Mish's Global Economic Trend Analysis

Chinese Manufacturing Recession Continues 3rd Straight Month; Romney’s Tough China Talk May Fall Flat in South Carolina
Le Pen Inches Closer to Bumping Off Sarkozy in First Round of French Elections; Interesting Crossover Vote Opportunity for Hollande Supporters to Dump Sarkozy
Reason for Watered Down Merkozy Treaty Comes to Light; The Answer is Ireland
Chickens Come Home to Roost in Croatia
Money Supply Figures Suggests Italy Headed Into Depression; Non-Performing Spanish Loans Hit 134 Billion Euros, 7.51% of All Loans, Highest in 17 Years; Eurozone Unemployment Charts

Chinese Manufacturing Recession Continues 3rd Straight Month; Romney’s Tough China Talk May Fall Flat in South Carolina

Posted: 19 Jan 2012 10:41 PM PST

The manufacturing slowdown in China continues for the third consecutive month prompting a Bloomberg headline China Manufacturing Boosts Case for Easing

A Chinese purchasing managers' index signaled manufacturing may contract for a third month as a slowing economy boosts the case for the government to further loosen credit controls.

The preliminary January reading of 48.8 for the gauge, released by HSBC Holdings Plc and Markit Economics today, compares with a final 48.7 number for December. The dividing line between contraction and expansion is 50.

China's central bank last month reduced banks' reserve requirements for the first time in three years to encourage lending and Premier Wen Jiabao this month reiterated a pledge to "fine-tune" policies as needed to support growth.

The nation's central bank is allowing the five biggest lenders to increase first-quarter credit by a maximum of about 5 percent from a year earlier, said two people at state lenders who have knowledge of the matter. Separately, the banking regulator is weighing a plan to relax capital requirements, according to four people with knowledge of the matter.

China's gross domestic product increased 8.9 percent in the last three months of 2011 from a year earlier, the fourth straight quarterly slowdown and the weakest pace in 10 quarters. Growth may drop to below 8 percent this quarter, according to estimates from UBS AG, Nomura Holdings Inc. and Societe Generale SA, as export demand cools further and the government maintains its campaign to rein in housing costs.

Home prices fell last month in 52 of 70 Chinese cities from November, according to government data released Jan. 18. The world's largest exporter posted the smallest gains in overseas sales and in imports for two years in December from a year earlier, excluding holiday distortions.

Romney's Tough China Talk

Please consider Romney's Tough China Talk May Fall Flat in SC

While Mitt Romney is a long way from the White House, he already knows what he would do on his first day in the Oval Office: crack down on Chinese "cheating" on trade.

Romney vows to designate China a "currency manipulator" and impose duties on its imports if the yuan isn't allowed to float freely. As Republicans prepare for tomorrow's presidential primary in South Carolina, that pledge may cheer companies such as steelmaker Nucor Corp. (NUE), which has a plant in Darlington and is among those blaming Chinese subsidies for eroding profits.

Yet South Carolina, long a battleground for textile makers fighting to block imports, is increasingly prospering through overseas ties and could suffer in any trade war. Companies such as France's Michelin & Cie., Germany's Bayerische Motoren Werke AG and Sweden's Husqvarna AB employ more than 102,000 state residents. And a dozen Chinese manufacturers have set up shop.

"We can't be protectionist; look at who our biggest employers are," said Bob Faith, former state commerce secretary, who cited several foreign-owned companies. "That is South Carolina, and these are South Carolina jobs."

China 'Threat' Plays

"The 'Communist Chinese are a threat to our economy and way of life' gets play among a broad spectrum conservative base no matter where you sing that tune," e-mailed Scott Huffmon, director of the Social and Behavioral Research Laboratory at Winthrop University in Rock Hill. "It just so happens that the 2012 tour is swinging through S.C. this week."

Other Republican candidates have warned of China's emergence. Former House Speaker Newt Gingrich has described the nation's rise as a "threat," although he says the U.S., which ran a $26.9 billion trade deficit with China in November, can defeat the challenge by rebuilding its manufacturing base and maintaining a strong defense.

At a candidates' debate last night in North Charleston, Representative Ron Paul said Americans "shouldn't be frightened about trade" because it often helps them to save money by buying cheaper products from overseas. Former Senator Rick Santorum said the corporate tax rate should be cut to zero for companies that manufacture in the U.S. to stem the loss of American jobs.

I do not know if his Romney's talk will fall flat in South Carolina, but I do know the results will be a disaster if actually implemented. Expect to see a net loss of jobs if Romney is economically-stupid enough to do what he says.

If Romney increases tariffs three things will happen, all of them bad.

