Mish's Global Economic Trend Analysis

Most Precious People On Earth
China Net Seller of Treasuries; Yield Curve Flattens and Treasuries Rally; Recession or Depression?
Yuan Drops 5 Consecutive Days, 1.8% Lower Than the Announced "End of the Peg"
Empire State Manufacturing Index Weaker Than Expected - New Orders, Sales, Prices Received are Negative

Posted: 16 Aug 2010 06:25 PM PDT

I have another email from a teacher to share in response to Huge Battle Looms Over Public Pensions - Who Will (Who Should) Foot the Bill? and the followup post Pension Tsunami Recognition Phase Arrives; Emails from Readers.

Reader "PST", a teacher at a private school wants to reply to "Bob" in the second link above. I will repost the Email from Bob followed by a reply from "PST".

Bob wrote ...

You are an idiot if you think teaching is a cherry job. Wonder why 80% of all new teachers are gone in 5 years.

Teaching is the most honorable respected and needed profession on the planet. You don't have a clue. And if you think paying a teacher for 10 months "time" is going to fix the problem then you are stupid. And if you think teachers sit home for two month in the summer, you are really stupid. And if you think that teachers are the culprits in all this you Sir are a moron.

The "fix" is real simple: close down the Dept of Ed. Throw out the unions, Pay teachers enough so they can save/earn the $900K needed to retire....let teachers bid on pay scale they will take..and then get it through your head that Teachers are the most precious Humans on the planet! (NOT BLOGGERS!)

How about you pay the teachers what football players make and pay football players what teachers make...DUH!

See the second link above for my response to Bob as well as 6 other responses from various people.

"PST" has this reply to "Bob" ...

Dear Mish,

I would like to respond to Bob and his e-mail re: teachers (more accurately teachers unions). Like Bob, I am married to a teacher... I am also a part time teacher myself so I would say I am rather well qualified to speak to the subject.

The sentiment that teachers are "the most precious people on earth" is nice and while I appreciate his support for our profession I would argue that it is the children whom we teach who are "the most precious people on earth." Which makes me wonder: what kind of people would destroy the financial futures of these very children by leaving them mired in a legacy of debt and out of control taxes to fund their fat pensions and high salaries?! (Hint: it's not the Sisters of Charity)

Consider this: my husband and I teach at a small private school just outside of Philadelphia. Our school pays its full time teachers on average 50K a year while the public school down the road pays its teachers on average 100K a year. So... while my husband and I (and every other "fair market salaried" worker out there) work hard and sacrifice to make ends meet for our family of 5, we have the added burden of being saddled with footing the bill to pay the UNION teachers TWICE what we make!

There's a lot of talk out there about "corporate greed." But the truth is that union greed makes corporate greed look like child's play. At least I have a choice whether or not I want to "pay in" to a corporation and thus "line their pockets." But where was my choice while over the last 4 years I saw my real estate taxes (taxes which benefit the public schools) go up nearly 50%? So much that we decided the only financially prudent thing to do was to sell our home? Who's greedy here?

Still, the fact remains: I will do whatever it takes to succeed in life and help my family (and as many others as I can) thrive. I am savvy with our money and I am very grateful to have a job. I make half what union teachers make but you can be damn sure I will outwork, outperform and out-teach any of them... not because it means I will get paid more, I won't. And not because I want their union job, I don't (plus I'm not "certified" to teach in PA Public Schools... cough, cough). But because I believe in giving people the biggest bang for their buck and the only way to do that is through the private sector. Lastly, I believe in my students having a better life than mine and I believe in my subject... which just so happens to be Personal Finance.

Most sincerely,

A proud private sector teacher in PA

P.S. Can't wait to assign some of your blogs in class. :)

"PST"

Thanks Private-Sector-Teacher, much appreciated. Feel free to use anything from this blog in your classes if you think it will help. Good luck to you.

By the way, the question keeps coming up wondering why I have been devoting so much space to public unions. I have explained this before but here it is again.

Public sector pensions and salaries are THE #1 issue facing cities and states (not the war, not banks, not CEO salaries). I am the only financial blogger willing to discuss the issue frequently and in depth. Most won't touch it at all except superficially (states are in trouble). Some do not even see it as a big issue. I see a $3 trillion pension hole that Krugman and other ignore.

