Mish's Global Economic Trend Analysis

Italian Bond Yields and Spreads at Euro-Record High; Massive and Growing 2-10 Inversion a Sign of Pending Portuguese Implosion
US Payrolls Rise by 80,000, Unemployment Rate Drops .1% to 9%; Recap and Analysis
Pimco El-Erian Video: "Unfortunately it's a Mess" in Europe, Credibility Declines, Merkozy Cannot Even Agree on the "Easy Part"
Canada Loses Most Jobs Since 2009 as Jobless Rate Rises to 7.3%; Meaningful Miss Sends Loonie Lower
Italy Threatened with Troika Surveillance; Merkozy Sends Inspectors to Italy to Verify the Italian Books; Berlusconi Under Intense Pressure to Resign
In Cabinet Revolt, Papandreou Ordered to "Calmly Step Down", and He Obliged; What about the Next Tranche of Aid?

Italian Bond Yields and Spreads at Euro-Record High; Massive and Growing 2-10 Inversion a Sign of Pending Portuguese Implosion

Posted: 04 Nov 2011 01:33 PM PDT

Following Threats of Troika Surveillance and Inspectors Headed to Italy to Verify the Italian Books it should be no surprise to find Italian bond spreads and yields surging to new highs.

Italy 10-Year Government Bond Yield

Italy 2-Year Government Bond Yield

Germany 10-Year Government Bond Yield

Germany 2-Year Government Bond Yield

European Sovereign Debt Spread Table 10-Year Bonds

Country	10-Yr Yield	Spread vs. Germany
Germany	1.82	0.00
France	3.05	1.23
Belgium	4.38	2.56
Spain	5.58	3.76
Italy	6.37	4.55
Ireland	8.21	6.39
Portugal	11.88	10.06
Greece	26.77	24.95

European Sovereign Debt Spread Table 2-Year Bonds

Country	2-Yr Yield	Spread vs. Germany
Germany	0.40	0.00
France	1.08	0.68
Belgium	2.69	2.29
Spain	4.25	3.85
Italy	5.46	5.06
Ireland	9.19	8.79
Portugal	20.14	19.74
Greece	97.97	97.57

Inquiring minds might be interested in what European spreads look like over time. Chris Puplava at Financial Sense graciously put together a few charts at my suggestion that shows this action. Thanks Chris!

10-Year Spreads vs. Germany Over Time

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Recent Record Highs: Italy, Belgium, France

1-Year Spreads vs. Germany Over Time

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Recent Highs: Portugal, Italy, France, Belgium, Spain

Note: Portugal does not have 1-year bonds. 2-year bond yield substituted

10-Year Minus 2-Year Yields, by Country

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That massive inversion in Portuguese bonds with the 10-Year bond yield at 11.88% and the 2-year bond yield at 20.14% is a sign Portugal may blow sky high any time. Ireland recovered from a similar setup, Portugal failed to do so.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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US Payrolls Rise by 80,000, Unemployment Rate Drops .1% to 9%; Recap and Analysis

Posted: 04 Nov 2011 11:12 AM PDT

Jobs Report at a Glance

Here is an overview of October Jobs Report, today's release.

US Payrolls +80,000
US Unemployment Rate 9.0%
Unemployment rate in narrow range from 9.0 to 9.2 percent since April.
Participation Rate steady at 64.2%
Actual number of Employed (by Household Survey) rose by 277,000
Unemployment fell by 95,000
Those not in the labor force increased by 17,000
Civilian population rose by 198,000,
Civilian Labor Force rose by 181,000
Average Weekly Workweek was unchanged 34.3 hours
Average Private Hourly Earnings rose 5 Cents to $23.19
Government employment decreased by 24,000

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

For the second month the labor force rose. This is a welcome sign. However, were it not for people dropping out of the labor force for the past two years, the unemployment rate would be well over 11%.

October 2011 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) October 2011 Employment Report.