Prices will rise
Growth will slow
China will retaliate with tariffs of its own or by buying more goods from Europe instead of goods from US produces

In essence everyone will pay higher prices for goods and services in hopes of bring back a few hundred manufacturing jobs (while losing tens-of-thousands of jobs in the ensuing economic slowdown). Once again, Ron Paul is the only candidate on the right side of this issue.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Le Pen Inches Closer to Bumping Off Sarkozy in First Round of French Elections; Interesting Crossover Vote Opportunity for Hollande Supporters to Dump Sarkozy

Posted: 19 Jan 2012 04:32 PM PST

Latest polls show French President Sarkozy is losing ground to right-wing anti-euro candidate Marine Le Pen in the first round of the France presidential election. Via Google translate, please consider Le Pen and Bayrou Back

François Hollande is still leading the voting intentions of a presidential first round to 28%, unchanged from January 6, according to a poll Ifop-Fiducial. Nicolas Sarkozy, who is still not officially a candidate, lost two points to 24%. Marine Le Pen gains 1 point to 20% and Francois Bayrou 12.5%.

Another survey (Ipsos-Logica Business) has the results Holland 29%, 23% to Sarkozy, Le Pen is 18% and 14% Bayrou.

The Socialist candidate Francois Hollande is still ahead of the vote in a presidential first round to 28%, unchanged from January 6, ahead of Nicolas Sarkozy to 24% (-2%) and Marine Le Pen 20% (+1%), according to a survey conducted for Ifop-Fiducial.

If the second round was held Sunday, François Hollande would win by 57% (+3) against 43% (-3) for Nicolas Sarkozy, thus widening the gap.

Another survey of opinions Ipsos-Logica Business, carried out for France Televisions, Radio France and Le Monde, gives the same quarter of head. François Hollande arrives again at the top of the vote of a presidential first round to 29% (-3), Nicolas Sarkozy at 23% (-2.5), Marine Le Pen 18% (+1) Francois Bayrou and 14 % (+7).

In the second round, Francois Hollande would win by 59% (-1) against 41% to Nicolas Sarkozy (+1).

Those surveys were conducted January 11 to 13 - when the Standard & Poor's withdrew to France's triple A rating.

French far-right threatens to upset Sarkozy's poll hopes

Reuters has a slightly different set of numbers but with the same general theme in its report French far-right threatens to upset Sarkozy's poll hopes.

French leader Nicolas Sarkozy faces a battle to avoid a shock first round exit in April presidential elections, a poll showed on Thursday, after far-right candidate Marine Le Pen closed to within two points of the incumbent.

A daily rolling poll of voting intentions conducted by Ifop for Paris Match showed Marine Le Pen on 21 percent, up one point and within striking distance of the conservative head of state.

The poll was the latest to confirm that Sarkozy is under pressure from Le Pen ahead of the April 22 first round, and raises the possibility of a repeat of the 2002 upset, when her father Jean-Marie Le Pen knocked out the mainstream Socialist candidate Lionel Jospin.

That result traumatised France, with hundreds of thousands taking to the streets in protest marches against the rise of the far-right. And it ensured mainstream conservative Jacques Chirac won a crushing majority in the run-off ballot of more than 80 percent.

Marine Le Pen, who replaced her father at the head of the National Front last year, has sought to broaden the appeal of the party beyond its traditional anti-immigrant constituency to attract a younger generation of voters.

Her anti-euro and protectionist stance has struck a chord with voters disillusioned by economic hardship since the global economic crisis triggered by the collapse of Lehman Brothers in 2008, and the dragging euro zone debt crisis.

A recent poll showed some 30 percent of French people agreed with Le Pen's ideas.

Crossover Vote Opportunity to Dump Sarkozy

Reuters did not give the date of the poll showing Sarkozy's lead over Le Pen shrunk to a mere two points. It did say "Thursday" which I interpret to mean today.

Interestingly, anyone who wants Hollande to win can crossover and vote for Le Pen in the first round, just to get Sarkozy off the ballot. Hollande would likely trounce Le Pen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reason for Watered Down Merkozy Treaty Comes to Light; The Answer is Ireland

Posted: 19 Jan 2012 10:00 AM PST

The treaty hammered out by French President Nicolas Sarkozy and German Chancellor Angela has been watered down to complete meaningless with new provisions that would allow countries to "temporarily deviate from the rules in case of an unusual event" or in "periods of severe economic downturn."

Bear in mind the there is an existing "Growth and Stability Pact" and among the first violators of that pact was Germany. Eventually every nation in the EMU violated the pact.

The point of the Merkozy Treaty was to prevent that from happening again. So why was the treaty watered down?

The Answer is Ireland

The Financial Times comments on the Irish legal threat to European fiscal treaty

The Irish government is likely to face a court challenge if it decides not to hold a referendum on a new European fiscal treaty, potentially plunging the country and Europe into months of legal uncertainty.

