Mish's Global Economic Trend Analysis

Iran Threatens Israel’s Existence if Attacked; Saudi Daily says Military Option Best Solution to Crisis; Russia to Deliver Nuclear Fuel to Iran
Obama's Job Approval Rating Sinks to New Low; Assessing the Odds Republicans Retake the House
July Seasonally Adjusted Retail Sales "Mixed Bag"; Manufacturing Output Rises Led by Auto Sector
Global Imbalances Keep Piling up; Japan Slides Towards Recession; Yen Strengthens; Japan's Bond Bubble

Iran Threatens Israel’s Existence if Attacked; Saudi Daily says Military Option Best Solution to Crisis; Russia to Deliver Nuclear Fuel to Iran

Posted: 17 Aug 2010 11:01 PM PDT

There is lots of Mideast tension in the news this week including alleged Russian delivery of nuclear fuel to Iran, Russian military defense of Iran, other weapons procurement by Iran, and various threats and counter-threats.

Given that Bloomberg is reporting on the story, at least some of the news is highly likely to be valid.

Iran Threatens Israel's Existence if Attacked

Bloomberg reports Iran Threatens 'Israel's Existence' If It Attacks

Iran will respond if Israel attacks its first nuclear power plant, which will begin loading fuel Aug. 21, according to the Persian Gulf country's defense minister.

"In that case we will lose a power plant, but Israel's existence will be in danger," Ahmad Vahidi was cited as saying today by the state-run Mehr news agency, in response to questions about the possibility of an attack by Israel on the Russian-built atomic facility at Bushehr.

Israeli leaders have said that all options are on the table in dealing with Iran's nuclear aspirations. Iran is under four sets of United Nations sanctions over its nuclear program, which the U.S. and many of its allies say is aimed at creating a weapon. Iran, the second-largest oil producer in the Middle East, denies the allegation, saying it needs nuclear energy for civilian purposes, such as generating electricity.

The Bushehr power station will begin producing electricity in several months, Sergei Novikov, spokesman for Rosatom Corp., the Russian state nuclear holding company that built the plant, said Aug. 13.

Saudi Daily says Military Option Best Solution to Crisis

A Saudi Daily Editorial says Military Option Best Solution to Crisis

"Tehran's [August 13, 2010] announcement, confirmed by Russia, that an Iranian nuclear reactor would be inaugurated this month in Bushehr, on the Arabian Gulf coast, and that it would be equipped with fuel and would operate as a nuclear facility, is an indication that the region is now entering a new phase.

"In taking this action, Tehran is ignoring all the advice, warnings, and requests to halt its nuclear program, or at the very least to try to continue it under clear and open international inspection that would guarantee that it does not have a military facet. If [Tehran] insists upon going ahead [with the program] without the agreement of the international community, it will bring embarrassment and suspicion upon every [country] that supported [Iran's] right to peaceful nuclear energy.

"More importantly, by means of this action, Tehran is moving its conflict with the international community into high gear, and [in this case] some may consider the military option to be the best solution. [Delaying recourse to this option] may lead to a point where it is impossible to implement it – if Tehran manages to produce a nuclear bomb of its own.

Russia to load fuel into reactor on Saturday

The Jerusalem Post reports 'Israel has days to strike Bushehr'

Israel has only mere days to launch an attack on Iran's Bushehr nuclear reactor if Russia makes good on its plan to deliver fuel there this weekend, former US ambassador to the UN John Bolton warned Tuesday.

He said that once Russia has loaded the fuel into the reactor -- slated for Saturday – Israel would no longer be willing to strike for fear of triggering widespread radiation in an attack.

Russia signed a contract with Iran to construct the Bushehr reactor in 1995, but has several times delayed completion. In announcing the long-overdue fuel installation, which should make Bushehr operational in September, Russia did not indicate why it was going ahead with the final stages now.

In addition to Bushehr -- for which Russia says it has guarantees it will receive back the spent fuel, the material needed to make a nuclear bomb -- Iran has its own uranium enrichment facilities.

Iran expert Ilan Berman of the American Foreign Policy Council said that the uranium enrichment plants are the real backbone of Iranian efforts and expenditures to get a nuclear weapons capability, and he suspected that they, rather than Bushehr, would be Israel's primary targets in any attack.

He suggested that Bolton was setting up a "straw man" by focusing on the fuel delivery to the Bushehr reactor.