Nonfarm payroll employment continued to trend up in October (+80,000), and the unemployment rate was little changed at 9.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment in the private sector rose, with modest job growth continuing in professional and businesses services, leisure and hospitality, health care, and mining. Government employment continued to trend down.

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Notice that employment is lower than it was 10 years ago.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted

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Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

In the last year of the weakest recovery on record, 2+ years old, the economy averaged about 125,000 jobs a month.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat.

Nonfarm Employment - Payroll Survey Details - Seasonally Adjusted

Average Weekly Hours

Index of Aggregate Weekly Hours

Average Hourly Earnings vs. CPI

"Success" of QE2

Over the past 12 months, average hourly earnings have increased by 1.8 percent. The consumer price index for all urban consumers (CPI-U) was up 3.9 percent over the year ending in August.

Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The BLS has moved to quarterly rather than annual adjustments to smooth out the numbers.

For more details please see Introduction of Quarterly Birth/Death Model Updates in the Establishment Survey

In recent years Birth/Death methodology has been so screwed up and there have been so many revisions that it has been painful to watch.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011

Birth-Death Notes

Do NOT subtract the Birth-Death number from the reported headline number. That is statistically invalid.

Household Survey Data

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In the last year, the civilian population rose by 1,739,000. Yet the labor force rose by a mere 238,000. Those not in the labor force rose by 1,501,000.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Table A-8 Part Time Status

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Part-time status is essentially right where it was a year ago.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

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Distorted Statistics

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 9.0%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

While the "official" unemployment rate is an unacceptable 9.0%, U-6 is much higher at 16.2%. The jump in U-6 this month is from part-time workers.

Things are much worse than the reported numbers would have you believe.

Encouraging Signs

The one encouraging factor is that for the second consecutive month the household survey was significantly stronger than the payroll survey.

A significant number of workers are looking for and finding jobs. Also for the second consecutive month, the labor force rose a significant amount, this month by 181,000.

However, I wonder how much of this increase is "forced employment" fueled by expiring unemployment benefits. Regardless, the jobs still have to come from somewhere.

Yet, the entire setup is on very thin ice given the clear slowdown in the global economy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Pimco El-Erian Video: "Unfortunately it's a Mess" in Europe, Credibility Declines, Merkozy Cannot Even Agree on the "Easy Part"

Posted: 04 Nov 2011 09:51 AM PDT

Here is an interesting interview between Mohamed El-Erian, CEO of PIMCO, and Bloomberg Television's Betty Liu and Michael McKee this morning regarding the situation in Europe and the global economy.

El-Erian said that it's "striking" that German Chancellor Angela Merkel can't agree on the "easy part" and that "unfortunately it's a mess" in Europe.

Link if video does not play: http://www.youtube.com/watch?v=-erklhXVv80

I agree with 60% of what El-Erian says. Yet once again, "non-solutions" coming from Pimco are nothing but Keynesian claptrap.

Here is a complete transcript ...

El-Erian on the situation in Europe and the G20 meeting in France:

"It is both disappointment and concern. It is striking that Ms. Merkel came out this morning and said they could not agree on the easy part, and the easy part was enhancing the IMF resources to help Europe. I am both worried and disappointed so far. Hopefully something will happen in the next day or so, but the signals are not good."

"We need four things. We need an agreement on Europe. We need to stabilize the European situation. Second, the world has to come together and agree on a growth and employment pact. Just like it did in April 2009 when there was a financial crisis, today we have an economic crisis and an employment crisis. We need to see different countries coming together with a common purpose. Third, let's not forget the hot spots in the world like North Africa. We need something there. Finally, there are longer term issues that are just as important, like climate change. That would have been an original agenda, but the G20 got hijacked by Europe."