Sinn Féin, the fourth largest party in Ireland's parliament, told The Financial Times on Thursday that the party had sought legal advice on the issue and was "seriously and actively considering" making a challenge to the Irish Supreme Court.

"We think the fiscal compact should be put to the people because of the draconian austerity that this will mean for years to come," said Pádraig Mac Lochlainn, Sinn Féin's foreign affairs spokesman.

In 1987 historian Raymond Crotty successfully challenged a decision by the Irish government not to hold a referendum on the Single European Act in the courts. Since then every significant EU treaty change has been put to public vote.

So behind the scenes Irish conspirators working with the EU have put in language that waters down the treaty hoping to do two things.

Water down the treaty so that it does not have to be voted on
Change the rules of the treaty later quietly, after the fact, with majority rule votes or other procedures

Give the Voters a Chance

The very last thing the unelected EU officials want is a public vote on anything. They intend come hell or high water to make their socialist nanny-zone state complete with a bureau of nightmarish regulations and agencies governing virtually every aspect of everyone's lives.

I praise Sinn Féin's insistence that voters be given a chance.

If Ireland is stupid enough to sign this treaty or any modifications to the treaty that would allow majority-rule voting on treaty changes, Ireland can kiss its lower tax corporate rate goodbye.

Ireland's lower tax rate irritates the heck out of the EU, yet it is the one thing that prevents a complete collapse of the Irish economy. See the New York Times article In Ireland, Low Corporate Taxes Go Untouched for a discussion.

Not only would Ireland lose its lower tax rate, a majority-rule scheme would see the ultimate nanny-zone dream come to fruition: eurobonds (likely packaged as stability bonds).

As the economic collapse in Europe strengthens (see Money Supply Figures Suggests Italy Headed Into Depression; Non-Performing Spanish Loans Hit 134 Billion Euros, 7.51% of All Loans, Highest in 17 Years; Eurozone Unemployment Charts for a discussion) there will be still more pressure on countries to "temporarily" agree to all sorts of bad ideas. Rest assured nothing will be temporary.

Ireland would be better off outside the EMU, and so would Germany. Moreover, the UK would be better off outside the EU or by some means the EU will cram down the Tobin Tax on financial transactions down London's throat.

Let those who want a one-size fits all socialist nanny-zone have it. I assure you, no one will like the result if it happens.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Chickens Come Home to Roost in Croatia

Posted: 19 Jan 2012 08:48 AM PST

Thanks to massive propaganda, Croatia is foolishly about to join the EU. Chicken farmers (Croatians in general) are about to pay a steep price.

The New York Times reports As European Union Beckons, Allure Fades for Wary Croatia

Zoran Sluga has a small family farm here on the border with Slovenia, his 300-year-old barn filled with thousands of squawking chickens.

But if Croatians vote to join the European Union next Sunday, Mr. Sluga's simple business will become a lot more complicated. The cages he keeps his hens in will not meet the group's rules, requiring expensive upgrades. Italian egg producers, given access to Croatian markets, are likely to undercut his prices. Mr. Sluga believes that his very way of life is a stake. And for what? he asks.

"See what happened to Greece," he said. "They got billions from the E.U. and it did not work out."

Recent polls show that Croats are still likely to vote yes. Then, the 27 European Union countries are expected to ratify their membership and Croatia will become part of the group on July 1 — in all likelihood, the last new member for many years.

Srdjan Dumicic, the director of Ipsos Puls, a company that has conducted several polls on the subject in recent years, said that support had been dwindling in the past few weeks and could narrow, according to the latest poll that has not yet been published. Some Croatians joke, he said, that joining now is like arriving at the party at 2 a.m. Half the revelers are drunk. Half have gone home.

"It's not the party it was at midnight," Mr. Dumicic said.

"In the European Parliament, we would be 12 members out of more than 740; in the Council of Ministers, 7 votes out of more than 350," said Marjan Bosnjak, secretary of the Council for Croatia, an association opposing European Union membership. "We will be a statistical error. Who will give a damn about what Croatians think?"

The reach of the European Union is often underestimated, as it tries to create an even playing field among its members. Take the egg business. No detail seems overlooked. The union's rules say that the chicken cages must allow at least 750 square centimeters per hen and contain a nest, litter, perch and "clawing board." These requirements are amusing to Mr. Sluga, the farmer. "The chickens have more rights than humans in the E.U.," he joked.

Mr. Sluga estimates that he will have to spend $100,000 on new cages or $13,000 for used equipment. The alternative is to allow his chickens to roam free either indoors or out, something he finds bizarre because, he said, the hens can — and do — eat their own excrement under such conditions. And such an operation would require a lot more labor, he said.

