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Saturday, December 3, 2011

Mish's Global Economic Trend Analysis

Cain Throws in the Towel; Gingrich's Serial Hypocrisy is Embarrassment to Republican Party; Ludicrous GOP Get-Tough Talk; Time for Romney and Gingrich to Step Aside as Well

Posted: 03 Dec 2011 04:17 PM PST

Herman Cain has "Suspends Presidential Campaign" which is a polite way of saying "I Quit".

Republican Herman Cain suspended his campaign Saturday, saying that allegations of sexual harassment in the workplace and an extramarital affair have "sidetracked and distracted" a run for the White House.

The accusations of personal misconduct, which he repeatedly denied, "had a tremendous painful price on my family," he said.

But while he added that he has "made mistakes," Cain insisted he's "at peace" with his God, himself and his wife, who was on stage at the event.

Newt Gingrich, who has recently emerged as the current leader in some polls, lauded Cain for "for having the courage to run and for having the courage to have big ideas," Newsday reports.

The former Speaker of the House added that he "appreciates why under the current circumstances, he decided to go back to being a private citizen."

Newt Gingrich: Serial Hypocrisy

Given the steady beat of Gingrichs's hypocrisy, Newt should throw in the towel as well. Please play the following short video.

Gingrich Willing to Lobby for Anything for a Price

The New York Times reports Gingrich Gave Push to Clients, Not Just Ideas

Newt Gingrich is adamant that he is not a lobbyist, but rather a visionary who traffics in ideas, not influence. But in the eight years since he started his health care consultancy, he has made millions of dollars while helping companies promote their services and gain access to state and federal officials.

Ludicrous GOP Get-Tough Talk

Peggy Noonan at the Wall Street Journal writes discusses the A Kettle of Hawks

We have a projected deficit over the next 10 years of $44 trillion. A group of Democrats and Republicans on Capitol Hill were charged with coming up with $1.2 trillion in cuts. Just 1.2 out of 44. Not that hard. And they couldn't do it.

To the Republicans, who met in debate Tuesday night in Washington. A note on the presentation of the debate itself. The videos each cable outfit now makes to introduce each debate have taken on a weird, hyperventilating tone. Tuesday's theme-setter included bombs dropping, jets roaring, presidents sweating, machine guns, screaming dictators, explosions and street demonstrators. Then, in urgent and dramatic tones: "The Republican National Security Debate begins—now." Guys, get a grip. Republican National Committee, start asking to OK the videos beforehand. This is a major-party nomination for the presidency, not a trailer for "Homeland."

Here are just a few phrases and sentences that were lobbed about for two hours. "Protect ourselves from those who, if they could, would not just kill us individually but would take out entire cities," "expanded drone campaign," "they can't be trusted," "strong special forces presence," "hot pursuit," "slapped new sanctions," "no-fly zone over Syria," "nuclear weapon in one American city," "break the Iranian regime," "sabotaging the oil refinery," "crippling sanctions," "centrifuges spinning," "covert actions within Syria to get regime change," there is an "imminent threat" in Latin America, "we have been attacked," "doctrine of appeasement."

At one point Wolf Blitzer asked Newt Gingrich: "Would you, if you were president of the United States, bomb Iran's nuclear facilities to prevent it from becoming a nuclear power?"

Messrs. Blitzer and Gingrich, longtime Washington insiders, live in a cultural cosmos in which things like this are chattered about with no more sense of import than if they were talking about the Redskins. In fact it's exactly what they talk about after they talk about the Redskins game. But should we be discussing those things so blithely and explicitly in such a public way? You have to wonder what the world thinks when it hears such talk—and the world is watching.

It would have been nice to hear one of the candidates say, "You know, Wolf, I'm not sure it's a good idea to talk the way we're talking at a time like this, with the world so hot and our problems so big. Discretion isn't cowardice, so let me give you the general and overarching philosophy with which I'd approach these challenges, and you can infer from it what you like. I prefer peaceable solutions when they are possible. I think war is always a tragedy, sometimes necessary, sometimes even inevitable, but always tragic, and so I don't speak lightly or blithely of taking up arms . . ."

