Mish's Global Economic Trend Analysis

Live Real Time Interactive Map of Iowa Caucus
World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe
Manufacturing ISM Highest Since June; Expiring Business Tax Credits Explain Why; Enjoy it While You Can As US Decoupling Won't Last

Live Real Time Interactive Map of Iowa Caucus

Posted: 03 Jan 2012 05:59 PM PST

Google Elections has a nice Interactive Map of the Iowa Caucus.

Click on the above link to see live results.

Joe Trippi writing for Fox News says Prepare to Be Surprised By Iowa Caucus Results and that high turnout favors Ron Paul.

Watch Dubuque: The county in the northeast corner of the state is heavily Catholic and an area Romney scored well in four years ago. If Rick Santorum isn't winning here it means the Santorum surge isn't real or isn't big enough to matter. The state is 23% Catholic – if Santorum, a pro-life Catholic himself, consolidates the Catholic vote in Dubuque and elsewhere the Iowa surprise could be a Santorum win.

Turnout: The higher the turnout the more like it is that Ron Paul wins the state. Ron Paul pulls in college students as well as Democratic and Independent and voters who do not typically vote in GOP caucuses. If they show up, turnout will be unusually high and the surprise could be the GOP suddenly having to deal with a libertarian uprising in their party.

Settling for Romney: Iowa, after all the ups and downs of the year, could "settle for Romney" with voters worried about defeating Obama they could make their decision on electability like the experience I had with Mondale. – But even in this scenario (as I learned with Fritz) the surprise will be who took second.

Call it the curse of the frontrunner, but Romney is supposed to win, so the story coming out of Iowa if he does win might be on the unexpected second place finisher emerging as the "other candidate."

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

World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe

Posted: 03 Jan 2012 01:09 PM PST

With everyone watching debt rollovers in Europe, let's instead take a look at the total global debt rollover and debt issuance problem.

Bloomberg reports World's Biggest Economies Face $7.6T Debt

Governments of the world's leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan's $3 trillion and the U.S.'s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg.

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor's cut the U.S.'s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

2012 Debt Rollovers and Interest Payments

Country	2012 Bond, Bill Redemptions ($)	Coupon Payments
Japan	3000 billion	117 billion
U.S.	2783 billion	212 billion
Italy	428 billion	72 billion
France	367 billion	54 billion
Germany	285 billion	45 billion
Canada	221 billion	14 billion
Brazil	169 billion	31 billion
U.K.	165 billion	67 billion
China	121 billion	41 billion
India	57 billion	39 billion
Russia	13 billion	9 billion

Japan's Problem

Remarkably, rolling over US debt is unlikely to be a problem. The same cannot be said for Japan. Because of demographics, pension plans will be net sellers of Japanese bonds. Unless balance of trade or tax revenues increase enough in 2012 Japan will not be able to roll this debt over at 1%. A rise to 3% would consume nearly all of Japanese revenues.

Europe's Problem

The ECB elected to kick the can down the road with a 3-year long-term refinance operation (LTRO).

For example, please consider Spanish banks use ECB cash to cover maturing debt-sources

MADRID, Dec 22 (Reuters) - Spanish banks will use the majority of the cheap long-term cash from the European Central Bank to cover steep 2012 debt maturities, market and banking sources said on Thursday.

Spain's banks face a massive spike in their funding needs next year with around 130 billion euros ($170 billion) of debt coming to maturity. Many banks took on 3-year, government-guaranteed debt in 2008, making up a large part of borrowing.

"The banks that have taken part in the auction have primarily done so to finance the hefty maturities that fall next year, mostly in the first half," said one savings bank source.

Also consider Italy banks almost halfway to 2012 funding needs

MILAN, Dec 22 (Reuters) - Italy's banks are almost halfway towards meeting their funding needs for 2012 after they tapped 116 billion euros of cheap long-term cash from the European Central Bank on Wednesday.

The ECB's first ever offer of three-year loans on Wednesday drew heavy demand of 489 billion euros from 523 banks, raising hopes a credit crunch can be avoided and that the money could be used to buy Italian and Spanish bonds.

The ECB will follow up with another similar operation in February in a move designed to directly help banks which need to raise capital.

A study by local broker Intermonte said 42-44 percent of total Italian bank funding and 75-80 percent of wholesale funding for next year had been raised on Wednesday.

The euro zone banks also have about 920 billion euros of liquidity existing with the ECB which indicates Italian banks could have some 230 billion.

On top of this are funds the banks can raise through the wide range of cash operations offered by the ECB.

Dollar Swaps Soar

That "wide range of cash options" no doubt includes the fact that European banks can borrow money from the Fed at a cheaper rate than US banks can. Please consider Demand for Dollars from Fed's Discount Window Swells in Europe by 12,735% After Fed Cut Rates on Dollar Swap Lines

There is considerable debate as to whether European banks are using cash from the ECB to purchase sovereign debt and capitalize on massive spreads but Italian banks deny the charge as noted by this clip from Reuters:

There is speculation that some banks will use the ECB funds not to boost the real economy but for carry trades on investment in high-yielding government bonds. "We intend to support the real economy as far as is possible given the stiff ties imposed by EBA," the CEO of UBI Banca Victor Massiah told Reuters."

There is also debate as to whether or not the LTRO can stop contagion. For a detailed discussion, please consider European Bank-to-Bank Lending Mistrust Hits Second Consecutive High; ECB's LTRO Won't Stop Collateral Contagion.

