Eurozone bureaucrats keep upping the ante as to how big a "firewall" is needed. And at every critical juncture, German Chancellor Angela Merkel has proven she is nothing but a liar. With every demand for additional firepower, comes an inevitable cave-in from Merkel supporting the move, no matter what she says in advance.
Meanwhile, the entire idea that firewalls can accomplish anything is ludicrous, given the key point that no currency unions in the absence of fiscal unions cannot and will not work.
I suspect Merkel understands this, merely wanting to get Germany so deep into bailouts step by step, that it will be reluctant to leave the Eurozone.
It is high time the German Supreme court step in and stop this nonsense.
However, nothing can stop Greece, Portugal, and Spain from leaving, and eventually they will. In the meantime, rest assured that every increase in firepower will be additional money of German citizens' pockets. The end-game will be a currency or banking crisis at the worst possible time.
European finance ministers meeting in Copenhagen on Friday agreed to boost the euro-zone firewall to over 800 billion euros. The move marks another U-turn on the part of the Merkel administration, which recently dropped its opposition to increasing the fund. German commentators warn that even the new firewall may still be too small.
German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, have been accused of crossing many of the "red lines" that they have set for themselves over the course of the euro crisis, making U-turn after U-turn as the crisis escalated. They officially stepped over the latest red line on Friday, when European Union finance ministers meeting in Copenhagen agreed to boost the scope of the euro zone's firewall to over €800 billion ($1 trillion). Berlin had long rejected such an expansion out of hand.
The Nuclear Option
On Thursday evening, in the run-up to Friday's summit, German Finance Minister Wolfgang Schäuble had said he was prepared to combine the existing bailouts with the new permanent mechanism. He said that the €800 billion capacity was "convincing" and "sufficient." But not everyone shares his view that the sum is enough. On Thursday, French Finance Minister François Baroin called for the permanent euro bailout fund to be increased to €1 trillion, to shore up market confidence and prevent contagion in the euro crisis. "The firewall, it's a little like the nuclear option in military planning, it's there for dissuasion, not to be used," Baroin said in a radio interview.
'Shifting Sand Dunes'
Opposition parties in Germany were quick to make political capital out of the Merkel administration's many U-turns during a debate on the euro rescue fund and the European fiscal pact in the German parliament, the Bundestag, on Thursday. "Your red lines have, in reality, become shifting sand dunes," Frank-Walter Steinmeier, floor leader for the center-left Social Democratic Party (SPD), said to widespread applause.
In December, Merkel argued, entirely convincingly, that boosting the euro bailout fund was the wrong course to take. After all, she said, it would reduce the pressure on crisis-stricken states to push through reforms. There was also the question of whether the creditor countries, including Germany, were in danger of being overwhelmed by ever-higher guarantees." "Now, the fund is indeed being expanded, and the coalition government's former concerns have suddenly disappeared. Instead, the administration is attempting to conceal its own U-turn with highly flawed arguments.
The left-leaning Die Tageszeitung focuses on the calls to boost the ESM to €1 trillion:
"One trillion euros is a lot of money, and yet even this huge sum will not be enough. But again, that's nothing new. For months, calculations have been doing the rounds that show that at least €1.5 trillion will be needed. The only interesting question left is how long it will take France and Germany to acknowledge this reality."
No Amount is Enough
For reasons noted at the top, no amount of money (that can reasonably be provided) would be sufficient. After all, there is a limit to what German citizens and taxpayers can stand. Besides,money alone cannot fix structural problems.
Finally, the "nuclear" option is nothing more than former US treasury Hank Paulson's "Bazooka" theory in disguise.
Bazooka Theory vs. Actual Results
"If you have a bazooka in your pocket and people know it, you probably won't have to use it." Paulson said at a Senate Banking Committee hearing. The reference was in regards to Fannie Mae and Freddie Mac.
Paulson believed that if he had the power to bailout Fannie Mae, the market would react to that possibility and no bailout would be necessary.
Now taxpayers have wasted close to $200 billion bailing out Fannie and Freddie bondholders (mainly PIMCO and foreign banks).
German Chancellor Angela Merkel and her counterparts yesterday pledged "determined and coordinated action" to support Greece's efforts to regain control of its finances. They stopped short of providing taxpayers' money or diluting their own demands for the country to cut the European Union's biggest budget deficit.
