Mish's Global Economic Trend Analysis

Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone"
Inane Department of Education Ruling Sends Education Stocks Flying
US Factory Orders Drop 1.2%, Durable Goods Orders Drop 3.6%, 67 out of 67 Economists Overoptimistic
Superb Russell Napier Interview on Financial Sense; Will the S&P Drop to 400 as Napier Suggests? Why it Might Not

Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone"

Posted: 02 Jun 2011 02:06 PM PDT

Rather than admit the innumerable mistakes has has made, ECB president Jean-Claude Trichet has continually upped the ante on taxpayers with increasingly risky measures such as loading up the ECB with junk bonds from Greece and Ireland in clear violation of the Maastricht Treaty.

Today, in the wake of still more failures of the bond market to follow his wishes, Trichet openly calls for a bold new initiative, one that would effectively transform the Euro-Zone, into a fiscal Nanny-Zone as well.

Creation of the "Nanny State"

Bloomberg reports Trichet Calls for Euro Finance Ministry as Crisis Deepens

European Central Bank President Jean- Claude Trichet said governments should consider setting up a finance ministry for the 17-nation euro region as the bloc struggles to contain a region-wide sovereign debt crisis.

"Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?" Trichet said in a speech today in Aachen, Germany. He also favors giving the European Union powers to veto the budget measures of countries that go "harmfully astray," though that would require a change to EU Treaties.

Trichet, who has no formal power over government decision making, hasn't said what he plans to do when he leaves the ECB at the end of October. He said today that while any single finance ministry would "not necessarily" administer "a large federal budget," it would "exert direct responsibilities in at least three domains."

These would include "first, the surveillance of both fiscal policies and competitiveness policies" and "direct responsibilities" for countries in fiscal distress, he said.

It would also carry out "all the typical responsibilities of the executive branches as regards the union's integrated financial sector, so as to accompany the full integration of financial services, and third, the representation of the union confederation in international financial institutions."

Trichet said that any new form of fiscal governance would need to be "decided by the people of Europe" and that the EU president, the European Commission and the German finance ministry are sure to have their own views. Calls to the German finance ministry for comments on Trichet's proposals were not immediately returned. Officials at the French finance ministry declined to comment.

This was bound to happen given the flaws in the creation of the Euro itself.

Who is the best person to head up the nanny-state? Why it's none other than Jean-Claude Trichet, soon to be out of his job as ECB president because of term limit restrictions.

Flashback December 17, 2010: Support Rises for "European Nanny State"; Is Germany unfit for the Euro or is the Euro Unfit for the PIIGS?

Angela Merkel's Big Mistake

Merkel's big mistake was caving in to Trichet, Noyer, and others who insisted on "no haircuts".

For that, she is now the subject of "The Big Point" with everyone jumping on her back and pointing fingers. Consider this statement from the EuroIntelligence article:

The Left Party's spokeswoman said Merkel's position did not reflect the national interest but those of the banks (a position with which we would agree. Merkel is extraordinarily lazy in the definition of what constitutes the national interest.)

European Nanny State

My initial reaction was "It would seem that Merkel stood up FOR Germany and against the banks when she insisted on haircuts."

Just to be safe, I emailed my friend "HB" who lives in Germany, asking for his thoughts. His reply was "I completely agree with your interpretation."

He went on to comment about a reference in the EuroIntelligence article citing Der Spiegel's online editorial "Union of the Unreconciled" calling for the coordination of all aspects of economic policy, includes taxes, wages, and pensions.

My friend "HB" commented
This is what the fools that rule the Eurocracy want - a huge centralized nanny state in which taxes are 'harmonized' and citizens can no longer choose between low and high tax nations.

It is the absolutely worst thing that could possibly happen. It would be better for the euro-area to break up.

Fiscal Nanny-Zone

Trichet was one of the architects of the Maastricht Treaty, and he has violated that treaty at will ever since.

Now he wants to completely trash the treaty, effectively transforming the Euro-Zone into a nanny-zone "Eurocracy".

When will Germany finally step up to the plate and tell Jean-Claude Trichet in no unmistakable terms where to shove it?

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

Inane Department of Education Ruling Sends Education Stocks Flying

Posted: 02 Jun 2011 10:31 AM PDT

The only thing student loan programs do is saddle students with debt and pad the pockets of educators, especially for profit colleges.

Students are defaulting in record numbers. Worse yet Yahoo Finance reports that students at for-profit institutions represent just 12 percent of all higher education students but 46 percent of all student loan dollars in default. Please see Big student debt could limit schools' aid access for details.

The government solution is to ban federal aid programs for profit colleges unless a minimum of 35 percent of its former students are repaying their loans.

35 Percent Effective Is OK??!!

Secretary of Education Arne Duncan said "We're asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective. This is a perfectly reasonable bar and one that every for-profit program should be able to reach."