"It's not at all clear that Bushehr would be a high value target because it's only tangentially related to any conceivable Iranian nuclear weapons program," he said. "My suspicion is this isn't a game changer. This isn't going to give Iran enough fissile material for a bomb overnight."

Berman added that since Bushehr is the most public Iranian nuclear facility, and therefore well monitored by international inspectors, it was also a less likely candidate for use by Iran to construct a bomb, though he nevertheless said if it became operational it would be "an enormous PR coup for the Iranians."

Hot Air or Real Threat?

News that Russia is going to deliver fuel to Iran seems very credible. That the US or Israel is about ready to attack Iran in preemptive action does not seem credible.

Neither the stock market nor the commodity market is acting as if anything is imminent.

Daily Crude

click on chart for sharper image

That chart just does not reflect "trouble on the way". Nor does a chart of the dollar, nor does a chart of the S&P 500.

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

Obama's Job Approval Rating Sinks to New Low; Assessing the Odds Republicans Retake the House

Posted: 17 Aug 2010 03:34 PM PDT

A recent Gallup survey shows Obama Sees New Lows in Job Approval

President Obama's job approval rating dipped to 44% for the week of Aug. 9-15, the lowest weekly average of his administration by one percentage point.

The drop in Obama's weekly average was driven by particularly low ratings near the end of the week, with record-low three-day rolling averages of 42% for Aug. 12-14 and Aug. 13-15 polling. Prior to this weekend, Obama's three-day low had been 44%. Additionally, Obama's disapproval rating reached 50% for the first time in the Aug. 13-15 average.

The overall pattern of Obama's job approval ratings within partisan groups is fairly stable. The 68-point difference between Democrats' and Republicans' approval ratings for Aug. 9-15 is in line with what has been the case for many weeks, while his 39% approval among independents is down slightly from the past several weeks.

Average Seat Loss

Gallup reports Avg. Midterm Seat Loss 36 for Presidents Below 50% Approval

On a historical basis, the Democrats under Jimmy Carter suffered the slimmest seat loss of a party whose president was below 50% approval, losing 11 seats in the 1978 midterms. More recently, Bill Clinton in 1994 and George W. Bush in 2006 saw their parties lose enough seats in the House to turn party control over to the opposition party when they had less than majority approval.

Assessing the Odds

It is virtually certain Democrats will lose seats in the upcoming election. Averages suggest 36 seats. Republicans need to pickup 40.

The approval rating at 12% for Republicans is probably not much different than an approval rating at 35%. They were not voting Democratic anyway.

Independents hold the key.

Looking at the second chart provides some clues. Independents overwhelmingly went to Obama in the Presidential election, as did the youth vote. Obama has literally abandoned youths who turned out en masse for him. Health care "reform" was financed by sticking it to young healthy workers and small businesses.

More importantly, a 35 point drop in the approval rating by independents looks ominous.

It would be interesting to see the approval rating of Carter by independents when he only lost 11 seats.

Another factor is economic data has generally been grim.

Initial unemployment claims ticked up to 482,000.
GDP will be revised lower to +1.0 or 1.5%.
Stimulus is wearing off.
Nearly all the economic surprises have been to the downside.

I see little chance for significant economic improvement between now and the election, but a decent chance for a hugely rising unemployment and a stock market collapse.

Unless these survey and economic reports change soon, the odds are Republicans retake the house. For the sake of argument, I think they are about 60-40 right now. Yet, even if Republican only pickup 30 seats or so, Obama's ability to pass his legislation will be crippled.

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

July Seasonally Adjusted Retail Sales "Mixed Bag"; Manufacturing Output Rises Led by Auto Sector

Posted: 17 Aug 2010 09:56 AM PDT

Excluding autos and gas retail sales ran out of steam in July 2010. Please consider the SpendingPulse Report July Retail Sales Show Mixed Results.

After several months of sales slowdown, total retail sales have stabilized somewhat, although overall growth has slowed sharply since earlier this year. In fact, growth in July headline numbers was driven largely by an increase in spending on gasoline, which is why the ex-auto ex-gasoline number is a better barometer to measuring the underlying health in retail spending.

July's growth rate excluding auto and gasoline leaves the three-month average year-to-year growth rate of retail sales at 1.0%, well below the 3.5% for the prior three months. The ex-auto year-over-year numbers tell a similar story of a shallow and stabilizing trough, with the unadjusted three-month average year-over-year growth rate slowing to 1.6% compared to the 6.5% average growth rate for the previous three months.

