Mish's Global Economic Trend Analysis

Lagarde Shows True Colors
12 Reasons US Recession Has Arrived (Or Will Shortly)
Monti Begs Germany to Stabilize Interest Rates; Merkel Pours Cold Water On "Theoretical Discussions"; Italy Official Denial #1; Why Monti's Days Are Numbered

Posted: 21 Jun 2012 07:35 PM PDT

The Financial Times says IMF challenges Berlin's crisis response

The International Monetary Fund on Thursday challenged Berlin's game plan for pulling the eurozone out of its crisis by advocating a series of short-term fixes that the German government has resisted.

Christine Lagarde, the IMF chief, said eurozone leaders needed to prevent the single currency from deteriorating further by considering the resumption of bond buying by the European Central Bank and pumping bailout money directly into teetering banks.

While Germany has resisted such measures, Ms Lagarde said the IMF was concerned about "additional tension and acute stress" in both the European banking sector and peripheral governments. She warned that the long-term measures being considered by EU leaders ahead of a summit next week were not enough.

"The IMF believes that a determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith in the system because we see at the moment, the viability of the European monetary system is questioned," Ms Lagarde said.

In addition to the short-term measures, Ms Lagarde also called on the eurozone to complete a fiscal and banking union in the longer-term, structures that she said should include a eurozone-wide bank deposit guarantee scheme and "gradual but limited" mutualisation of eurozone sovereign debt – both measures also resisted by Berlin.

Ms Lagarde said that while the IMF consulted several EU institutions in its three-week evaluation, it did not run its recommendations by Berlin.

"We did not go into each and every member state's political position," she said.

True Colours

In case you were looking for Lararde's true colours (colors if you prefer), here they are.

There certainly was no need for Lagarde to consult Berlin. After all, France's position is all that matters.

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

12 Reasons US Recession Has Arrived (Or Will Shortly)

Posted: 21 Jun 2012 10:14 AM PDT

I am amused by the Shadow Weekly Leading Index Project which claims the probability of recession is 31%. I think it is much higher.

When the NBER, the official arbiter of recessions finally backdates the recession, May or June of 2012 appear to be likely months. Let's take a look at why.

US Manufacturing PMI

Markit reports PMI signals weakest manufacturing expansion in 11 months

Key points:

PMI lowest since July 2011, suggesting slower rate of manufacturing expansion
Rate of output growth broadly unchanged
New orders rise at weakest pace in four months
Input costs fall for first time in three years

Durable Goods Orders Plunge

Those numbers do not look good but they are hardly disastrous. Here are some numbers that are disastrous.

Philly Fed Survey

For the second consecutive month the Philly Fed Survey has been solidly in the red.

click on chart for sharper image

Those numbers are nothing short of a disaster.

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, fell from a reading of ‐5.8 in May to ‐16.6, its second consecutive negative reading. Nearly 40 percent of the firms reported declines in activity this month, exceeding the 22 percent that reported increases in activity.

Indexes for new orders and shipments also showed notable declines, falling 18 and 20 points, respectively. Indexes for current unfilled orders and delivery times both registered negative readings again this month, suggesting lower levels of unfilled orders and faster deliveries.

Firms' responses suggest steady employment this month but shorter hours. The percentage of firms reporting higher employment (14 percent) edged out the percentage reporting lower employment (12 percent). The current employment index increased 3 points this month. Firms indicated fewer hours worked this month: the average workweek index decreased 14 points and posted its third consecutive negative reading.

Misguided Optimism

click on chart for sharper image

Note the misguided optimism about six months from now. It's not going to happen.

Why?

Europe is a disaster.
US manufacturing is cooling rapidly
China is cooling rapidly: China Manufacturing PMI 7-Month Low, Sharpest Decline in New Export Orders Since March 2009
US Monetary policy is at best useless, but more likely net harmful, especially to those on fixed income.
First year presidential politics are frequently recessionary
US still needs fiscal tightening
Unemployment insurance has expired for millions: 200,000 Lose Unemployment Benefits This Week, Nearly Half From California
Self-Employment desperation: 100% of U.S. Jobs Added Since 2010 Have Been Self-Employment, Contractor, or Other Jobs Without Unemployment Insurance Benefits
Last two jobs reports have been dismal: Another Payroll Disaster: Jobs +69,000, Employment Rate +.1 to 8.2%, April Jobs Revised Lower to +77,000; Long-term Unemployment +310,000
The 4-week moving average of weekly unemployment claims is at the highest rate of the year, at 386,250.
New home sales cannot gain significant traction: New Home Sales Hype vs. Reality
Tax Armageddon

Deficit spending has carried this "recovery" further than I thought it would, but the party is now over.