35 Percent is NOT a "perfectly reasonable bar". However it certainly is a bar that "every for-profit program should be able to reach."

Yet, amazingly, the DOE said it expects 18 percent of for-profit schools' programs to fail its tests at some point, and 5 percent of programs to lose eligibility under the new law.

69% is flunking, 35% is preposterous.

Education Stocks Rip Roaring

On that inane ruling by Secretary of Education Arne Duncan, Education Stocks Rally 15 Percent.

Education stocks were the top gainers on U.S. exchanges on Thursday. Shares of Corinthian Colleges, up almost 40 percent, were the most heavily traded on Nasdaq.

Market leader Apollo Group rose 15 percent, while stocks of Strayer Education, ITT Educational and Education Management rose more than 20 percent.

An education index was up 15 percent.

Analysts said the new rule benefited all companies in the sector. Companies like Apollo and Capella Education, which were in the restricted zone to access federal aid based on the repayment rate metric, can now grow their student base unrestricted.

The education department surprised with the number of changes that benefited the colleges, given its tough stance on the issue in the last two years.

A key change in the rule is that colleges have now till 2015 before a program can be denied tuition loans over too many defaults by ex-students.

The rule is part of the Obama administration's crackdown on for-profit schools, accused of overcharging students, burdening them with debt and not preparing them adequately for jobs.

The department finalized a set of 13 rules last year but delayed the 'gainful employment' rule after much opposition.

Crackdown by Obama? What Crackdown?

The abuses are staggering as is the burden on students who graduate collage hundreds of thousands of dollars in debt, with useless degrees in English or culinary arts. In regards to the latter, for-profit colleges include burger-flipping as getting a degree in the field.

Obama brags about safeguarding student loans. That is like bragging about safeguarding the plague.

Student loans have done four things, all of them bad.

Jack up the cost of education
Make students debt slaves for the rest of their lives
Unjustly hand over huge profits to schools like the University of Phoenix at taxpayer expense
Add to the national debt

The best thing to do with student loans would be scrap the program entirely.

Please consider

Education Bubble: The "Education Bubble"; Student Loan Debt Passes Credit Card Debt, Expected to Hit $1 Trillion

A Remarkable Comparison: Affordable Student Loans vs. Affordable Housing an email from Eugene Holloway, a Maryland Attorney, on the rising cost of college education.

Debt for Diploma Schemes: Debt for Diploma Schemes and the Cookie Monster Principle

Off-Balance-Sheet Budget Fraud: Budget Deficit Accounting Fraud and the Off-Balance-Sheet Student Loan Scam; Time to Scrap Entire Student Loan Program

Pell Grants Turn Students into Debt Zombies: For Profit Schools Turn Students Into Debt Zombies; It's Time To Kill The Entire Pell Grant Program

Subprime College Loans, Who is to Blame?: Subprime Goes to College; Students Buried in Debt; Who is to Blame?

Expect More Student Riots: University of California Campus Erupts In Riots; Student Loan Scam Drives Up Cost Of Education; Expect More Riots

Reflections on a Wise College Major

Student Loan Projections 2009-2020 in $Billions

Scalpel and Machete Both Wrong

We do not need to take a Scalpel or a Machete to the student loan program. The student loan program should be scrapped in entirety. Indeed there are entire departments that should be scrapped entirely, including the department of education and department of energy.

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

US Factory Orders Drop 1.2%, Durable Goods Orders Drop 3.6%, 67 out of 67 Economists Overoptimistic

Posted: 02 Jun 2011 09:08 AM PDT

Add durable goods to the ever-growing pile of stats that suggest the economic growth is slowing rapidly, assuming of course there is any growth at all.

The growth everyone is trumping up is in reality a mirage as noted in the excellent column this morning Can We Please Stop Pretending the GDP Is "Growing"? by Charles Hughes Smith.

The Federal government borrowed and spent $5.1 trillion over the past four years to generate a cumulative $700 billion increase in the nation's GDP. That means we've borrowed and spent $7.28 for every $1 of nominal "growth" in GDP.

In constant dollars, GDP is flat: we got no growth at all for our $5.1 trillion: zip, zero, nada. In constant dollars, the GDP in 2011 might return to the 2007 level, if the economy continues "growing" at the same pace reached in the first three months of 2011. If not, then the GDP will actually be lower than pre-recession levels.

If you borrowed $7 to get $1 in your pocket, would that strike you as a good deal?How long do you reckon you could borrow $7 to get $1 of "growth" in your finances?

US Factory Orders Drop 1.2%, Durable Goods Orders Drop 3.6%

Bloomberg reports U.S. Factory Orders Fell 1.2% in April, Most Since May 2010

Orders placed with U.S. factories fell in April by the most in almost a year as demand for aircraft waned and Japan's earthquake restrained auto-related supplies.