By the end, some of what was said sounded so dramatic that Ron Paul seemed like the normal one. He very much doesn't want new wars or new military actions. This is not an unreasonable desire! Jon Huntsman was normal too. They both seemed to think our biggest foreign-policy challenge is the American economy, which pays for our arms and diplomacy but has grown weak. It has to be made stronger, because without it we can afford nothing.

The tone of the debate seemed to me another example of the perils of Republo-world, where politicians, consultants and policy professionals egg each other on in hopes of reaching the farthest points of the base.

On Foreign Policy, Ron Paul Is More Mainstream Than His Opponents

The Atlantic reports On Foreign Policy, Ron Paul Is More Mainstream Than His Opponents

In Peggy Noonan's latest column, discussed here by my colleague James Fallows, the Wall Street Journal columnist responds to the most recent GOP foreign policy debate by remarking on its bellicosity. "By the end, some of what was said sounded so dramatic that Ron Paul seemed like the normal one," she wrote. "He very much doesn't want new wars or new military actions. This is not an unreasonable desire!"

It's good to see an establishment columnist coming around to Paul's foreign-policy thinking, even if it's hedged in the condescending frame of they're so crazy they make even Ron Paul sound reasonable. Perhaps she'll go even farther in a future column if presented with evidence that Paul doesn't just "seem" like a normal candidate on foreign affairs, he is a normal candidate.

Remember when Paul belonged to the minority in Congress that opposed the Iraq War? Now, 62 percent of Americans say fighting the Iraq war was a mistake. You know the Republicans who criticized President Obama for presiding over the end of America's military presence in Iraq? Well, like Paul (and unlike Obama) 78 percent of Americans support full withdrawal. And in Afghanistan, another country that Paul wants to leave, two thirds of Americans want to see troop levels reduced. "Just one in three Americans believe fighting there is the right thing for the U.S. to do," CBS News found, "while 57 percent think the U.S. should not be involved in Afghanistan."

Like Ron Paul, Americans are also overwhelmingly against bombing Iran's nuclear infrastructure. And although I'll bet he wants to cut the Pentagon budget more than the average American does, a majority of the public prefers defense cuts to other kinds, and as Rasmussen found earlier this year, "Nearly one-half of Americans now think the United States can make major cuts in defense spending without putting the country in danger. They believe even more strongly that there's no risk in cutting way back on what America spends to defend other countries."

Comparing Paul's positions to those of either the American people or foreign-affairs experts in the State Department and academia, it is clear that his views are closer to normal than most of his Republican opponents' (that is to say, closer to normal than everyone but Jon Huntsman). On the biggest, most consequential foreign policy issues, he is averse to war, as are his countrymen. It is only when they are compared to the views of the Washington establishment, where the Washington Post op-ed page, the Weekly Standard, and the American Enterprise Institute are regarded as mainstream institutions, that Paul's foreign-policy views seem like the abnormal ones.

Romney is another war mongering fool and his trade policy positions will be as disastrous as the Smoot-Hawley tariffs were in the Great Depression.

I commend Cain throwing in the towel. Newt Gingrich needs to do the same because he is a hypocrite. Mitt Romney also need to do the same given that President Obama and Mitt Romney are Nearly One and the Same!

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

German Finance Minister Hatches "National Redemption Fund" Scheme to Kick the Debt-Can Another 20 Years

Posted: 03 Dec 2011 08:53 AM PST

Finance Minister Wolfgang Schaeuble hatched a plan to siphon off a huge chunk of sovereign debt for every country in the EU and pretend to do something about it, not now of course, but over the next 20 years.

Allegedly the siphoned off debt would be paid back via a "National Redemption Fund".

Of course the only way to pay that debt back is by raising taxes or cutting spending for 20 years which means it has a snowball's chance in hell of actually working.

Reuters discusses the 20-year can kicking idea in German finance minister details debt fund plan before EU summit

Wolfgang Schaeuble outlined his plans under which states would effectively siphon off a chunk of their debt to a special national fund and pay it off over about 20 years while committing to reforms to keep debt levels on target.