"It's like Paulson's bazooka," said Nielsen, Goldman Sachs's chief European economist in London. "It's a difficult balancing act -- saying something comforting to the market without committing money and hoping the market will take their word for it."
After a three-month long plunge in Greece's bonds amid speculation it was facing the threat of default, euro-region leaders yesterday ordered the country to slash its budget deficit and warned investors they would be willing to defend the country from speculative attack if necessary.
"This is not money for free," said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers. "This is a strong commitment imposed on Greece."
How Well Did That Idiotic Bazooka Move Work Out?
Bazooka theory does not work, nor did threats to investors that the ECB and EMU would be willing to defend the country from speculative attack if necessary.
The same holds true today. The Bigger the Bazooka, the More Money Will be Lost.
Here are thoughts from the last couple of days on the strikes, protests, and violence in the wake of more austerity plans by Prime Minister Mariano Rajoy.
Pro-government news played down the strike to a virtual non-event, giving much criticism of the unions methods and exaggerations. Reality however, is that there is enough support by strikers to shape future politics, especially as austerity starts to bite.
The unions have promised to step up protests. The Indignado 15 Million Movement also protested, but separately from the unions.
One comment stuck out - German Chancellor Angela Merkel said the protests did not represent Spain. Maybe she was trying to be reassuring, but she is taking sides against maybe a million or so people of a foreign population, not very wise at best and otherwise agitating.
The Spanish government on Friday delivered what it called the biggest fiscal adjustment in the country's democratic history, unveiling a 27 billion euro ($36 billion) deficit-reduction plan that includes sharp spending cuts across government ministries and higher taxes for corporations.
With images of nationwide demonstrations and strikes against labor reforms still fresh, the weight of the budget appeared to fall on big companies and government spending. Labor unions said nearly 1 million took part in Madrid's rally alone Thursday evening.
Corporations will be asked to pay higher taxes this year, and their tax breaks will be reduced while the government said value-added-taxes would not rise. It said tax receipts for VAT would fall 2.6% as a result of weak growth in Spain.
Budget Minister Cristobal Montoro said all ministries would need to reduce their budgets by around 17% this year, which was slightly higher than expected, saving a total of up to €65.8 billion. Salaries for public workers will not be reduced, but will be frozen this year.
Electricity prices will rise 7%, to pay off a €24 billion electricity-tariff deficit that accumulated due to the difference between consumer prices set by the state and producer's costs. Tariffs paid by electricity companies will rise 5%.
Austerity Measures Prompt Spanish Workers To Strike
Workers walked off the job in Spain on Thursday, halting public transport, closing schools and leaving hospitals with emergency staff only. The general strike was called by unions in response to the conservative government's labor reforms, which let companies opt out of collective bargaining agreements and fire workers more cheaply. But more punishing austerity could still be to come, as Spain tries to whittle down its budget deficit under pressure from Brussels.
March 29, 2012 A demonstrator throws stones next to a burning Starbucks, which was stormed by demonstrators during clashes with police at the general strike in Barcelona. Spanish workers livid over labor reforms they see as flagrantly pro-business staged a nationwide strike Thursday and tried to bring the country to a halt by blocking traffic, closing factories and clashing with police in rowdy demonstrations. Emilio Morenatti / AP
March 29, 2012 People attend a demonstration in Valencia, Spain, during a national strike. Jose Jordan / AFP/Getty Images
March 29, 2012 A woman cries after demonstrators smashed a shop window during heavy clashes with police during a 24-hour strike in Barcelona. David Ramos / Getty Images
Eurozone crisis live: Violence in Barcelona Amid Spanish General Strike
Protesters crowd in Madrid's landmark Puerta del Sol square for a closing rally tonight. Photograph: Paul Hanna/Reuters
As many as 900,000 people took part in the march to Madrid's centre square, Puerta del So.
Spanish Economy Will Implode
Labor reforms are badly needed but electricity price hikes of 7%, higher corporate taxes, increased VAT and other tax hikes are not. Spain needs more time not more tax hikes. With unemployment rate already at 23.3% austerity measures are guaranteed to make matter worse, and tax hikes on top of it all will be the nail in the coffin.
Prime Minister Rajoy forecasts the Spanish economy will contract 1.7% and government GDP targets and budgets are based on that. I bet that 3% contraction minimum is in the works if Rajoy enacts the tax hikes and austerity measures as planned.
Things will be much worse if the violence and strikes stay in an elevated state. Unlike the protests a year ago, these strikes have more serious overtones.
