Mish's Global Economic Trend Analysis

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• Top 1% Received 121% of Income Gains During the Recovery, Bottom 99% Lose .4%; How, Why, Solutions
• Eurozone Economy Contracts .6% in 4th Quarter; France Down .3%, Germany Down .6%, Italy Down .9%; Expect ECB Jawboning on the "Strong Euro"
• Can People or Corporations Have Too Much Cash?

Top 1% Received 121% of Income Gains During the Recovery, Bottom 99% Lose .4%; How, Why, Solutions Posted: 14 Feb 2013 11:06 PM PST I have spoken many times about "income skew" during the recovery. However, I was never able to precisely quantify the "skew". It's now possible, thanks to many readers who sent a link to a Huffington Post article on Income Gains During the Recovery. The original source of the data is a study Striking it Richer: The Evolution of Top Incomes in the United States by Emmanuel Saez. From 2009 to 2011, average real income per family grew modestly by 1.7% but the gains were very uneven. Top 1% incomes grew by 11.2% while bottom 99% incomes shrunk by 0.4%. Hence, the top 1% captured 121% of the income gains in the first two years of the recovery. From 2009 to 2010, top 1% grew fast and then stagnated from 2010 to 2011. Bottom 99% stagnated both from 2009 to 2010 and from 2010 to 2011. In 2012, top 1% income will likely surge, due to booming stock-prices, as well as re-timing of income to avoid the higher 2013 top tax rates. Bottom 99% will likely grow much more modestly than top 1% incomes from 2011 to 2012. This suggests that the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, excluding realized capital gains, the top decile income share in 2011 is equal to 46.5%, the highest ever since 1917 when the series start. How and Why? Inquiring minds may be wondering how and why this happened and what to do about it. Currently there is a lot of misguided thinking such as calling for caps on CEO pay and increased minimum wages as proposed by president Obama in his state of the union address. I propose that to find a cure, one needs to understand the problem and what cause it. In that regard, it's crucial to understand that inflation benefits accrue to those with first access to cheap money, the banks and the already wealthy. Consider the housing boom and bust. By the time easy credit was universally available (with sensible income and down payment requirements flying out the window), the party was nearly over. The root cause of boom-bust cycles (and the associated income inequality distortions) is the Fed's inflationary and reflationary policies. Simply put, the Fed has sponsored bubbles and busts of increasing amplitude over time, and those with first access to cheap money have come out ahead at the expense of everyone else. It's even worse than that. The Fed's policy of "too big to fail" encourages rampant speculation if not outright manipulation in both directions. How, Why, Solutions The solution to income disparity is not wage caps on executive pay or hikes in the minimum wage, but rather the elimination of the Fed, the elimination of fractional reserve lending, and a return to sound money policies that do not benefit the already wealthy at the expense of everyone else. For a detailed rebuttal to Obama's alternative proposals including a hike minimum wages, please see Hot Air and No Substance; Obama's Plan to Destroy Jobs "Won't Cost a Dime" Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Eurozone Economy Contracts .6% in 4th Quarter; France Down .3%, Germany Down .6%, Italy Down .9%; Expect ECB Jawboning on the "Strong Euro" Posted: 14 Feb 2013 10:43 AM PST As expected in this quarter (but not by economists) eurozone economies contracted at the sharpest rates in four years with Germany, France, and Italy falling short of consensus estimates. The eurozone consensus was .4%. The 17-nation bloc shrank at .6% quarter-on-quarter while the broader 27-nation bloc shrank .5% quarter-on-quarter. From the above Financial Times link: Germany and France, the eurozone's two biggest economies, both saw output shrink. German GDP shrank 0.6 per cent in the period while France contracted 0.3 per cent compared with the previous three months. Both were marginally worse than the consensus forecasts of 0.5 per cent and 0.2 per cent respectively. Italy's economy shrank 0.9 per cent, also more than expected, and its sixth consecutive fall. Both Dutch and Austrian GDP also contracted. The figure for the wider EU – all 27 member states – was a fall of 0.5 per cent. The steep German decline reflected a sharp drop in net exports and investment in plants and machinery. Although business surveys have been much more upbeat, the weakness underscores how the recent appreciation of the euro could threaten an export-led recovery. Insee, France's national statistics agency, said manufacturing output fell 2.3 per cent in the fourth quarter after a 0.9 per cent rise in the third quarter. Spotlight on Germany The Financial Times noted "the contraction in Germany is widely expected to be shortlived." I believe otherwise. Italy remains a basket case, and the French economy is seriously imploding (for details, please see France Economic Implosion Accelerates; Record Decrease in Service Employment in Italy Precisely what is supposed to carry the German economy to strong growth? Expect ECB Jawboning One likely consequence of this "unexpected" news is the ECB is highly likely to start jawboning about the "unwelcome strength of the euro", hoping to talk the exchange rate lower without the ECB having to take any action. When that fails to work, the ECB will cut rates. That will not work either. How can it? The euro is a one-size fits all currency, but what needs to happen is a rebalancing within the eurozone itself. I spoke about this on February 7 in Illusions of Stabilization ... Germany Will Pay a Steep Price One way or another Germany will pay a huge price. These are the only two eurozone recovery options Germany gives (not lends) more bailout money to the rest of Europe The eurozone breaks up Until one of those things happens, signs of stabilization are nothing but an illusion. See the above link for further discussion. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Can People or Corporations Have Too Much Cash? Posted: 14 Feb 2013 12:07 AM PST Is it possible to have too much cash for your own good? I believe the average 7th grader would easily recognize the inherent absurdity of such a question. However, the average economic writer does not understand what the average 7th grader does. For example, please consider Apple isn't only company with too much cash on CNN Money by author Paul La Monica. Issuing preferred shares that pay a big dividend may not be the best use of Apple's more than $137 billion of cash and liquid investments. But hedge fund manager and Apple shareholder David Einhorn, who is pushing the maker of iEverything to reward investors with a new class of high-yielding stock, has a point. Apple should be doing something more productive with its more than $137 billion in cash. Did I mention that Apple (AAPL) has more than $137 billion in cash? And it's not alone. Several leaders in the tech and pharmaceutical industries are hoarding cash. .... Mercy Me Mercy! Corporations have too much cash! And they are hoarding it! My Goodness. It's no wonder their stocks are doing poorly. Why everyone knows making money is bad business and spending money isn't. Yes readers, this is the way economic writers on mainstream media think. Although I am not opposed to higher dividend yields, I am also not opposed to the concept of waiting for better opportunities. Recall that Microsoft bid $44.6 billion for Yahoo in 2008. Microsoft's offer was over $30 a share. The current price, after a huge rally is $21. But No! Heaven forbid corporations "hoard cash". La Monica wants corporations to do something with their cash now. The fact is the S&P just had a rally over 100%. Stocks are likely to correct (and hard). Buying companies at lofty prices is a fool's game, and I commend Apple for not doing it. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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