Schaeuble believes his proposal, which has won qualified support from Chancellor Angela Merkel, would boost confidence as states would be sending a signal they were serious about limiting debt levels to 60 percent of gross domestic product.

"We need a redemption fund in every single country of the euro zone," Schaeuble told the Passauer Neue Presse.

"Each of these countries should put into a special fund that part of its debt which exceed 60 percent of its GDP, and should pay that off with tax revenues. Over a period of 20 years, the debt should be reduced to 60 percent," he said.

In Germany's case, the fund - covering federal, state and municipal debts - would amount to about 500 billion euros ($672 billion) as German debt is around 80 percent of its gross domestic product, said Schaeuble.

Merkel's spokesman welcomed Schaeuble's proposal as "interesting," saying it could help rebuild investor confidence.

Just One Catch

Schaeuble's plan has already hit opposition from Austria. Finance Minister Maria Fekter said on Friday any proposals that resulted in gathering billions of euros from taxpayers would encounter problems in national parliaments.

Duh? Ya think?

Bear in mind the idea is progressively harder for countries already under extreme difficulty with various austerity measures imposed to pay back French and German banks.

This is another one of those dead-on-arrival ideas that might even be agreed upon, but will never succeed.

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

Friday, December 2, 2011

Mish's Global Economic Trend Analysis

Bobo’s Travels - Plenty of Job Offers for Skilled Engineers IF You Can be Like Bobo
Charts of the Day: Labor Force and Unemployment Rate Adjusted for Population Growth Since 1948 Show Falling Unemployment Rate is "Statistical Mirage"
Unemployment Rate Dips to 8.6% as 487,000 Drop Out of Labor Force

Bobo’s Travels - Plenty of Job Offers for Skilled Engineers IF You Can be Like Bobo

Posted: 02 Dec 2011 04:34 PM PST

I received an interesting email today from a reader "Freemon" regarding the trials and tribulations of his engineer on the move friend "Bobo".

"Freemon" writes ...

The following is an email I received from a fellow engineer. It pretty much summarizes the times.

My Florida nuclear power plant work ended sooner than promised, so I networked my contacts and in 6 working days landed 2 solid offers. Yep, it's moving time again.

I'm flying to Vancouver CA to work for 3 weeks, then flying back to Florida to move my stuff to AZ. I'm driving my truck the southern route - New Orleans, San Antonio River Walk and Alamo, Austin City Limits, etc. Should be in Phoenix the last few days of 2011, which gives me just enough time for a round of golf and a hike up Squaw Peak. Then I'm going to Nevada for my next job building a new gold mine.

Let's see, that makes 4 states, 3 companies, 2 countries, and 5 different job-sites for me in the past 11 months. Pack-and-move and pack-and-move and pack-and-move. My world is spinning faster and faster and I can barely hold on anymore. I've rented my house, sold all my furniture, dumped my camping gear, and given away my t-shirts, and now I live out of cardboard boxes.

Anything I buy is too much trouble to drag around. I have simplified so much that all I own anymore is a cell phone, a laptop, and an email address. Travel light, move fast, and stay alive. There's no middle ground anymore.

There are thousands of starving engineers, spun out into a ditch, unable to make that next move, meet that upcoming deadline, or attend tomorrow's meeting. So I travel light and move fast. Very fast. Always faster than the last time. Always faster than the next guy. Always jumping higher and farther and better than ever before. One day I'll just burn up, spin out, or perhaps just give up. But not just yet. Somehow, somehow still, I keep missing career death with that one well-placed contact. With that one quick jump, with that one flexible move, lucky me, I just survived another crash.

And, extra lucky me this time — the nukies downsized me in November but paid me thru January, and by next week I'll be polishing gold nuggets in my hotel room in Vancouver. Double-dipping sweet!

So tonight I'm heading to Wal-Mart to buy a trench coat with deep pockets, extra sunglasses, and a 10 gallon hat. While you are sitting in your cubicle smothered in paperclips and yellow stickies, I'll be surrounded with tons of gold! I'm sure they won't miss an ounce or two every now and then.

And, so I spin, faster and faster, around the world. Where it stops nobody knows. It's either spin or spin out in this business anymore.