In contrast, every hint of bank corruption is discussed in multiple places. Yet, I am not exactly shy about doing may part on that as well. Finally, pension news is finally making mainstream media so I am pleased to be leading the way.

Whether most bloggers are willing to place the blame or not, I am, in hopes of changing attitudes. Attitudes will not change unless people are aware of the problem, and my intent is to make sure as many people as possible are aware of how public unions are destroying the United States just as they destroyed Greece.

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

China Net Seller of Treasuries; Yield Curve Flattens and Treasuries Rally; Recession or Depression?

Posted: 16 Aug 2010 12:23 PM PDT

Treasury bears have been waiting a long time for China to start selling treasuries. It finally happened (not that two months is that much of a trend). Nonetheless, treasury bears got their wish. The result was not what they expected but it is what I expected: US demand picked up.

Please consider U.S. 10-Year Yield Drops to 16-Month Low, Narrows Yield Curve

Treasury 10-year note yields fell to their lowest level in more than 16 months as reports showed manufacturing in the New York region expanded less than forecast and foreign purchases of U.S. government debt climbed.

Two-year note yields dropped to a record low as the Federal Reserve prepared to buy Treasuries tomorrow as part of its plan to spur the slowing economy by keeping borrowing costs low. The difference between yields on 2- and 10-year note yields narrowed for a third day to the flattest yield curve since April 2009. A report from the National Association of Home Builders/Wells Fargo showed builders unexpectedly turned pessimistic.

Do Economists Ever Expect Bad News?

Economists' consensus forecast for unemployment, GDP, interest rates, consumer spending, manufacturing and darn near everything else has been far too optimistic for years. What it takes for them to realize things are not going well and are likely to continue to not go well remains a mystery.

"We are heading back to a weaker economy," said Theodore Ake, head of Treasury trading at Societe Generale in New York. "It feels like a recession, even though we are not in one. We are creating another bubble, but it won't burst for one to two- years."

Recession or Depression?

Given that the NBER never declared the end to the recession that started in 2007, how does Ake (or anyone) know we are not in a recession?

The proper question is not "Are we in a recession?" but rather "Is this a recession or a depression?" I think we are in a depression.

The difference between yields on 2- and 10-year notes narrowed to 2.09 percentage points. The so-called yield curve typically flattens when investors anticipate a slowdown. It widens when investors anticipate a recovery because they demand more compensation for the risk that growth will spark inflation.

Global demand for long-term U.S. financial assets rose in June from a month earlier as investors abroad bought Treasuries and agency debt and sold stocks, the Treasury Department reported today in Washington. Net buying of long-term equities, notes and bonds totaled $44.4 billion for the month, compared with net purchases of $35.3 billion in May.

The report also showed China's holdings of long-term Treasuries fell for the first time in 15 months to $839.7 billion, a 2.5 percent drop. Its overall Treasury position declined for a second month to $843.7 billion, the lowest since May 2009. The decline represents the first year-over-year decline in China's Treasury holdings since 2001. The holdings peaked in July 2009 at $939.9 billion.

"June represents a relatively weak month of debt buying," David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut, wrote in a note to clients today. "What is notable is China's selling of coupons."

Notable Happenings

The notable happening is not China's selling of treasuries. That selling is perhaps an outlier, a random fluctuation, or more likely a direct result of increased US demand.

Rather the notable happening is the massive rally in treasuries in spite of Chinese selling.

"The pace of economic recovery is likely to be more modest in the near term than had been anticipated," the Fed said Aug. 10. It announced it will invest the principal payments from its holdings of mortgage-backed securities into longer-term Treasury securities in the same statement.

Manipulation? Of Course!

No doubt treasury bears will look at that paragraph and scream "We Waz Robbed". The reality is ...

1. Fed cannot change the trend; The Fed can only goose the trend or slow it down.
2. The economy was clearly weakening.
3. It was pretty clear the Fed would resort to these tactics when the economy weakened.

Thus, there was no reason to be shorting treasuries, and there still isn't.

Massive Treasury Rally Continues

The above chart courtesy of Bloomberg.

Once again the rally is across the board with the longer dated treasuries gaining the most. Note that 7-year treasuries are below 2%!

