Mish's Global Economic Trend Analysis

Gold Plunges Over $100; Some Blame Bernanke; What Did He Say? Nothing (However, I have 5 Different Interpretations of Nothing)
Economy Grew 3.0% Annualized, Faster Than Expected in 4th Quarter; Or Did It?
World Bank Warns of Economic Crisis in China; Only 3% Growth for Decade Says Michael Pettis

Gold Plunges Over $100; Some Blame Bernanke; What Did He Say? Nothing (However, I have 5 Different Interpretations of Nothing)

Posted: 29 Feb 2012 06:06 PM PST

It was a wild ride in gold today with a top to bottom over $100 as show in the following chart.

Some Blame Bernanke For "Committing to Nothing"

Bloomberg reports Gold Falls in 'Manic' Plunge as Bernanke Damps Stimulus Bets

Gold futures fell as much as $100 to below $1,700 an ounce on signs that that the Federal Reserve will refrain from offering more monetary stimulus to bolster the U.S. economy.

In testimony before Congress today, Fed Chairman Ben S. Bernanke gave no signal that the central bank will take new steps to boost liquidity.

"People were expecting that the Fed would loosen policies, even if the perception is that the economy is doing well," James Dailey, who manages $215 million at TEAM Financial Management LLC in Harrisburg, Pennsylvania, said in a telephone interview. "The investor sentiment changed as the Fed committed to nothing. This is the manic nature of the market."

Bernanke Hints at More QE

In video commentary Fox News says Bernanke Hints at More Quantitative Easing

Hints at More QE? Really? How about this interpretation?

Door is Open, But Not For A While

The Wall Street Journal reports Comex Gold Tumbles On Bernanke Testimony.

"Bernanke's comments to Congress left the door open for more QE," said Steve Scacalossi, a director of precious metals with TD Securities, in a note. "But his statements that employment is recovering at a better than expected rate implies that if QE is coming, it won't be for a while."

QE Increasingly Improbable

The LA Times says Bernanke's testimony in Congress pushes down gold, silver prices

Federal Reserve Chairman Ben S. Bernanke's words carried a great deal of weight in the commodity markets — so much so that they squashed the prices of gold and silver.

Bernanke told Congress that the U.S. economy was probably headed for modest growth this year, adding that the current increase in oil and gas prices probably would reverse before sparking long-term inflation.

The presentation Wednesday signaled to many investors that the Fed's embarking on another round of quantitative easing was an increasingly improbable scenario.

"When Bernanke didn't mention the possibility of another round of monetization, that was enough to take the fizz out of everything," said independent commodities analyst Dennis Gartman. "Before today, gold was looking quite strong, but today it just gave up the ghost."

Overall Dovish Undertones With Markedly Less-Dovish Testimony

Yahoo! Finance reports Euro Tanks, U.S. Dollar Surges on Bernanke Testimony

Federal Reserve Chairman Ben Bernanke was on Capitol Hill today testifying in front of the Committee on Financial Services. Despite overall dovish undertones, the chairman's testimony was markedly less-dovish than recent Federal Reserve communiqués, boosting the U.S. Dollar across the board.

Bernanke's Actual Testimony

Please consider Semiannual Monetary Policy Report to the Congress, Testimony by Ben Bernanke.

A quick sscan shows Bernanke did not mention the word "quantitative" once. The Only reference to "easing" was in relation to constraints on motor vehicle parts in Japan related to the earthquake.

Bernanke did say growth would be close to or somewhat above second half of last year but "fundamentals that support spending continue to be weak". More specifically the Fed forecasts "2.2 to 2.7 percent, considerably lower than the projections they made last June"

He also said "housing affordability has increased dramatically" but "potential buyers lack the down payment ... others are reluctant to buy a house now because of concerns about their income"

In regards to unemployment, Bernanke said "With output growth in 2012 projected to remain close to its longer-run trend, participants did not anticipate further substantial declines in the unemployment rate over the course of this year. Looking beyond this year, FOMC participants expect the unemployment rate to continue to edge down only slowly toward levels consistent with the Committee's statutory mandate."

That's "markedly less dovish"? Really?

What does that mean for QE?

Nothing. That's what.

People can and did read into Bernanke's testimony what they wanted to hear. Others judged the market reaction, and wrote a corresponding explanation to fit.

One thing's for certain, that was hardly an upbeat assessment of the economy especially in light of the statement that "global financial markets posed significant downside risks".

Here's the deal. If the economy tanks the Fed is likely to do another round of QE. The same holds true for another LTRO by the ECB.

By the way, a couple of the links above came via email from Pater Tenebrarum at the Acting Man Blog, who in turn got them from Lance Lewis. Thanks!

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

Economy Grew 3.0% Annualized, Faster Than Expected in 4th Quarter; Or Did It?

Posted: 29 Feb 2012 10:48 AM PST

Reuters reports Economy grew faster than expected in fourth quarter

Gross domestic product expanded at a 3 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said on Wednesday in its second estimate.

The reading, which was up from the 2.8 percent pace the government reported last month and reflected modest upward revisions to almost all components of GDP, added to the recent run of fairly upbeat economic reports.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised to a 2.1 percent rate of increase from 2 percent. At the same time, growth of real disposable income was revised up to a 1.4 percent rate from 0.8 percent.