Another job, another state, another company, another promise, another airplane flight, another hotel. What day of the week is it? Sorry, I don't have a clue.

All I care about now is that this new job is good. I work 6 weeks on and get 2 weeks off. Free airplane, hotel, food, car, etc. They pay for everything. Even overtime. See you on Squaw Peak every day for 2 weeks about mid-February. Or perhaps Hawaii, Mexico, or wherever the plane lands next.

It looks like I'll be living in hotels until the sky caves in, so if anyone needs any towels, shampoos, or soaps, just let me know.

Hey, Freemon, you can certainly understand. What a fast unstable world! You can do anything you want with this letter, but please change everything that identifies me with it. Thousands of engineers like us are stuck in this spin, and the corporate spin of "America needs more engineers, blah blah blah"

We have thousands of engineers too many. We need a stable economy!

That is a slightly edited version (corrected grammatically only) of a version on Freemon's website Market Place of Ideas website Bobo's Travels

I cannot confirm the accuracy of the post, but to me it rings true.

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

Charts of the Day: Labor Force and Unemployment Rate Adjusted for Population Growth Since 1948 Show Falling Unemployment Rate is "Statistical Mirage"

Posted: 02 Dec 2011 09:53 AM PST

In Unemployment Rate Dips to 8.6% as 487,000 Drop Out of Labor Force I presented some quick facts on the drop in the unemployment rate.

In the last year, the civilian population rose by 1,726,000. Yet the labor force fell by 67,000. Those not in the labor force rose by 1,793,000.
In November, those "Not in Labor Force" rose by a whopping 487,000. If you are not in the labor force, you are not counted as unemployed.
Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Labor Force and Unemployment Rate Adjusted for Population Growth

Reader Tim Wallace responded with a very nice set of graphs and commentary. Wallace writes ...

In the entire history of the labor force data, only in 1951, 1961, 1964, and 2009 did the labor force "shrink". It also "shrank" in 2011 off 2010. Also note that from 1964 to 2007, only in 1991 at 631,000, 1995 at 723,000 and 2002 at 801,000 did the labor force fail to add more than 1,000,000 people.

However, in 2008 the labor force only expanded by 776,000. This was followed by a loss of 826,000 in 2009, a trivial gain of 155,000 in 2010 and a loss of 67,000 in 2011.

If you look at the average labor force growth from 1948 to 2007 of 1,579,000 the labor force should have expanded by 6,316,000 2008-2011. Instead the labor force expanded by a mere 38,000!

Thus, 6,278,000 people are unaccounted for in the unemployment numbers based on historical averages.

The final graph takes the adjusted data and calculates the unemployment number off the adjusted workforce and those that actually have jobs. The unemployment numbers using this historical trend method show the following numbers for November in these years:

Unemployment Rate Adjusted for Population Growth

2007 4.7%
2008 7.3%
2009 11.7%
2010 12.4%
2011 12.2%

I am sure it is just coincidence, but it is interesting to note that the flat lining of the labor force began in earnest with the Obama administration.

Tim

Thanks Tim!

click on any chart for sharper image

Labor Force Seasonally Adjusted 1948 to Present

Labor Force Seasonally Adjusted 1948 to Present
Years 2008-2011 Adjusted to Historic Growth

Unemployment Rate Adjusted for Normal Labor Force Growth 1948 to Present

Due to boom demographics, a slowing rate of increase in the labor force was to be expected. Instead the bottom has fallen out for 3 years.

Conclusion

Those who think the economy is improving based on the falling unemployment rate are looking at a statistical mirage based on an extremely atypical and prolonged drop in the labor force.