"Nothing Good is Coming"

Any country that joins the EU now instead of waiting a couple years to see the results of a Eurozone breakup, has mush for brains.

To understand why Croatia is likely to plow ahead anyway, please consider the following snip from the above New York Times article.

The campaign against European Union membership is being run from a cramped three-room office with no heating. The only visitor before 10 a.m. one recent morning was the landlord asking about the rent. Mr. Bosnjak, the secretary of the Council for Croatia, said the council represented about 25 small groups that together had just $4,000 to $5,000 to spend. (The government said it planned to spend about $800,000 on television spots and a pro-integration information campaign.)

Yet even opponents of European Union membership seem to think that the country has nowhere else to go. As he mulled what to do about his hen cages, Mr. Sluga said that he feared that his no vote would be in vain.

"I am aware that we will have to enter the E.U.," he said, "but I also know that nothing good is coming."

Chickens Come Home to Roost Expression

The chickens are about to come home to roost. To help those unfamiliar with the expression please consider Chickens Coming Home to Roost

As a proverbial expression it's half a millennium old. The older fuller form was curses are like chickens; they always come home to roost, meaning that your offensive words or actions are likely at some point to rebound on you. The idea goes back to Chaucer, though he expressed it rather differently in The Parson's Tale, around 1390, writing that curses are like "a bird that returns again to his own nest".

Bureaucrats can and will cram this down the throats of Croatians, because they, not Croatia will benefit. Bigger salaries and benefits await representatives of the European Parliament.

There is absolutely no reason for Croatia to join now, especially as the UK ponders an EU exit. Nonetheless, if recent polls are correct, it seems likely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Money Supply Figures Suggests Italy Headed Into Depression; Non-Performing Spanish Loans Hit 134 Billion Euros, 7.51% of All Loans, Highest in 17 Years; Eurozone Unemployment Charts

Posted: 19 Jan 2012 12:26 AM PST

Ambrose Evans-Pritchard says The euro is pushing Italy into depression

Here is the latest money supply chart from the Banca d'Italia. Just look at M3. Horrendous.

Italy M1, M2, M3

click on chart for sharper image

This speaks for itself. There is no clearer indictment of the dysfunctional nature of monetary union. Italy is being pushed into depression. Criminal.

Obviously, Italy and Germany can no longer share the same monetary policy. Ergo, Germany should leave EMU, pronto.

The Banca said Italy's economy contracted by 0.5pc in the last quarter of 2011. It will shrink by a further 1.5pc this year, with no growth in 2013.

This is a direct result of the misguided pro-cyclical austerity policies imposed by Angela Merkel and the ECB – the infamous Trichet letter – without offsetting monetary and exchange stimulus.

This will of course play havoc with Italy's debt trajectory.

Non-Performing Spanish Loans Hit 134 Billion Euros, 7.51% of All Loans

Italy may be headed for depression, but Greece, Spain, and Portugal are already in depression. The most important country in that sad group is Spain, and the Spanish hit-parade keeps right on rolling.

Via Google Translate, please consider Non-Performing Spanish Loans Highest in 17 Years.

The NPL ratio of credit granted by banks, savings banks, cooperatives and credit institutions rose in November to 7.51%, the highest percentage for seventeen years due to increased volume of bad loans, which exceeded the 134,000 million euros. [134 billion]

According to provisional data published today by the Bank of Spain, this new increase of one tenth compared to 7.41% last month, is the fifth in a row after the small cuts that took place in June.

As the volume of bad loans, the loan portfolio of banks, savings banks, cooperatives and credit institutions rose in November to 1.785 billion euros [1.785 trillion euros in US notation], from 1.778 billion [trillion] in October.

Eurozone Unemployment Rates

click on chart for sharper image

Tax Hikes, Austerity Measures Will Backfire

Spain, Greece, Ireland, and Portugal and Italy already have high and rising unemployment rates. France unemployment rate is relatively stable near 10%.

In contrast, the unemployment rate in Germany is low and falling. Don't expect that condition to last. A European recession will affect the German export machine and Germany's unemployment more than most suspect.

Given various austerity measures in Spain, Portugal, France, and Italy coupled with high and rising taxes, expect eurozone economic conditions to get much worse. The sad thing is, four eurozone countries are already in depression.

Changing work rules, pension rates, retirement ages, is badly needed. Raising taxes in a harsh recession is inane.

Greece is going to default and Portugal will soon follow. The ECB is attempting to fence off Italy and Spain, but the only way it can do so is by buying massive quantities of Italian and Spanish debt (and doing so puts Germany and France at risk when the setup blows up).

How long the ECB can get away with this policy before the bond market focuses on France and Germany remains to be seen, but it sure will not be forever.

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

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Thursday, January 19, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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