Bookings for manufacturers' goods dropped 1.2 percent, the biggest decrease since May 2010, after a revised 3.8 percent gain in March, figures from the Commerce Department showed today in Washington. Economists projected a 1 percent decline in April, according to the median forecast in a Bloomberg News survey. Orders for durable goods fell 3.6 percent.

Estimates of the 67 economists surveyed by Bloomberg ranged from a decline of 3 percent to a gain of 1.5 percent.

Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, fell 2.3 percent, the most since January. March capital goods orders rose 5.4 percent.

Jobless claims decreased by 6,000 to 422,000 in the week ended May 28, according to Labor Department figures released today. Economists had predicted a drop to 417,000.

Tokyo-based Honda said its North American and China vehicle production will return to pre-earthquake levels in August. In the U.S., production of Honda's Civic small cars will continue to be slowed by limited supplies of some parts, the Tokyo-based company said in a statement May 26. Production of the 2012 Civic, which went on sale in April, will be at about 50 percent, it said.

"The light at the end of the tunnel is glowing brighter for us, represented by this significant improvement in our production situation," John Mendel, executive vice president of U.S. sales, said in the statement.

No Light At End of Tunnel

By the time parts are back in full supply, there will be little demand for cars.

The light at the end of the tunnel is in reality the recession train headed this way.

Moreover, durable goods inventories mount. Please consider the Department of Commerce Full Report on Manufacturers' Shipments, Inventories and Orders April 2011

Inventories of manufactured durable goods in April, up sixteen consecutive months, increased $3.3 billion or 0.9 percent to $350.6 billion, unchanged from the previously published increase. This was at the highest level since the series was first published on a NAICS basis and followed a 1.7 percent March increase.

4-Week Moving Average of Weekly Unemployment Claims 425,500

As expected, the 4-week moving average of Weekly Unemployment Claims dropped by 14,000 to 425,500, a decrease of 14,000 from the previous week's revised average of 439,500.

That number was very easy to game as noted in Mood Swings: Economists Rush to Lower Payroll Estimates; What to Expect on Thursday and Friday.

My guess was 427,000. Tomorrow's job report is much more of a crap shoot.

What to Expect on Friday?

Garbage. That's what.

I will take the under on jobs and the over on the expected unemployment rate of 8.9%. For a guess on the latter, 9.2% seems reasonable on the data (and that was my opinion before the ISM and ADP reports). However, Lord only knows how many people the BLS might say dropped out of the labor force.

Bear in mind that McDonald's added 50,000 to 70,000 jobs and those jobs may affect the establishment survey. However, no one knows because the BLS will not confirm who is in the survey.

Regardless, if burger flipping saves the day, it won't last.

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

Superb Russell Napier Interview on Financial Sense; Will the S&P Drop to 400 as Napier Suggests? Why it Might Not

Posted: 01 Jun 2011 11:48 PM PDT

Reader Chris sent the following comment regarding a Russell Napier Interview on Financial Sense:

Hi Mish if you get a chance, I highly recommend this Russell Napier interview with Jim Puplava. I think Napier is incredibly rational and knowledgeable, with a very interesting perspective on things. This is the best interview I have heard for a while.

Napier seems reasonably aligned with your own views on deflation and what you have been saying on stock market valuations.

Napier sees the scary prospect of a slumping economy and higher bond yields something that has not happened for a long time, as usually bonds do well when the economy sinks. Napier likens it to 1931 when the UK came off the gold standard.

I concur with Chris and would also like to add that Jim Puplava is one of the best interviewers around. Here are a few select quotes from the Financial Sense audio Russell Napier Discusses the Failure of QE2 and the Coming QE3

Puplava: For stocks to continue to do well, don't we need to see mild inflation and sustained economic growth, and do you see that as a possibility? The leading economic indicators would probably tell us otherwise.

Napier: I think we need to see more than that. The cyclically adjusted PE does not forecasting this level [of GDP] or associated with this economic outcome, it has been associated with very good economic outcomes. That is why I don't buy the story here.

Many people say that equities are cheap. Well they are cheap based on current earnings but current earnings are at an all-time high. We have a reasonable measure of this going back to 1929. You find that corporate profit as a share of GDP is the highest it has been since 1929.

This is a very mean-reverting figure.

So this stock market is pricing in more than a median economic recovery. Yet as you say, even asking for an average economic recovery is a big ask at this stage. The Fed has distorted two asset prices: treasuries and equities, but they have not yet produced a rise in fundamental economic activity to support these valuations.

Puplava: If I look at your analysis, so far you would argue that QE2 has failed, and a lack of broad money growth will mean that growth and inflation expectations are too high. That implies, likewise that equity prices should fall, and yields rise which you believe could lead to deflation and a bad environment for equities.