Spain Headed for Bond Revolt and Bailouts
The idea that Rajoy will cut the deficit to 5.3% this year and 3% next year are purely Fantasyland proposals.
For now, the bond market has given Rajoy the benefit of the doubt, assuming you call 5.35% on the 10-year bond any kind of "benefit". With the suspension of the LTRO, and a budget targets that cannot possibly be met, look for a substantial move up in Spanish bond yields.
That will also punish any Spanish banks foolish enough to load up on bonds in a misguided carry-trade play. With Spain, nearly everything is worse than the government reports, and the reports are awful.
A bond market revolt and bailout are in the cards this year. Ultimately, Spain will not survive in the Eurozone.
Canada will withdraw the penny from circulation this year, saving taxpayers about C$11 million ($11 million) annually and forcing retailers to round prices to the nearest nickel, the government announced in its budget today.
The Royal Canadian Mint, which has produced 35 billion pennies since it began production in 1908, will cease distribution this fall due to the coin's low purchasing power. Production and handling cost for the one-cent coin are a C$150- million drag on the economy, according to a 2006 study by Desjardins, a Levis, Quebec-based financial institution.
Business groups welcomed the move, which follows other countries such as Australia, Brazil and Sweden, and economists said it would have little impact on inflation.
The penny, with two maple leafs on one side and Queen Elizabeth II on the other, can continue to be used in payments. As they are gradually withdrawn from circulation, price rounding on cash transactions will be required, the government said.
Retailers and other businesses can continue to price goods and services in one-cent increments and there will be no need to reprogram cash registers, according to the government.
Catherine Swift, president and chief executive officer of the Canadian Federation of Independent Business, said the move will increase efficiency.
"It has been a long time coming," she said. "It's been a real pain more than anything else. We've actually polled our members on this and they're supportive."
Economists said there would be "little" impact on inflation. Actually, there will be "no" impact on inflation. The penny has not been discarded as a pricing point, rather final transaction costs will be rounded to the nearest nickel.
The US needs to follow suit. Dealing with pennies is a nuisance.
John Mauldin pinged me with a question on jobs and demographics from one of his readers.
Hello John. In past letters you have cited the need to create 125,000 jobs per month to stay even with the growth rate in the labor force. Dick Hokenson of ISI Research has recently published reports suggesting that 75,000 jobs is a more accurate estimate based on his demographic analysis. This difference obviously has profound implications for the pace of recovery and potential improvement in the unemployment rate. Have you seen any of Hokenson's work? Do you have any insights into why his analysis is so different than consensus?
How Many Does It Take to Keep Up With Demographics?
Ben Bernanke has estimated 125,000 jobs a month. That is the number I have been using recently.
However, based on demographics alone, I believe 75,000 is indeed the correct number.
75,000 is a number I arrived at a couple of years ago independently, for the boomer-bust years of 2013-2015.
So why use 125,000 if it only takes 75,000? I do not know Bernanke's rationale, but I can explain mine.
Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.
In the last year, the civilian population rose by 3,584,000. Yet the labor force only rose by 1,569,000.
Millions of people dropped out of the labor force in the last several years and if jobs are available they will start looking again
As soon as people start looking for jobs, the number it will take to hold the unemployment rate steady will rise, perhaps to a number well above 125,000
Point number 4 above is the key issue.
Household Survey Data - March 9, 2012
click on chart for sharper image
Take a good look at the household survey from the latest BLS jobs report. Recall that the unemployment rate comes from the household survey, and not the headline jobs number.
Note that 428,000 jobs were allegedly created in February. Also note the unemployment did not change. Why? Because the civilian labor force went up by an even larger 476,000. Thus the unemployment rate actually rose a fractional amount that rounding took away.
If I would have told you that a rise in 428,000 jobs would not drop the unemployment rate you would have thought I was off my rocker. Yet it happened, assuming of course you believe BLS numbers, complete with amazing seasonal adjustments.
Non-Revolving credit rose $11.8 billion in December. However, $8.8 billion of that is growth in federal government loans (which just happens to be where student loans are parked).
Here are some charts I put together stripping out federal government loans.
Non-Revolving Loans Minus Government Loans
Non-Revolving Loans Minus Government Loans Detail
True Bounce in Percentage Terms
Note that the year-over-year "bounce" has not even gotten back to the zero-line in spite of exceptionally easy comparisons.