On recently returning from Europe and his assessment from having been there:

"Unfortunately, it is a mess. There are three parties to a solution and all three are unraveling. There are the debtor countries and they are starting to have even bigger political issues. There are the official creditors and they cannot agree on providing support. And then there are the private creditors. It is not sure that they will get all of the banks to agree on the 50% reduction for Greece, which is the minimum Greece needs. So I'm afraid it's a bit of a mess out there."

On whether Europe is worse off now having gone through the agreement on Greek debt last week:

"We are [worse off now], because every time you get to an agreement and it unravels, the credibility of the process is undermined. Keep the image in your of the snowball rolling downhill. The problems get bigger and it becomes even more difficult to control the snowball. We cannot afford disappointment after disappointment. Europe needs to turn a corner and start building the basis for a solution."

On European leaders questioning whether or not they should belong in the euro:

"You are getting leaders saying strange things. It started with Mr. Sarkozy last Thursday saying Greece should not be in the euro zone. Now you have questioning left, right, and center. The leaders need to get on the same page. The narrative is important here. When there are difficulties that there is a conflict between regional priorities and national realities. That is what we're seeing in Italy. That is what we're seeing in Greece, countries like Germany and France as well. This is a very delicate period."

On today's jobs report:

"The good news is that the report in relative terms is better than expected mainly because of the revisions to August and September. The bad news is that we are still in this unemployment crisis, so no, it does not do enough to remove the risk of stall speed, which is growth but not fast enough growth. We need to see much higher employment creation to get over this issue."

On what it will take to achieve faster growth in the U.S.:

"We have fundamental structural problems in the labor market, housing market, credit market. We don't have enough infrastructure. These are a series of structural issues. We also have to reconcile medium-term fiscal reform with short-term stimulus. There are some big issues that are not as yet addressed sufficiently, certainly not addressed in a comprehensive manner."

On whether there is an increasing risk that the U.S. is losing control of its own economy because of the crisis in Europe:

"The reality is that we live in a globalized economy. Europe is a major economic area. It is an important trading partner. European banks are an important part of the financial situation. No country, whether it is the U.S. or China, is totally immune from what is happening in Europe. The important thing is to be able to navigate it and that depends on your internal dynamics. We are not immune from Europe. Nobody is in the world, but different countries are better or less able to navigate it."

On how central banks have been handling the situation so far:

"They have been doing heavy lifting. The Fed in particular has been the only policymaker really in play. The problem is they don't have enough instruments. You must always remember that central banks are monetary institutions. They can only be a bridge to somewhere. In order to be a bridge to somewhere good, you need other policymakers to also contribute. That is what has failed Europe and the U.S. so far."

On the October market rally and whether we won't see activity like that for a long time:

"This is an incredibly headline-driven market, a macro-driven market, as opposed to a bottoms up market. What we should expect is enormous volatility. We suggest to investors to play general defense and selective offense. I think it's important to be generally defensive because the world is very fluid, but there are values out there."

On whether there's more value in the U.S. than in Europe right now:

"I see value where balance sheets are strong, where companies are exposed to growth in emerging markets and where they're relatively immune to erratic policymaking. That's where value is and it's all over the world."

No Magic Wands

There are no magic wands, Keynesian or otherwise.

El-Erian 's idea that global leaders and central bankers can snap their fingers, "agree on a growth and employment pact" fueled by more stimulus and "heavy lifting" by central banks to produce growth is simply Keynesian claptrap.

Certainly structural issue need to be fixed. However, the Fed and Central bankers need to stop printing, governments everywhere need to stop deficit spending, the US needs to let housing bottom naturally, and public sector employment needs to shrink globally.

In short, there will be no gain without more pain, and that has Keynesian clowns howling at the thought.

El-Erian offered a realistic viewpoint of what is happening. Unfortunately, he is essentially clueless about what needs to be done to fix things.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Canada Loses Most Jobs Since 2009 as Jobless Rate Rises to 7.3%; Meaningful Miss Sends Loonie Lower

Posted: 04 Nov 2011 09:06 AM PDT

More proof the entire global economy is cooling rapidly comes from North of the border where Canada Loses Most Jobs Since 2009 Recession as Jobless Rate Rises to 7.3%

Canada's economy lost the most jobs since the 2009 recession during October, led by declines in the manufacturing and construction industries, cementing projections that the recovery is slowing.