Napier: Equities are overpriced and bonds overpriced. But the thing I am saying that is really quite different is normally when the economy slows bonds do well, that is the normal relationship. That's what everybody expects. What I am saying is a much more frightening scenario, where the economy slows and bond yields go up. And the reason I am suggesting they go up is the matters underpinning their path of huge inflows of foreign central bank capital simply stop coming or slow very dramatically. You might say that this just does not happen. You just do not get scenarios like this. But what springs to mind is 1931 when falling Britain's exit from the gold standard and people panicked that America would do the same, and when they realized that money they lent to America the American government would be paid back in pieces of paper that would be worth less than gold, then suddenly bond yields went up into a depression as people reassessed the quality of the paper they would be paid back with.

I think that is where we are going, not just for the United stated but the developed world markets.

....
If the Chinese find a Paul Volcker, we all better be very careful.

Puplava: If some event like that happens, in 2009 the S&P 500 touched 666, could we go back to those levels again, or in fact lower?

Napier: In my 2005 book "Anatomy of the Bear" I forecast the S&P would bottom in 2014 and the S&P would get to 400. I do not have a strong feeling as to the particular year it happens, but 400 number is looking at the low points over the last 100 years, of cyclically adjusted PEs, and also the Q-Ratio which is measuring equities to the replacement value of assets, and if the valuation measures continue to mean-revert, then we are not talking 666 but a number near 400.

The bottoms I talked about in the book are not about business cycles, they are about things much bigger than that: the first world war, the great depression, the second world war, and the collapse of the Bretton Woods agreement. And this is right up there with the collapse of the Bretton Woods agreement.

This is an emerging market that says we no longer think the developed world has good credit quality and we refuse to back developed world governments with our capital. If we begin to question the credit of governments of the developed world then this [400] is where we go to.

In Austrian terms, the Austrians always tell us we have creative destruction. We have had several business cycles governments have refused to permit creative destruction of the private sector. They threw their balance sheets and the balance sheets of the central banks on the line to stop creative destruction.

So the ultimate situation we have to get to is the creative destruction of the government.

Puplava: Given this forecast that seems highly likely, what would it take to turn you more positive on the equity environment?

Napier: As a historian, the one thing that can always come along is technology that permits much higher level of productivity growth. Cheap energy is something that could transform long-term growth forecasts. There may be many others, but I can't see them on the horizon.

=========================
That concludes the Financial Sense audio excerpts.

Here is a link to the much shorter Financial Times video Long View: Historian sees S&P fall to 400

Stock market historian and CLSA consultant Russell Napier discusses with head of Lex John Authers his warning that the real bear market in the S&P has yet to come and could push the US equities index down to 400, plus he explains how emerging markets could trigger a leap in US Treasury yields. (11m 16sec)

Stocks Tremendously Overpriced

In 2007 people might even have thought Napier was a bearish fool. He clearly wasn't. The S&P 500 fell to 666 and there is no reason why that level cannot be tested again.

I made the case recently in Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

As a follow-up, please consider Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?

Overvalued is Not a Price Target

Stock prices are tremendously overpriced. However, I do not know if we see Napier's targets or not.

Overpriced can be worked off by a stock market that goes nowhere for 10 years or a stock market that takes another plunge. It can even be worked off by a bigger rally now before a plunge. I seriously doubt the latter, but it is certainly possible.

What's Different Now?

The big difference that I see now vs. 2008 and early 2009 is corporate cash levels. Cash levels are much higher today thanks to a certifiable bubble in corporate bonds.

Google, which does not even need cash raised billions in a 10 year blended offering at 2.33%. Google will not default but that is ridiculous . Why lend money at 2.33% for 10 years when such a paltry yield does not possibly compensate for the risk of much higher rates a few years from now, possibly even next year?

Who knows what interest rates will be 5 years from now? I don't. Nor does anyone else.

Regardless, corporations from total junk to top-tier are flush from with cash from debt offerings. Unless corporations blow it on stock buybacks or acquisitions at absurd prices, corporations have a chance to sit on cash (debt really), for a long as the terms permit.

Thus, corporations can weather a cash-crunch storm today better than a couple years ago.

In the midst of the decline in 2008-2009 there was a genuine fear corporations in need of cash could not raise that cash. Now they have cash-on-hand in advance. It sits on the balance sheet as debt (it is debt), but it is spendable.

The best use for that cash is to let it sit there. If instead, corporations blow it on absurd buybacks at silly prices we will be back in the 2008 crash scenario. For reasons Napier suggests the markets could crash anyway.

Not knowing what corporations or the Fed will do (or in what time-frame), I see no need to make a prediction other than to say history suggests that stock market outcomes from here are highly unlikely to be favorable even if corporations avoid serious mistakes.

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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