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

Unemployment Rate Dips to 8.6% as 487,000 Drop Out of Labor Force

Posted: 02 Dec 2011 08:18 AM PST

Quick notes about the "falling" unemployment rate:

In the last year, the civilian population rose by 1,726,000. Yet the labor force fell by 67,000. Those not in the labor force rose by 1,793,000.
In November, those "Not in Labor Force" rose by a whopping 487,000. If you are not in the labor force, you are not counted as unemployed.
Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Jobs Report at a Glance

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

US Payrolls +120,000
US Unemployment Rate Declined .4 to 8.6%
Civilian labor force fell by 315,000
Those Not in Labor Force rose by 487,000
Participation Rate fell .2 percentage points to 64.0%, nearly matching a low last seen in 1984
Actual number of Employed (by Household Survey) rose by 278,000
Unemployment fell by 594,000
Civilian population rose by 172,000
Average workweek for all employees on private nonfarm payrolls was unchanged at 34.3 hours for the second consecutive month.
The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged down 0.1 hour to 33.6 hours in November.
Average hourly earnings for all employees in the private sector fell by 2 cents to $23.18
Government employment decreased by 20,000
The private sector has only recovered 33 percent of jobs lost in the peak-to-trough period of January 2008 to February 2010.

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%.

November 2011 Jobs Report

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

The unemployment rate fell by 0.4 percentage point to 8.6 percent in November, and nonfarm payroll employment rose by 120,000, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in retail trade, leisure and hospitality, professional and business services, and health care. Government employment continued to trend down.

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Notice that actual employment is lower than it was nearly 11 years ago.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted

click on chart for sharper image

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, 2.5 years old, the economy averaged about 131,000 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 and Operation Twist

Over the past year, average hourly earnings of all employees have increased by 1.8 percent. The consumer price index for all urban consumers (CPI-U) was up 3.6 percent from October 2010 to October 2011.
Average hourly earnings for all employees in the private sector fell by 2 cents to $23.18 in November after increasing 12 cents over the prior 2 months.
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.

It is exceptionally rare to see negative numbers in birth-death adjustments in months other than January and July. Data for much of this year actually seems reasonable.

Household Survey Data

click on chart for sharper image

In the last year, the civilian population rose by 1,726,000. Yet the labor force fell by 67,000. Those not in the labor force rose by 1,793,000.

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

click on chart for sharper image

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.

click on chart for sharper image

Distorted Statistics

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers. Digging under the surface, the drop in the unemployment rate is nothing but a statistical mirage.

The official unemployment rate is 8.6%. 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 8.6%, U-6 is much higher at 15.6%.

Falling unemployment rate would normally be considered a good thing, but not if it is happening because 1,793,000 people stopped looking for work.

Things are much worse than the reported numbers would have you believe. The entire economic picture is on very thin ice given the clear slowdown in the global economy.

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

Mish's Global Economic Trend Analysis

Has Ambrose Evans-Pritchard Lost His Mind?
Incredibly Anemic Performance of Chinese Stock Market; Decoupling in Reverse?
Crude Futures Have Risen Significantly, So Why are Gasoline Prices Relatively Low?
EU Bank Writedowns to Exclude Pre-2013 Debt; French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%

Has Ambrose Evans-Pritchard Lost His Mind?

Posted: 02 Dec 2011 12:02 AM PST

The question of the day is "Has Ambrose Evans-Pritchard Lost His Mind?" The reason I ask stems from his post on The Telegraph You are all wrong, printing money can halt Europe's crisis

This will enrage many readers — especially the "Austrian" internet vigilantes — but I have to say it.

A near universal view has emerged that Europe's crisis can only be solved by governments and fiscal policy, with varying views over the proper dosage of pain.

I beg to differ. This is a monetary crisis, caused by a jejune central bank that aborted a fragile recovery by raising rates earlier this year, allowed the money supply to collapse at vertiginous rates in southern Europe, and caused a completely unnecessary recession — and a deep one judging by the collapse in the PMI new manufacturing orders in November.

Needless to say, drastic fiscal austerity is making matters a lot worse. You cannot push two-thirds of the eurozone into synchronized fiscal and monetary contraction without consequences.

....

This crisis can be stopped very easily by monetary policy, working through the old-fashion Fisher-Hawtrey-Friedman method of open-market operations to expand the quantity of money, ideally to keep nominal GDP growth on an even keel.

This does not solve the 30pc intra-EMU currency misalignment between North and South, of course, but it quite literally "solves" the solvency crisis for Italy and Spain. They would not be insolvent if the ECB had not driven them into depression by letting their money supply implode.