The first table above compares June and July 2010 vs. the same month in 2009.

The second table shows July 201o vs. June 2010 seasonally adjusted. For an alleged recovery, these are weak numbers.

Industrial Production up 1 Percent, Led by Autos

Inquiring minds are taking a look at the July Federal Reserve Industrial Production and Capacity Utilization report.

Industrial production rose 1.0 percent in July after having edged down 0.1 percent in June, and manufacturing output moved up 1.1 percent in July after having fallen 0.5 percent in June. A large contributor to the jump in manufacturing output in July was an increase of nearly 10 percent in the production of motor vehicles and parts; even so, manufacturing production excluding motor vehicles and parts advanced 0.6 percent.

The production of consumer goods moved up 1.1 percent, as the output of consumer durables jumped 4.9 percent: Production for all of its major components advanced. In addition to a gain of 8.8 percent in the output of automotive products, which was mainly due to a large increase in light truck assemblies, the indexes for home electronics and for miscellaneous goods increased 1.3 and 1.5 percent, respectively; the index for appliances, furniture, and carpeting moved up 0.5 percent.

Among components of consumer nondurables, the output of non-energy nondurables declined 0.2 percent, and the output of consumer energy products moved up 0.7 percent. Within non-energy nondurables, the output both of foods and tobacco and of clothing fell, while the indexes for consumer chemicals and paper products increased.

Industrial Production Perspective

Before anyone gets too excited by these numbers let's take a look at where we are vs. pre-recession and vs. 1999.

click on chart for sharper image

Manufacturing is not yet back at 1999 levels while overall industrial production is barely there.

Will Sales Keep Up?

The strength in the auto sector noted by the Fed mirrors the MasterCard report. Looking ahead, not just pertaining to autos, production is up, but will sales match?

Given weakening economic indicators across the board, especially housing, I rather doubt it.

The next few months may be quite telling.

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

Global Imbalances Keep Piling up; Japan Slides Towards Recession; Yen Strengthens; Japan's Bond Bubble

Posted: 17 Aug 2010 12:56 AM PDT

Imbalances in Asia continue to mount as Japan slides precariously towards another recession. Please consider Japan Slowdown Amid Yen Rise Adds Pressure for Action

Japan's weakest economic growth in three quarters adds pressure on policy makers to safeguard the recovery by expanding fiscal spending and loosening monetary policy to weaken the yen.

Growth slowed to an annual 0.4 percent pace in the three months ended June 30 as consumer spending stalled and exports cooled, Cabinet Office figures showed yesterday. The expansion was less than the estimates of all 19 economists surveyed and pushed the economy into third place behind the U.S. and China.

"If the yen strengthens further, the Bank of Japan may have no choice" but to ease monetary policy, said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. "We could see more fiscal support from the government."

The central bank is likely to ease policy at its Sept. 6-7 meeting or sooner should the yen gain and stocks fall sharply, said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.

Overoptimism Regarding Japan

Japan is sliding towards recession if not indeed in it with GDP falling to a mere .4 percent.

Note the perfect score by 19 out of 19 economists regarding Japanese GDP. All were overoptimistic.

Nonsense About Easing

Sentiment is overwhelming that Japan is about to ease. One economist suggested there was "no choice".

Really!?

What good could it possibly do?

click on chart for sharper image

Chart courtesy of Bloomberg.

Pray tell what kind of reaction does the bank of Japan expect from "easing" when 5-year bonds are yielding .28% and 10-year bonds a mere .95%?

Talk of the need to "ease" is nonsensical and the Fed better take note.

Japanese Bond Bubble

Those looking for a bubble in bonds can arguably find a bigger one in Japan than the US.

Some will counter that Japan is "nation of savers". However, the savings rate in Japan has fallen to 1% while the savings rate in the US has risen to 6%.

How much longer Japan can get away with interest rates this low is a mystery, but that too is something for US treasury bears to consider.

The day of reckoning will come for Japan if and when it needs foreigners to supply money at any spot on that yield curve, because that is not likely to happen.

However, one must also factor in balance of trade issues. Right now those trade flows are strongly in favor of Japan.

Japan Balance of Trade

click on chart for sharper image

Japan's export model is one reason Japan has serious concerns over the strength of the Yen.

Every country wants a cheap currency relative to the others to help fuel exports. Mathematically that is impossible, and the global imbalances keep piling up as a result.

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

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Tuesday, August 17, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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