Yield Curve May 2008 to Present

click on chart for sharper image.

For about a month the long bond yield was on a shelf of support at or near 4%. It has been on a tear since then, with yields dropping the most of any spot on the curve.

This is not bullish for equities, nor is it a "deflation scare".

This IS deflation at work. After a respite in 2009, the US is back in deflation. Those pointing at prices, the CPI, and other such things do not understand what deflation is, nor do they understand what is important.

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

Yuan Drops 5 Consecutive Days, 1.8% Lower Than the Announced "End of the Peg"

Posted: 16 Aug 2010 09:50 AM PDT

It should not be too long before Congress starts threatening China with "currency manipulation charges" given the Renminbi (Yuan), has now fallen five consecutive days and sits below the level it was at when China announced the end of the peg in June.

The Telegraph reports US and China to clash over yuan fall

The yuan dropped at the fastest pace in almost two years last week and is now 1.8pc lower against a basket of currencies than in June, when Beijing announced the end to its fixed peg against the dollar.

Western economists had seen yuan liberalisation as a sign that China is abandoning its mercantilist policy in a step-by-step move towards a floating currency, which was expected to rise. They misjudged China's motives badly.

Sander Levin, chair of the House Ways and Means Committee, said the US may have to consider retaliatory sanctions. "We must ensure that the international trading system ensures fair rules of competition. There is no real question that China's deliberately undervalued exchange rate is unfair, contributes to global trade imbalances, and costs the US jobs," he said.

Many on Capitol Hill suspect that China fiddled trade data with a "one-off" deficit in March when the Obama administration was preparing its verdict on whether Beijing is a currency manipulator.

Jim O'Neill, chief global economist at Goldman Sachs, said China's exchange policy was becoming a concern. He described its as "most odd" for Beijing to weaken the yuan at a time when US data has been weak and China's trade surplus has reached the highest in 18 months.

"It is not a great week for those of us who believe the big era of US-Chinese global imbalances is behind us."

Tension between the US and China is escalating on several fronts. China has restricted exports of rare earth minerals by more than 70pc in the second half of this year, cutting off the world supply. China produces 97pc of these minerals, used in a wide range of high-tech industries, from hybrid engines to computers, mobile phones, radar, navigation and precision-guided weapons.

Big Imbalance Correction Ahead

The mystery to me is how anyone could possibly have thought the "big era of US-Chinese global imbalances is behind us."

Get Out The Violins

In June dollar bears were convinced Armageddon was at hand for the US dollar. Instead on June 19, 2010 I thought China Plays Obama like Violin on Yuan Exchange Rate

On June 21, 2010 I asked Yuan Climbs Most in 20 Months - a "Whopping" .37 Percent; Are we Supposed to be Impressed?

Given that China pegged the Yuan for nearly a year, of course this is the biggest move in 20 months. Moreover, before anyone celebrates with champagne, please note the Yuan advanced 0.37 percent, hardly a big deal.

Whether this buys China some time with the protectionists in Congress remains to be seen. However, it is clear that China played its hand as good as conceivably possible with an extremely tough hard-line stance, followed up a day later with seemingly large concession.

Had China not played these games, no one would have been impressed with a pissy .37 percent move. Now, everyone is going gaga.

By the way, I have said this before and it bears repeating, If China freely floated the RMB there is a decent chance it would collapse.

While most are touting China's amazing growth, I suggest that China's growth is not sustainable. Peak oil alone is reason enough to believe that. Energy aside, China is busy building cities no one can afford to live in and malls with no shoppers.

Chinese Ghost Towns

Please consider Rise of the Chinese Ghost Town

In Chenggong, there are more than a hundred-thousand new apartments with no occupants, lush tree-lined streets with no cars, enormous office buildings with no workers, and billboards advertising cold medicine and real estate services – with no one to see them.

As my colleagues and I wandered, on–foot, down the center of Chenggong's empty 8-lane boulevards and dedicated bus lanes, never seeing a single person, we marveled about the fiscal and political conditions that would have to exist to create something like this.

In June, I accompanied a World Bank mission to Kunming, where the Bank is supporting the development of a new light rail system. Upon learning that two stations had already been built in Chenggong, my colleagues and I just had to go see for ourselves -- just what does a modern Chinese ghost town really look like? Well, here it is.