"Consumers are spending from rising income rather than digging into their savings to spend," said Shulyatyeva.

Business investment in capital goods was lifted to a 2.8 percent pace from 1.7 percent, but still weak compared to the recent trend. Outlays on home building were firmer than previously estimated, while investment on nonresidential structures was modestly weak.

While a rebuilding of inventories added a hefty 1.88 percentage points to GDP in the last quarter, the increase was revised down to $54.3 billion from $56.0 billion.

"The large boost to GDP growth from stock building in the fourth quarter is unlikely to be repeated in first quarter but the household accounts provide a much more encouraging backdrop for consumer spending," said Peter Newland, a senior economist at Barclays Capital.

Excluding inventories, the economy grew at a 1.1 percent rate, rather than the 0.8 percent initially reported. That was still a sharp step-down from the prior period's 3.2 percent pace.

The report also showed exports were not as strong as previously thought, but imports are also not growing strongly, leaving a smaller trade gap that was less of a drag on growth.

It also showed still moderate inflation pressures, though a

price index for personal spending rose at a 1.2 percent rate instead of 0.7 percent.

GDP Price Indices

The rise in income is nice but excluding the inventory correction, the rise in GDP was anemic.

Moreover, please note Excel Spreadsheet Table 4.--Price Indexes for Gross Domestic Product and Related Measures: Percent Change From Preceding Period in the BEA's GDP Report.

My friend BC Writes

Does anyone actually believe prices decelerated at a 70% quarterly annualized rate in Q4?

Had the trend rate of the deflator held from Q1-Q3, annualized real GDP for Q4 would be 1.3% instead of 3%, 1.2% yoy, and a slight contraction q-q for real final sales and barely 1% yoy (historically recessionary).

It would not surprise me were the NBER in 3 quarters or more to date a recession as having begun in Q1 '12 after the economy stalled in Q4 '11.

BTW, the Treasury withholding receipts from Jan. to Feb. indicate a contraction in employment, which fits with Gallup's self-reported employment survey.

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

World Bank Warns of Economic Crisis in China; Only 3% Growth for Decade Says Michael Pettis

Posted: 29 Feb 2012 12:32 AM PST

A World Bank report to be released next week warns of an economic crisis in China unless state-run firms are scaled back. The Wall Street Journal discusses the report in New Push for Reform in China

An exclusive preview of an economic report on China, prepared by the World Bank and government insiders considered to have the ear of the nation's leaders, offers a surprising prescription: China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms.

"China 2030," a report set to be released Monday by the bank and a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.

The report warns that China's growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.

It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship.

China's Difficult Transition From an Unsustainable Growth Model

Peak oil, a housing bubble, bad debts and over-reliance on investments with no genuine economic feasibility guarantee China's current boom is not sustainable. China bulls are in for a ride awakening when various bubbles pop.

As for recommendations, the report proposes a sharp increase in the dividends that state companies pay their owner (the government) in order to boost revenue and pay for new social programs.

Does China need to increase competition, break apart, and privatize the state-owned monopolies?
Or should China simply increase the dividends?

I vote for the former as does Michael Pettis at China Financial Markets.

Via email, Pettis says:

The report is good as far as it goes, but it doesn't go far enough. Of course increasing SOE dividends to the government for use in social programs will transfer wealth from the state sector to the household sector, but if the total profitability of the SOE sector is less than one-fifth to one-eighth of the direct and indirect subsidies transferred from the household sector, as I have argued many times, then even 100% dividends is not enough to slow the transfer significantly, and remember the transfers have to be reversed, not merely slowed. This proposal falls in the better-than-nothing category, but just.

What we really need are much more dramatic transfers, for example wholesale selling of assets, with the money used either to clean up bad loans or delivered directly to households. According to the article, however, "neither the World Bank nor the DRC proposed privatizing the state-owned firms, figuring that was politically unacceptable."

This is the problem. The best solution for China, economically, seems to be off limits because it will be politically difficult. In that case the second best solution, a gradual build-up of government debt as growth slows for many years, is the most likely outcome.

And how much will growth slow? The World Bank report apparently doesn't say, but the consensus has been slowly moving down towards 5-6% annual growth over the next few years.

That's better than the crazy numbers of 8-9% most analysts were predicting even two years ago (and some still are), but it is still too high. GDP growth rates will slow a lot more than that. I still maintain that average growth in this decade will barely break 3%. It will take, however, at least another two or three years before a number this low falls within the consensus range.

And by the way when it does, metal prices should fall sharply. Copper prices have done reasonably well in the past few months as Chinese buyers have restocked, as we suggested might happen to our clients last fall. With the recent easing we may see more strength in copper over the next month or so, but I have little doubt that within two or three years copper prices are going to be a whole lot lower than they are today. Chinese investment demand simply cannot hold up much longer.

Sad State of Political Acceptability

The report makes feeble recommendations to ensure the proposals are "politically correct". This is a bad practice for three reasons.

You only damage your own credibility
You presume perhaps incorrectly what is politically acceptable
You plant false hope that incorrect solutions will work, when it's clear they will not

It would be far better list the alternatives and the limitations of those alternatives, then provide an honest assessment rather than assume something cannot be done. Unfortunately, telling people what they want and expect to hear is the sad state of political pandering everywhere.

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

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Wednesday, February 29, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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