Employment fell by 54,000 after an increase of 60,900 jobs in September, Statistics Canada said today in Ottawa, in the biggest monthly decline since February 2009. The unemployment rate rose to 7.3 percent from 7.1 percent. Economists surveyed by Bloomberg News had forecast an increase of 15,000 jobs and a 7.1 percent jobless rate in October.

"The headline was bad, and the underlying numbers don't look great either," said Rudy Narvas, senior economist at Societe Generale in New York, by phone. "It's not pretty."

The world's 10th-largest economy shrank in the second quarter, two years after its last recession. Finance Minister Jim Flaherty told lawmakers Nov. 1 the global economic recovery remains fragile, and that too many Canadians remain unemployed.

The monthly decline in Canada was led by the loss of 48,400 jobs in the manufacturing sector and 20,100 jobs in construction. Natural resources posted the biggest gain, adding 12,100 jobs.

"Essentially, we have created no net new jobs in the past three months," said Sal Guatieri, senior economist at Bank of Montreal's Capital Markets unit, referring to Canada. Between August and October, the economy added only 1,400 jobs, according to Statistics Canada figures.

Full-time employment dropped by 71,700 in October, while part-time jobs increased by 17,700. Self-employed workers declined by 18,100, while workers classified as employees fell by 35,900.

Employment in the private sector slid by 32,000, while public-sector jobs dropped by 3,800.

"Suddenly, the jobs market doesn't look quite so rosy in Canada," Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce in Toronto, said in a note to clients. The monthly decline suggests economic growth could be "much weaker" in the fourth quarter than in the third, he said.

"Meaningful Miss" Sends Loonie Lower

Bloomberg reports Canadian Dollar Declines as Jobless Rate Unexpectedly Increased in October

Canada's dollar dropped against most of its major counterparts after a government report showed the jobless rate unexpectedly increased in October as the nation's employers eliminated positions.

The Canadian currency slid for the first time in three days versus its U.S. counterpart on reduced demand for risk after Germany's Chancellor Angela Merkel said Group of 20 leaders were unable to agree on International Monetary Fund resources. The Canadian dollar headed for its first weekly decline since September on increased speculation the Bank of Canada will lower borrowing costs following the jobs report.

"It's a miss in a very meaningful way," said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, in a telephone interview. "This is likely to contribute to some Canada lagging."

The loonie, as the Canadian currency is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated 1.2 percent to C$1.0193 per U.S. dollar at 11:09 a.m. Toronto time, extending its weekly drop to 2.7 percent. It touched C$1.0229, the weakest level since Oct. 20. One Canadian dollar buys 98.16 U.S. cents.

Expect more weakness in the Canadian economy and the Loonie in the coming months. No major countries will escape the global slowdown. The commodity currencies of Canada and Australia may be in for considerable declines as both countries head for recession.

My report on the US jobs situation will be out shortly.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Italy Threatened with Troika Surveillance; Merkozy Sends Inspectors to Italy to Verify the Italian Books; Berlusconi Under Intense Pressure to Resign

Posted: 04 Nov 2011 02:28 AM PDT

Angela Merkel and Nicolas Sarkozy were more than a little ticked off when Italian Prime Minister Silvio Berlusconi showed up for the Cannes summit "empty handed". In response. Merkozy proposed a new Troika for Italy and sent inspectors to pour over Italy's books.

Courtesy of Google translate, please consider Europe puts Italy under surveillance

While outside the world has their eyes on Greece, Italy is to be found in the line of sight of the negotiators inside the palace in Cannes.