Yes, I know there are lots of central bankers who say or think monetary policy cannot achieve these miracles. They are wrong. Of course it can. A whole generation of policy-makers have been side-tracked into cul-de-sacs like (Bernanke) creditism, or German religious theories of "expansionary fiscal contractions". (By the way, I learned in Ireland last week that the country's 1980s experience used as the poster child for that credo is based on false data. It does not validate the theory at all).

They have forgotten some basic lessons of economic history. As the Bank of England's Adam Posen put it, policy defeatism has taken over.

...

"Yesterday's coordinated central bank intervention was like the captain of a transatlantic flight coming on the intercom to tell us that, while three of the four engines have failed, the remaining one might get us to our destination," said Steen Jakobsen from Saxo Bank.

"The central banks are now the only source – or engine – of funding for banks. Yes, it means we now have even more guarantees of cheap money/liquidity in the system, but it's still a scary, one-engine plane. The central bank liquidity is the one engine, while the private market that used to be the other three engines, has seized up and stop functioning."

"French banks lost more than €120bn of funding in the short-term wholesale market from the US over the last month, and the duration of the funding fell from an average of 44-days to less than 5-days."

Quite.

...
Clearly a lot of investors think that Wednesday's central bank drama is a sign that something big is starting, that authorities of Europe and the world "get it" at last.

Well, I'm sorry. The world gets it OK, but Germany does not, and nor does the ECB.

Pritchard Wants to Save the Unsaveable

Pritchard clearly has it in for Germany. Why I do not know.

What's disappointing about his article is that he predicted well in advance that the Euro experiment would end in failure. Rather than bask in the glory of being correct early and often, he has now lost his mind attempting to save the unsaveable.

If that's not losing one's mind, what is?

Monetary Printing Rebuttal

I could spend a lot of time writing a rebuttal to Pritchard's monetary printing thesis, but I do not have to. Pater Tenebrarum wrote an excellent rebuttal on November 29.

Please consider Central Banks and Monetary Cranks

Monetary Cranks Unite!

Ambrose Evans-Pritchard is joining the ranks of the monetary cranks (and there are more then a few of those) sotto voce in a recent missive entitled "Should the Fed save Europe from disaster?". After counting down the litany of things that are currently going wrong and could conceivably get worse, he launches into the following diatribe:

Berkeley's Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. "The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash," he said.

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world's paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent. One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.

David Zervos from Jefferies has proposed an extreme variant of this, accusing Germany's fiscal Puritans of reducing Europe's periphery to "indentured servants" and driving the whole region into depression with combined fiscal and monetary contraction.

"We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them," he said."
Berkeley's Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. "The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash," he said.

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world's paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent. One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.

David Zervos from Jefferies has proposed an extreme variant of this, accusing Germany's fiscal Puritans of reducing Europe's periphery to "indentured servants" and driving the whole region into depression with combined fiscal and monetary contraction.

"We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them," he said."

If adding to the money supply is truly beneficial, why not allow every citizen to set up his own money printing press? That would surely 'increase spending', and therefore should, following the logic of the likes of Bernanke and DeLong, lead to 'economic growth'. If they disagree with this proposition, they must explain what difference it makes when the Fed (and the associated banking cartel) does it. As far as we can tell the main difference is in who gets to profit from the redistributive effects of money printing. Of course it could be argued that if everyone were free to print, there would be no way of controlling the amount that is created. In that case, how about crediting every citizen with a pro rata amount of the newly printed money? Why is it not done in this manner?

Evans-Pritchard seems to indicate here that one should prop up unsound debt by hook or by crook, if need be even against the wishes of those concerned. However, what can be expected to change if the debt is not propped up is in the main that the ownership of assets will be transferred from inept stewards of capital to decidedly more prudent ones. The assets concerned will not disappear.

So what good exactly is supposed to come of keeping the inept guys in charge at the expense of those who were prudent? We are eagerly awaiting an explanation.

Always Wrong to Bail Out Banks

Bear in mind that much of the austerity measures Pritchard rails against are designed to bail out the French and German banks. On that point Pritchard is correct.

