.

I do not know if the bottom in equities is in or not, but no one else does either. Nonetheless, I see no sense in predicting something for 30 years that has not happened and still seems unlikely today.

Moreover, supercycle deflation calls for gold at $250 seem preposterous although in theory darn near anything can happen.

Why Gold?

As I predicted (unlike what other deflationists were saying), gold soared in response to Central Bank rate-cutting and liquidity moves. Notice I said Central Bank, not just the Fed.

Moreover, the sovereign debt crisis in Europe, the massive housing bubble in China and especially the credit bubble in China offer still more reasons to own gold.

Those calling for deflation and for gold to crash with it, blew the call. Hyperinflationists blew the call as well. I will address the silliness of hyperinflation theories in a subsequent post.

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

Imported Food Cost Up 20% From Year Ago, Biggest Increase Since 1977; Other Imported Goods Up More Than Expected

Posted: 10 May 2011 07:40 AM PDT

In a headline sure to bring out more nonsensical comments about hyperinflation, Bloomberg reports Cost of U.S. Imported Goods Rose More Than Forecast in April

Prices of goods imported into the U.S. rose more than forecast in April, driven by gains in fuel and food that may put pressure on some companies to raise prices.

The 2.2 percent increase in the import-price index followed a revised 2.6 percent gain in March, Labor Department figures showed today in Washington. Economists projected a 1.8 percent increase, according to the median estimate in a Bloomberg News survey. Prices excluding fuel advanced 0.6 percent.

Growing demand from economies in Asia and Latin America, paired with a weaker dollar, may keep pushing up the cost of goods from overseas. While businesses like Whole Foods Market Inc. (WFMI) are trying to decide whether to pass increased prices onto consumers, Federal Reserve Chairman Ben Bernanke said he expects elevated commodity costs to moderate.

Compared with a year earlier, import prices increased 11 percent, exceeding the 10 percent increase projected by economists surveyed and the biggest 12-month gain in a year.

The cost of imported petroleum increased 7.2 percent from the prior month and was up 37 percent from a year earlier.

Excluding all fuels, import prices climbed 4.3 percent from April 2010, matching the prior month's 12-month increase as the biggest since October 2008.

Imported food was 1.8 percent costlier last month and was up 20 percent from a year earlier, the biggest 12-month increase since records began in 1977.

Costs of imported automobiles rose 0.4 percent from the prior month, today's report showed. Consumer goods excluding vehicles showed a 0.4 percent increase after falling 0.2 percent in March.

Imported capital goods prices were increased 0.1 percent.

A quick look at the no-so-shocking details shows oil was the biggest component. Of the 2.2% advance this month, 1.6% was petroleum. In other words 72% of the increase was petroleum, and food was much of the rest.

With food prices rising worldwide, this does not seem like much news, especially since the US grows the vast majority of its food. However, hyperinflationists will be all over it.

If oil takes a huge slide, and I think that is likely, oil prices will fall to negative territory at some point later this year.

Nonetheless, I am not in agreement with Bernanke's policy statements regarding "transitory inflation" because he and the Central bank of China are responsible once again for spawning and ignoring equity and commodity bubbles. Bernanke's primary intent was to stabilize housing and he failed.

The Fed can create liquidity but it cannot control where it goes, or if it goes anywhere at all.

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

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Tuesday, May 10, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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