It will be difficult if not impossible to overcome the above set of circumstances regardless of what anyone feels about economic back-tested recession probabilities.

Taxmageddon

Please consider Taxmageddon

The Tax Foundation reports that because of higher federal income and corporate tax collections, Tax Freedom Day came four days later this year than last. And the bad news is that unless Washington takes action, it will take working Americans 11 more days to meet next year's tax burden.

That's all due to Taxmageddon — a slew of expiring tax cuts and new tax increases that will hit Americans on January 1, 2013, amounting to a $494 billion tax hike. Heritage's Curtis Dubay reports that American households can expect to face an average tax increase of $3,800 and that 70 percent of Taxmageddon's impact will fall directly on low-income and middle-income families, leaving them with $346 billion less to spend.

Taxes Will Go Through the Roof

PolicyMic reports When the Payroll Tax Holiday Ends in 2013, Taxes Will Go Through the Roof

Without significant tax code changes, in 2013, America is scheduled to get hit with what would be the largest tax increase in our history.

Not only will the $1,000 per year tax holiday for a $50,000 income household disappear, come 2013 all Americans will see the tax on their first $8,700 of income jump from a 10% rate to 15% rate.

That hike will cost the majority of filers an additional $435.

For those eligible for child care tax credits that deduction will drop from $1,000 to $500. The marriage penalty will roar back into effect. The AMT, alternative minimum tax, will finally kick in.

Roll those changes up and a family filing as married with two children making $50,000, will see their taxes increase by basically $2,700.

Regardless of whether or not you feel taxes need to be raised, a big set of tax hikes is scheduled to happen.

To be sure, some of those hikes will be undone in compromises, but many if not most will sneak through.

Who is to blame for Taxmageddon?

Republican are to blame. They accepted this silly deal instead of a far better one that Obama would actually have signed.

But No! Republicans insisted on no tax hikes at all in 2012, putting everything off until after the election, believing Romney would win in a cake-walk.

However, if President Obama wins, certainly not at all an unlikely possibility, he is going to drive a much harder bargain this go around.

Regardless of tax consequences, the US is headed for recession, if not already in one. 2013 rates to be a disaster regardless who wins.

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

Monti Begs Germany to Stabilize Interest Rates; Merkel Pours Cold Water On "Theoretical Discussions"; Italy Official Denial #1; Why Monti's Days Are Numbered

Posted: 21 Jun 2012 07:53 AM PDT

The G-20 summit is over. As expected, the two-day summit produced nothing but bickering.

On day one, European Commission president Jose Barroso kicked things off by sniping at a Canadian reporter and blaming the US for Europe's problems.

UK Independent Party (UKIP) leader Nigel Farage responded by calling Barroso a "delusional idiot".

For a highly entertaining video of Farage's tongue lashing, check out Nigel Farage: "EC president Jose Barroso is a Delusional Idiot, The Whole Thing's a Giant Ponzi Scheme!"

Merkel Ambushed

On day two, French president François Hollande and Italian technocrat prime minister Mario Monti combined to Ambush German Chancellor Angela Merkel

Angela Merkel, German chancellor, is well accustomed to turning up at international events to receive lectures on how to solve the eurozone's crisis, but at the Group of 20 in Los Cabos the meeting turned into an ambush.

This time, the rebellion against Ms Merkel came from within the eurozone. Mario Monti, who last year received Ms Merkel's imprimatur after succeeding Silvio Berlusconi as Italy's prime minister, suggested the eurozone's €440bn rescue fund should be used to drive down rocketing borrowing costs for both Spain and Italy.

Mr Monti denied Italy was about to seek help, but confirmed there were ongoing discussions about ways to reward "virtuous countries", such as Italy and Spain, that are nevertheless being punished by financial markets.

"The idea is to stabilize borrowing costs, especially for countries who are complying with their reform goals, and this should be clearly separated from the idea of a bailout," Mr Monti told a press conference.

The proposal was quickly seized upon by François Hollande, the new French president who has shown no compunction about publicly disagreeing with Ms Merkel about her crisis management plans since he assumed office last month.

Ms Merkel quickly left the summit on Tuesday evening with only brief comments to the media. But back in Berlin on Wednesday, she insisted such discussions were only theoretical and German officials attempted to pour cold water on the idea.