Educational borrowing is up for every age group over the past three years, but it has grown far more quickly among those between 35 and 49, according to the analysis of more than 3 million credit reports provided to Reuters by the credit score tracking site CreditKarma (CreditKarma.com). That group saw its school debt burden increase by a staggering 47 percent, according to the analysis.
The average student loan debt for those aged 38 to 41 was the biggest of that group -- about $12,000, up from just under $9,000 in 2009. Young people still carry the biggest student loan burdens; those aged 26 to 29 have an average of $14,000 in student debt. But the increased levels in middle-aged student debt is a new phenomenon.
Negative Payback on Retraining
The benefit of going back to school at age 49 is likely negative.
My friend "BC" comments:
The payoff for 40- and 50-somethings taking on debt to change occupations or trying to find jobs in "health care" or "education" and compete with Millennials trying to secure similar positions is low or negative.
Statistically, the benefit to "education" occurs between ages 14 and 22, where one goes to high school and university. Obtaining an MBA, law degree, or another graduate degree after age 26-28 historically has not resulted in a net benefit in terms of job/career prospects or wage/salary income; and this has become particularly the case since the late '90s.
In other words, the vast majority of people running up debt at universities, community colleges, and for-profit technical schools are wasting their time and money, as well as directing scarce resources to the "health care" and "education" sectors that don't need more misallocation further driving up costs.
Needless to say, there is no precedent in US history for middle-aged unemployed, underemployed, or unemployable Americans running up debt in an economy that has not created a net new private sector full-time job per capita in at least 10 years.
There are currently 132,409,000 nonfarm employees. In December of 2000 there were 132,481,000 employees. How's that for job growth?
Retraining Scam
Job retraining is scam perpetrated by for-profit universities, fueled by statements from Obama regarding re-training people for new jobs.
Brick-layers are told they can be "chefs", take $10,000 courses and the universities call it a "success" if they land a job "in their field" at McDonald's. Unemployed roofers are led to believe they can become Java programmers, and they waste collective $billions trying. Meanwhile out of work Java programmers are told to take up a trade like roofing or auto mechanics.
The cost of education keeps rising because Obama (like Bush before him), keeps adding to the student loan program when the entire student loan scam really needs to be shut down.
Why Does the Scam Roll On and On?
No politician wants to stand up and tell the truth: Retraining is a waste of money and the odds of launching a new career in other than a low-paying job requiring few skills is simply not likely.
For-Profit universities pad politicians' pockets
One can always find success stories, but in aggregate, retraining middle-aged workers is a net waste of money.
To Paraphrase Joe Weisenthal
Now, to paraphrase Joe Weisenthal: "It's hard to think that the economy is NOT going back into a recession with numbers like these." The difference in viewpoint is understanding what the underlying numbers really represent.
Hiding Out In School
All those hiding out in school, including those going back to school for retraining are not counted in the ranks of the unemployed. Nor are discouraged workers, who stopped looking for a job.
As soon as those folks think there are jobs, they will start looking. Economically speaking, that would be a good thing if it happened, but it would also increase the number of jobs it will take to hold the unemployment rate steady.
In a vacuum, all things being equal, it would take about 75,000 jobs a month demographically speaking. But things are not equal. Millions of workers want back in the labor force and they will start looking, especially students who at some point will have no choice. It may take 150,000 jobs a month or even 175,000 jobs a month, if those workers come back into the labor force in a 2-year surge.
That is still not the end of the story. What if we slip back into recession and people stop looking? How many will it take then? The answer may be closer to 100,000. The middle of the road approach is to stick with the number I have been using recently which is 125,000 a month.
The irony is, the better the economy is, the more jobs it will take. One way or another, headwinds on lowering the unemployment rate are very strong.
The Economist says "China's GDP, measured in nominal dollars, will be the world's largest by 2018". Michael Pettis at China Financial Markets disagrees and says I would like to make a bet with The Economist.
I recently read in The Guardian an article by enthusiastic orientalist Martin Jacques in which he says that The Economist has just predicted that China's GDP, measured in nominal dollars, will be the world's largest by 2018. Earlier estimates, he says had China becoming the largest economy in the world by 2027.
I have always been a little skeptical about the 2027 claim ... given how much we would have to assume about the sustainability of Chinese growth, about the likelihood of current GDP numbers not having been vastly inflated by an over-investment boom, and about the unstable range of political outcomes. It seemed to me to be a prediction about as valuable as the world-beating predictions about the USSR in the 1960s or Japan in the 1980s.