For now, massive Fed dollar swaps coupled with the ECB's first ever 3-year LTRO have temporarily calmed European debt markets, how long that lasts remains to be seen.

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

Manufacturing ISM Highest Since June; Expiring Business Tax Credits Explain Why; Enjoy it While You Can As US Decoupling Won't Last

Posted: 03 Jan 2012 09:25 AM PST

The Institute for Supply Management released the December 2011 Manufacturing ISM Report On Business®

"The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey."

MANUFACTURING AT A GLANCE DECEMBER 2011
Index	Series Index Sep	Series Index Aug	%age Point Change	Direction	Rate of Change	Trend* (Months)
PMI	53.9	52.7	+1.2	Growing	Faster	29
New Orders	57.6	56.7	+0.9	Growing	Faster	3
Production	59.9	56.6	+3.3	Growing	Faster	4
Employment	55.1	51.8	+3.3	Growing	Faster	27
Supplier Deliveries	49.9	49.9	+0.0	Growing	Same	2
Inventories	47.1	48.3	-1.2	Contracting	Faster	3
Customers' Inventories	42.5	50.0	-7.5	Too Low	From Unchanged	1
Prices	47.5	45.0	+2.5	Decreasing	Slower	3
Backlog of Orders	48.0	45.0	+3.0	Contracting	Slower	7
Exports	53.0	52.0	+1.0	Growing	Faster	2
Imports	54.0	49.0	+5.0	Growing	From Contracting	1

OVERALL ECONOMY				Growing	Faster	31
Manufacturing Sector				Growing	Faster	29

Expiring Business Tax Credits Partially Responsible

Looking for an explanation for the rise in December? I have one (and was aware of a likely jump in PMI in advance): 2011 Expiring Business Tax Incentives

Expiring Business Tax Incentives

100% Bonus Depreciation – The bonus depreciation deduction for qualifying property placed into service after September 8, 2010 and through 2011 was increased to 100%. Once the incentive expires the depreciation rate reverts back to 50% bonus depreciation.

Self-Employment Tax Reduction – In 2011, the self-employment tax was reduced on a temporary basis. Individuals who are self-employed only need to pay a Social Security tax of 10.4% (reduced from 12.4%) and 2.9% Medicare tax on qualifying income. Self-employed individuals can also take a deduction for the 6.2% employer's share of Social Security with a 1.4% employer's share of Medicare as an above-the-line deduction.

Section 179d Depreciation Provisions - The increase in expensing limits under Section 179d for 2011 at $500,000/$2,000,000 (equipment/property) will be phased out at the end of 2011. In 2012, the rates will reduce to $125,000/$500,000 (equipment/property) until December 31, 2012..

15 Year Straight Line Depreciation – This allows property owners and lessees to depreciate qualifying improvements to commercial office spaces, as well as restaurant leasehold improvements and new restaurant development.

Enhanced Charitable Deductions. This tax credit allows C-Corporations the opportunity to claim an enhanced charitable deduction for qualified computer contributions, book inventories to school and food contributions to food depositories.

Employer Wage Credit for Active Military Reservists – This tax credit provides eligible small businesses (companies with 50 or fewer employees) with a credit against the company's income tax liability for a taxable year in an amount equal to 20% of the sum of the wage payments made to activated military reservists..

New Markets Tax Credit – This tax credit offers a 39% credit on an equity investment to a Community Development Entity (CDE) that is claimed over a 7 year compliance period. The CDE must then make a Qualified Equity Investment or loan to a Qualified Business in a Qualified Low Income Community (LICs). Most commercial and mixed-use real estate development located in LICs are considered Qualified Businesses. The credit is designed to encourage investment in LICs that traditionally have limited access to debt and other sources of investment income.

Credit for Construction of New Energy Efficient Homes - This tax credit provides an eligible contractor which constructs a qualified new energy efficient home a credit of up to $2,000 per home. The credit is available for all new homes, including manufactured homes constructed in accordance with the Federal Manufactured Homes Construction and Safety Standards.

Energy Efficient Appliance Credit. This tax credit is available to companies that manufacture or produce qualifying models of refrigerators, dishwashers and washers/dryers. The credit is available for models produced in 2008, 2009, and 2010. The amount of the credit is dependent on the efficiency of the model and date the appliance was manufactured.

Alternative Fuel Vehicle Refueling Property Credit. This tax credit provides a 30% credit of the cost of any alternative fuel vehicle refueling property placed into service in 2011 (not including hydrogen stations). The credit is limited to $30,000 per location for commercial clean fuel property, and $1,000 per location for residential clean fuel property.

Some of the above incentives are minor but others likely had a major impact.

Think manufactures did not bring massive amounts of production forward to take advantage of these expiring credits?

Enjoy it While You Can As US Decoupling Won't Last

Manufacturers are producing at an unsustainable rate. The global economy is rapidly cooling led by Europe, Asia, and Australia. That is a lot of downside leadership.

Please note that Eurozone Manufacturing Contracts 5th Straight Month; New Orders Fall Faster than Output

The US will not decouple this year as noted in Major Slowdown in Global Trade Coming Up; Think the U.S., China, Germany, or U.K. will Be Immune?

Expiring tax incentives provided a nice, but unsustainable pop in manufacturing. Notice how prices and backlog of orders did not follow.

Regardless of how much tax credits affected the ISM numbers, the global slowdown will take a toll on US manufacturing.

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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