Official Denial

Please note the "official denial" from Italy: "Mr Monti denied Italy was about to seek help." A few more of those denials and it will be 100% clear Italy will "seek help".

How many official denials were there in Spain before it happened? I recall at least a half-dozen in the span of a week, and dozens in the preceding month.

Monti Begs Germany to Stabilize Interest Rates

Also note the self-serving interests of Monti, practically begging (with help from Hollande) to stabilize borrowing costs of "virtuous countries", such as Italy and Spain.

Monti claimed there were "ongoing discussions" on doing just that. Indeed there were. Alas, those discussions were led by "delusional idiots" including European Commission president Jose Barroso and Herman Van Rompuy, president of the European Council.

Merkel once again poured cold water on the ideas, calling them "theoretical".

Why shouldn't she pour cold water on the idea? The only way to stabilize rates in Italy and Spain is to destabilize them in Germany.

Questions of the Day

Might I ask why there needs to be a European Commission and a European Council, each with their own president and staff?

Are two delusional idiots better than one?

Why not a European Committee as well? That way we could have three "EC" presidents.

Why Monti's Day's Are Numbered

To understand why Monti's days are numbered, one only need look at a pair of polls, the first in November 2011, the second one a few days ago.

Please consider this now-humorous headline from November 20, 2011: Everybody Loves Mario Monti

According to a new survey conducted by polling company Demos for daily newspaper La Repubblica, 80% of Italians support his new technocratic government. An even higher proportion, 84%, approve of Monti personally.

Now consider this this June 15, 2012 article: Monti's approval rating falls to new low

Monti's approval rating dropped 1 percentage point to 33 percent by mid-June compared to the start of the month, after falling steadily from a high of 71 percent when he became prime minister last year, the SWG-Agora poll showed.

When asked how effective Monti's government is, three quarters of those polled said "not much" or "not at all". Monti's technocrat government took over from Silvio Berlusconi last year to try to transform the economy and avert a Greek-style debt crisis.

The poll also showed a rise in the number of people who planned to vote for comedian Beppe Grillo's Five-Star movement, which has become Italy's second most popular party after dealing a stunning blow to traditional parties in local elections in May.

Twenty-four percent said they would vote for the center-left Democratic Party (PD), up from 23.2 percent. Voter support for Silvio Berlusconi's People of Freedom (PDL) party fell to 15 percent from 15.4 percent.

About 21 percent of survey respondents said they would vote for Grillo's movement, up from 20.2 percent earlier in June.

Beppe Grillo's Five-Star Movement Now Second Largest Party

While everyone was glued to the elections in Greece, far more significant events were happening in Italy and France.

Support for Grillo is at 21 percent, support for PD is 23.2 percent. All it will take is a mere two percentage point shift to put Five Star in the lead.

Why Italy May Exit the Euro Before Spain

To understand the significance of the Five Star Movement, please read Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement.

The article discusses the Five Star movement from the perspective of reader "Andrea" who is from Italy but now lives in France.

Grillo's personal opinion (not a mandate for the Five Star Movement) is for Italy to get out of the Euro and default on debt.

Socialists Take Over French Parliament

For more about France, please see Greek Election Sideshow; Socialists Win Absolute Majority in France

Early Elections

The nannycrats in Brussels (assuming they are paying attention which is of course debatable) are no doubt in huge fear of early elections in Italy.

On June 4, 2012 Reuters reported Pressure grows in ruling Italian party for early election

Prime Minister Mario Monti no longer has the backing in parliament to adopt more reforms and Italy should consider holding an early election before the year-end, the economic spokesman for a major ruling party told Reuters on Sunday.

"In this political context and with this parliament, Monti does not have the strength to carry out more reforms," said Stefano Fassina, economic spokesman of the centre-left Democratic Party (PD), one of the two main parties Monti depends on for his majority.

"We should verify quickly if there is any chance of reforming the electoral law and if that doesn't work we should consider the possibility of bringing forward the budget law for 2013 and voting in the autumn," he said in an interview.

On Friday, Berlusconi said Italy should leave the euro unless the European Central Bank agreed to pump more cash into the economy, only to play down his remarks the next day as a "joke".

Four Front Battle

Note the brewing four-front battle: Italy, Spain, France, Greece. Of those, Italy is the most crucial.

Time is not on the nannyrats' side.The longer the delay before an election in Italy, the more strength the Five Star movement will gather.

"See you in the next Parliament" Beppe Grillo said after the local elections in May.

Let's hope so.

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

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Thursday, June 21, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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