Still, this 2018 prediction deserves I think more than a little questioning — it requires that nominal Chinese GDP growth in dollars outpace nominal US GDP growth by 12% a year.
So I am wondering whether we could set up a friendly bet — not for too large stakes. I would like to bet that by the end of 2018 China will not be the largest economy in the world.
If I win, perhaps The Economist could invite a very cool underground Chinese band of my choice to perform at their next big conference, whereas if I lose I could buy four-year subscriptions (student rates, please) to a group of Peking University freshmen. Everybody would end up feeling pretty pleased with themselves no matter who wins, right? So?
The Dating Game
Inquiring minds are looking at an interactive chart on The Economist in an article called The Dating Game.
AMERICA'S GDP is still roughly twice as big as China's (using market exchange rates). To predict when the gap might be closed, The Economist has updated its interactive chart below with the latest GDP numbers. This allows you to plug in your own assumptions about real GDP growth in China and America, inflation rates and the yuan's exchange rate against the dollar. Over the past ten years, real GDP growth averaged 10.5% a year in China and 1.6% in America; inflation (as measured by the GDP deflator) averaged 4.3% and 2.2% respectively. Since Beijing scrapped its dollar peg in 2005, the yuan has risen by an annual average of just over 4%. Our best guess for the next decade is that annual GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2018. Alternatively, if China's real growth rate slows to an average of only 5%, then (leaving the other assumptions unchanged) it would not become number one until 2021. What do you think?
Snapshot of The Economist Baseline Assumptions
The interactive graph is too large for my blog, but the above screen snapshot shows The Economist baseline assumptions. To play around with the numbers, click on the above link.
I share a viewpoint with Pettis that The Economist is way too generous in their estimate of real GDP growth for China.
Pettis thinks China will average 3% growth and I already posted I found that number reasonable. As far as Yuan appreciation is concerned, I am not at all convinced the Yuan is undervalued at all, yet I plugged in a nominal 2% annual appreciation.
Assuming a "Real GDP growth" of 3% and Inflation at 4% yields a chart that looks like this.
Snapshot of Mish Baseline Assumptions
Even still, I wonder if the year 2030 is still far too optimistic from the standpoint of China.
I strongly believe peak oil and energy consumption is going to put a serious damper on Chinese growth, and that is on top a necessary and very painful shift away from an entirely unsustainable growth model based on exports, housing, and fixed investment.
I share Pettis' view regarding "inflated GDP numbers, an over-investment boom, and the unstable range of political outcomes" adding my own energy concerns and yuan valuation concerns on top of it all.
I find the arguments by Pettis, the ECRI, and Chanos compelling. Add to that the restraint of peak oil coupled with potential political instability and the proper conclusion is that long-term Chinese growth of 7.5% is Fantasyland material.
Not a single Democrat endorsed the budget proposed by president Obama. The scorecards reads as follows Obama budget defeated 414-0.
President Obama's budget was defeated 414-0 in the House late Wednesday, in a vote Republicans arranged to try to embarrass him and shelve his plan for the rest of the year.
The vote came as the House worked its way through its own fiscal year 2013 budget proposal, written by Budget Committee Chairman Paul D. Ryan. Republicans wrote an amendment that contained Mr. Obama's budget and offered it on the floor, daring Democrats to back the plan, which calls for major tax increases and yet still adds trillions of dollars to the deficit over the next decade.
But no Democrats accepted the challenge.
Senate Democrats have said they will not bring a budget to the floor this year, though Republicans in the chamber have talked about trying to at least force a vote on Mr. Obama's plan there as well.
Last year, when they forced a vote on his 2012 budget, it was defeated 97-0.
Not satisfied with wasting close to $200 billion of taxpayer dollars bailing out holders of Fannie and Freddie Bonds (notably PIMCO and China), Geithner is back at it with another proposal sure to cost US taxpayers plenty if adopted.
The proposal this time is for taxpayers to pick up 63% of the cost of mortgage principal reductions. Geithner made the offer to Edward J. DeMarco, Fannie Mae and Freddie Mac's overseer.
Geithner, the U.S. Treasury secretary, is offering new incentive payments to the two government-supported mortgage financiers if DeMarco drops his opposition to principal reductions for homeowners whose loans are backed by the companies.
It's not just a question of whether the numbers add up, DeMarco said in an interview at Bloomberg's headquarters in New York yesterday.