"The subject is no longer Greece: the real goal is to stabilize Italy," says one side of Brussels. European leaders were particularly incensed to see Silvio Berlusconi land at Cannes without any concrete steps to ensure the fiscal trajectory of his country, providing a return to balanced public accounts in 2013. At the summit of 27 October, the Italian Prime Minister promised to present to the G20 a new package of measures.

Proposed new troika

Greece - which weighs 2% of GDP in the euro area - is a manageable issue. However, an implosion of Italy and its 1.9 trillion of debt would be far more dramatic. To reassure the markets, it is imperative that each country meets its commitments attacked. To this end, several officials in Brussels would have gone to Rome to check the progress of previous reforms.

And now, the Commission does more to go beyond, strengthening the role of the monitoring team. This would create a kind of troika, on the model of regularly examining Ireland, Portugal and Greece. With one difference: there is no question at this stage to lend money to Rome.

Moreover, Berlusconi is under intense pressure from his own cabinet and he will likely be the next Prime minister to fall.

Please consider Italy PM faces more pressure to resign

The calls on Berlusconi to resign come a day after he failed to win support at a cabinet meeting on comprehensive reforms to stimulate growth and cut the European country's massive debt.

Meanwhile, six of the Italian premier's former parliamentary loyalists are calling for a new government.

The deputies, three of whom have already left Silvio Berlusconi's crumbling coalition, wrote to the prime minister that Italy needed a "new political phase and a new government," Reuters reported.

"We are asking you to take an initiative which is appropriate to the situation," the deputies said.

Opinion polls show Berlusconi's popularity is at an all-time low. He is also facing charges of bribery, tax fraud and abuse of power.

Flush with a Pyrrhic victory over Greece (but not recognized as such just yet), Merkozy is stepping up the pressure on Italy. Expect more pressure on Spain and Portugal as well.

Although reforms are badly needed, Greece, Spain and Portugal are already imploding and budget targets will be increasing hard to meet the more austerity measures are crammed down taxpayer throats.

Recovery timelines and haircuts are both insufficient, and budget expectations are outright preposterous across the board.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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In Cabinet Revolt, Papandreou Ordered to "Calmly Step Down", and He Obliged; What about the Next Tranche of Aid?

Posted: 03 Nov 2011 11:22 PM PDT

It's the end of the line for Greek Prime Minister George Papandreou.

In a cabinet revolt led by his finance minister, Papandreou was ordered to "leave calmly in order to save his party". He obliged, having no real choice in the matter because otherwise he would have been ousted in a vote of confidence.

He may survive the vote, but it will do him no good as part of the agreement.

Please consider Greek PM ready to go, dump referendum, for euro deal

Intense European pressure forced debt-stricken Greece to seek political consensus on a new bailout plan instead of holding a referendum after EU leaders raised the prospect of a Greek exit from the euro to preserve the single currency.

Fast-moving events in Athens overshadowed the first day of a summit of the Group of 20 major economies on the French Riviera on Thursday, with anxious world leaders urging Europe to act to stop contagion from its sovereign debt crisis.

Greek Prime Minister George Papandreou bowed to cabinet rebels and agreed to step down and make way for a negotiated coalition government if his Socialists back him in a confidence vote on Friday, government sources told Reuters.

"He was told that he must leave calmly in order to save his (PASOK) party," one source said on condition of anonymity. "He agreed to step down. It was very civilised, with no acrimony."

Papandreou's Plan Backfired?

It may look that way but his days were already numbered. He was gone anyway. It is safe to say his strategy did not work. I supported the strategy because I support democracy.

Members of his own cabinet did him in, not demands from Merkozy.

What about the Next Tranche of Aid?

Radio New Zealand discusses the question of the next tranche of money in Greek PM to stand down

Finance Minister Evangelos Venizelos has warned the country needs the next €8 billion tranche of aid within the next 12 days.

But Chancellor Angela Merkel of Germany has reiterated her threat the cash will be not be available unless Greece accepts the terms of the bailout.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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