Dedicated bus lanes without routes assigned to them – stations without purpose

These are not isolated incidents. Property bubble, vacant offices, and vacant mall stories abound.

How Will China Handle The Yuan?

14-year Commercial Real Estate Supply In China

Ponzi "Shark Loans" Fuel China's Housing Bubble; Home Sales Plunge 44% in Xiamen; Bubble Busts in Tianjin

Beijing Seen Vacant for 50% Commercial as Chanos Predicts Crash

10 Signs of Speculative Mania in China

Email from a Chinese on China's Real Estate Bubble

Implosion of the China "Fabric City" Frenzy

The first link above has a nice video of vacant commercial properties and images of the world's largest mall. The mall is vacant.

One thing we can say is at least China is getting something for its stimulus money. The US repaves roads many of which did not need paving. We also drop bombs in Afghanistan in a nonsensical attempt to be the world's policeman. War-mongering adds to GDP but has negative benefits.

Massive Manipulation Everywhere

The US acts as if trade imbalances are a result of China's currency manipulation. The reality is there is so much manipulation everywhere it is nearly impossible to sort it all out.

Why is China's manipulation of the RMB any worse than Fed manipulation of treasuries or Europe's nonsensical bank stress test that says all is well in Europe?

If China did not build cities that no one lived in, malls that no one shopped at, and commercial real estate that no one wants to buy, would its GDP look so magnificent? If China was not doing all this unsustainable activity, would the RMB look so attractive?

It is easy to want to throw the blame on someone else, but most of the problems in the US, including the housing and commercial real estate bubbles, had their origins in Fed and Congressional policy, not China's currency peg.

Although it would be a welcome event, China floating the RMB would not cure global imbalances or bring back manufacturing jobs to the US. Structural problems are too deep and too many.

Tariffs and trade wars are not the answer. The US needs to focus on things it can achieve by itself (such as tax policy that encourages job flight) instead of or at least in addition to perpetually harping about things not in its control. Unfortunately, with each drop in the RMB, trade wars become increasingly likely.

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

Empire State Manufacturing Index Weaker Than Expected - New Orders, Sales, Prices Received are Negative

Posted: 16 Aug 2010 08:04 AM PDT

Prices received by manufacturers in the Empire State Fed Survey stood in negative territory for the second consecutive month, while new orders and sales dipped below zero for the first time in a year. Once again, ever-optimistic economists expected a better report.

Please consider the Empire State Manufacturing Survey

The Empire State Manufacturing Survey indicates that conditions improved modestly in August for New York manufacturers. The general business conditions index rose 2 points from its July level, to 7.1. The new orders and shipments indexes both dipped below zero for the first time in more than a year, indicating that orders and shipments declined on balance; the unfilled orders index was also negative. The indexes for both prices paid and prices received inched down, while employment indexes were positive and higher than last month.

In a series of supplementary questions, manufacturers were asked about their capital spending plans. Looking ahead to the next six to twelve months, 37 percent of respondents indicated that they expected to increase capital spending relative to its level in the past six to twelve months, while just 13 percent planned reductions. Of those predicting increased capital spending, 27 percent noted that "a considerable fraction" of the increase reflected investment that had been postponed because of the recession; 41 percent of respondents had given this same response in a similar survey back in January. Another 46 percent of those surveyed this month attributed "some" of the spending increase to the recession. The most commonly cited factors behind increased investment were high expected growth in sales and a need to replace capital goods other than IT (information technology) equipment.

In spite of a slightly rising index, this was a very weak report.The most encouraging thing was 37 percent expect capital spending to rise, but that needs to be balanced with 46 percent saying some increase in spending was on account of the recession.

Moreover, in January 41 percent of respondents delayed a "considerable fraction" of capital spending but that number is now down to 27 percent.

Squeeze on Profits

The diffusion indexes show a considerable squeeze on profits. Take a look at prices paid vs. prices received.

New Orders, Unfilled Orders, Shipments are Negative

The average workweek, capital expenditures, technology spending, and number of employees all rose leading the way to a "positive" report. However, as noted above some of the January delays in capital spending have now been spent. Finally, in conjunction with the collapse in US housing, I expect to see the overall index to be in contraction within a couple months.

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

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Monday, August 16, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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