"We've got to consider all of the ramifications of principal forgiveness relative to other tools."
Proponents from Martin Feldstein, a chief economic adviser to the late President Ronald Reagan, to activist groups such as MoveOn.org have called on DeMarco to allow writedowns. Congressional Democrats including Rep. Elijah Cummings of Maryland have accused him of blocking a recovery and called on him to resign.
FHFA is not yet convinced principal reductions are the best answer, DeMarco said, in part because the agency still must examine how offering loan writedowns would affect the behavior of underwater borrowers who are still making their payments on time. Until now, the agency hasn't specifically focused on the issue of whether loan forgiveness would create a moral hazard by providing an incentive for borrowers to default. That's because without the extra incentives offered by the government this year, debt forgiveness was more costly than forbearance as most underwater borrowers would stay in their homes if given a low enough payment, according to its analysis.
Violating Legal Responsibility
The U.S. government has spent $190 billion to shore up the companies since they were taken into federal conservatorship in 2008 after their investments in risky loans soured. DeMarco said adding to the firms' costs would be a violation of his legal responsibility to restore them to financial health.
Using principal forbearance instead of forgiveness so far has been better for taxpayers, DeMarco said. Forbearance reduces monthly payments while requiring borrowers to pay back the full amount of the loan when they sell the house.
"If the borrower is successful on the modification, allows them to stay in their house and they stay in their house and start making mortgage payments, the taxpayer gets to share in the upside of that borrower's success," DeMarco said in the Bloomberg Television interview. "If we forgive the principal up front and the borrower is successful, that upside all goes to the borrower and is not shared with the taxpayer."
Vote Buying
This is not about doing what's right for taxpayers. It's about doing what's right to help Obama's reelection chances. Of course Hedge Funds and PIMCO like the buyback idea because it immediately puts a bid in for Fannie and Freddie bonds they hold.
Retail sales in the Eurozone fell only marginally at the end of the first quarter, according to Markit's latest PMI® surveys. The average rate of decline over the first quarter matched that seen over the final three months of 2011, which was the worst quarter since Q1 2010. The survey data again highlighted marked disparity between growth in Germany and falling sales at Italian retailers, while sales in France were again broadly flat.
The Eurozone Retail PMI is a single-figure indicator of changes in the value of sales at retailers. The PMI is adjusted for seasonal factors, and any figure greater than 50.0 signals growth compared with one month earlier. The PMI remained below 50.0 in March, signalling a fifth successive monthly drop in sales revenues. Sales have fallen ten times in the past 11 months. But the index rose for the second successive survey, recovering further ground from January's 35-month low of 42.9 to post 49.1. The latest figure signalled only a marginal decline in sales revenues. The latest PMI figure suggested that the pace of decline in retail sales as measured by the EU's statistical office Eurostat (on a three-month-on-three-month basis) will ease in the coming months.
Eurozone retail PMI figures are based on responses from the three largest euro area economies. March data signalled that the Italian retail sector remained mired in a steep downturn, posting a thirteenth successive monthly drop in retail sales. The rate of contraction was slower than January's record low, but still marked nonetheless.
German retail sales continued to rise in March, extending the current sequence of growth to 18 months. This is the longest period of expansion since monthly sales data were first collected in January 2004. The rate of growth slowed since February, but was broadly in line with the average for 2011.
Year-on-Year Sales Decline 10th Month
Retail sales in the Eurozone continued to fall on an annual basis in March. Year-on-year sales have fallen for the past ten months, the longest sequence since that registered from June 2008 to March 2009. Moreover, the rate of decline accelerated since February, reflecting a sharp reversal in the year-on-year sales trend in France. German retail sales registered the fourth-fastest annual increase in sales since the series started, but Italy posted another substantial decline.
Other indicators from the latest surveys underlined the ongoing weakness of market conditions in the retail sector. The value of purchasing activity fell for the eighth month running, while retail employment was broadly flat for the second successive month. Retailers' gross margins remained under substantial downward pressure, and original sales plans were missed again.
Commenting on the retail PMI data, Trevor Balchin, senior economist at Markit and author of the Eurozone Retail PMI, said:
"Across the Eurozone, retail sales fell only marginally during the month but were down sharply compared with one year ago. Compounding retailers' difficulties, wholesales prices continued to rise at a steep rate, squeezing margins which have already been under intense pressure from the need to offer discounts to stimulate sales."
Markit Clings to Hope
Once again Markit clings to every bit of hope that things are about to get better. Here is the key sentence: "The latest PMI figure suggested that the pace of decline in retail sales as measured by the EU's statistical office Eurostat (on a three-month-on-three-month basis) will ease in the coming months."
Why?
Why are sales in Europe going to get better? Once again I propose it is far more likely for German sales to slip as its vaunted export machine takes a hard tumble.
I said the same thing two months ago regarding Manufacturing PMI when Markit was hoping Germany could keep Europe out of recession.
Markit then shifted its stance from hoping for no recession in the Eurozone, to hoping for no recession in Germany and I responded with:
What's with the Markit "Pollyanna" Forecasts?
This month Markit is talking about Germany avoiding a recession. Even more amazingly, just last month Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:
"A retreat back below the 50.0 no-change level for the Eurozone PMI is a disappointment, and highlights the ongoing risk that the region may be sliding back into recession.
That "risk of recession" became a sure thing as Markit threw in the towel on non-recession hopes as noted above.
Expect German-Periphery Divergence to Resolve to the Downside for Germany
The idea that Europe can avoid a recession is complete silliness. Europe is clearly in a recession already.
The amazing thing is things have not deteriorated more than they have. Unlike the Chief Economist at Markit, I expect the divergence to resolve to the downside for Germany, not for the divergence to continue for some time. Given conditions in Europe and Asia, the odds that Germany is immune from the global slowdown are essentially zero.
Sure enough, German exports took a dive in March, and it's reasonable to assume another dive in April.
Conditions in Europe are deteriorating badly, and a general strike looms in Italy. Spain, Greece, and Portugal are basket cases. The odds that weakness does not spill over into Germany are near-zero.
Egyptians' opposition to U.S. economic aid continued to climb in early 2012. More than eight in 10 Egyptians in February said they opposed U.S. economic aid, up 11 percentage points since December and up 30 points since April 2011 when Gallup first posed the question.
An intense debate within the Obama administration over resuming military assistance to Egypt, which in the end was approved Friday by Secretary of State Hillary Rodham Clinton, turned in part on a question that had nothing to do with democratic progress in Egypt but rather with American jobs at home.
A delay or a cut in $1.3 billion in military aid to Egypt risked breaking existing contracts with American arms manufacturers that could have shut down production lines in the middle of President Obama's re-election campaign and involved significant financial penalties, according to officials involved in the debate.
Since the Pentagon buys weapons for foreign armed forces like Egypt's, the cost of those penalties — which one senior official said could have reached $2 billion if all sales had been halted — would have been borne by the American taxpayer, not Egypt's ruling generals.
The companies involved include Lockheed Martin, which is scheduled to ship the first of a batch of 20 new F-16 fighter jets next month, and General Dynamics, which last year signed a $395 million contract to deliver component parts for 125 Abrams M1A1 tanks that are being assembled at a plant in Egypt.
Mrs. Clinton's decision to resume military assistance, which has been a foundation of United States-Egyptian relations for over three decades, sidestepped a new Congressional requirement that for the first time directly links arms sales to Egypt's protection of basic freedoms. No new military aid had been delivered since the fiscal year began last October, and Egypt's military has all but exhausted funds approved in previous years.
Mrs. Clinton's decision provoked sharp criticism from lawmakers across the political spectrum, as well as human rights organizations. Senator Rand Paul, Republican of Kentucky, criticized it as "beyond the pale."
Referring to Egypt's recent decision to prosecute four American-financed international advocacy organizations, Mr. Paul added, "It sets a precedent that America will not punish its aggressors but instead give them billions of our taxpayers' dollars."
The M1A1 components are built in factories in Alabama, Florida, Michigan, Ohio and Pennsylvania, several of them battleground states in an election that has largely focused on jobs. Because the United States Army plans to stop buying new tanks by 2014, continued production relies on foreign contracts, often paid for by American taxpayers as military assistance.
Senator Patrick J. Leahy, Democrat of Vermont, who added the certification requirements to legislation authorizing military aid to Egypt, called the decision to waive them regrettable, and the resumption of aid "business as usual."
Let's piss away billions of dollars on aid to countries that don't even want it.
Note that Mrs. Clinton waived a requirement that she certify Egypt's protection of human rights as a condition of aid.
Yes indeed, this is "business as usual", so much so that even Democrat senators are complaining about it.