It is always wrong to force tax hikes and other austerity measures on private citizens simply to bail out reckless bank behavior. Every Austrian economist in the world would agree.

Pritchard Poses False Dichotomy

Pritchard poses a false dichotomy: print money or impose various austerity measures like hiking taxes to bail out banks. Why do either?

I wrote about this disgusting situation on Thursday in EU Bank Writedowns to Exclude Pre-2013 Debt; French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%

EU officials have hatched a plan to make banks and bondholders take losses for risks, not now of course, but after 2013. In the meantime, taxpayers will shoulder 100% of the losses for bank lending stupidity. On this confidence inspiring news, European bonds rallied sharply.

Three Key Provisions

Taxpayers would be screwed for all losses up to 2013

The year can be extended

Writing down Derivatives is a last-resort

Since the market likes a free lunch at taxpayer expense it's no wonder the debt markets rallied somewhat. However, to what extent the market will believe "no losses" and for how long remains to be seen.

Bailing Out Banks at Taxpayer Expense is 100% Wrong

Bailing out banks that take stupid risks is always wrong, in every situation. Taxpayers will suffer from higher inflation (notably in food and energy), wages will not rise, banks will pass out big bonuses once they are bailed out, and taxpayers will still be stuck with the debt.

That by the way is exactly what happened in the US and it is one of the reasons hiring is anemic and lending is weak.

In the US, but even more so in Europe, banks cannot lend because they are capital impaired. The solution is not austerity and higher taxes, but rather a writedown of that debt.

However, various structural reforms surely are needed, free-market reforms. France needs to stop protecting farms at the expense of the UK, Greece needs to get rid of its public union problems, Italy needs to shed a plethora of inane rules and regulations. I can go on and on about structural problems in the US, UK, EU, and every European country.

Printing money will not fix a single structural problem, all it will do is bail out the banks (yet again), leaving private citizens with debt they cannot pay back or inflation that punishes savers.

Yes, Ambrose Evans-Pritchard has indeed lost his mind because printing money will not solve a damn thing. It will only provide an illusion of temporary success, requiring still more printing when the stimulus dies.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Incredibly Anemic Performance of Chinese Stock Market; Decoupling in Reverse?

Posted: 01 Dec 2011 08:24 PM PST

Every day I watch the relative performance of various equity markets. Since April, the Shanghai index has been the last to rally and the first to go down.

$SSEC Shanghai Composite Index

click on chart for sharper image

On recent news China Cuts Bank Reserve Ratios by .5 Percentage Points; Central Banks Cut Rates on Dollar Swap Lines global equities soared.

However, the Shanghai stock index stands alone in failing to hold the gains, a pattern I have seen and commented about for months.

Note the Shanghai Index was the last global index to rally in late October. Also note that in November the index gave up nearly the entire October rally.

Yesterday the index gapped up strong but gave back much of the gains.

The night is young, but so far today (morning in China) the index is strongly in the red, down 34 points (1.44%) to 2,352 as of 11:12 PM EST.

Chinese Manufacturing in Contraction

Earlier today I commented China Manufacturing PMI Plunges to 32-Month Low of 47.7; Reflections on Stocks Rallying on "Bad News"

Yesterday stocks rallied on news China Cuts Bank Reserve Ratios by .5 Percentage Points and Central Banks Cut Rates on Dollar Swap Lines.

However, the reason Chinese central bank reacted is hugely deteriorating conditions in China. The reason the Fed reacted is hugely deteriorating conditions in Europe.

Equities have rallied on reported "good news". However the first irony is the global economic picture outside the US is horrendous. The second irony is bottoms are formed on bad news (and tops on good news), but central banks intervention is really bad news widely recognized as good news.

Decoupling in Reverse?

The equity markets can rally all the want on deteriorating fundamentals but it will not change the facts one bit.

Europe is in recession, Australia is in recession, Chinese manufacturing is in recession, and the US cannot carry the global economy on its own.

Note the irony in that last sentence. Peter Schiff and others mistakenly thought in 2008 the global economy would decouple from the US economy. The idea was silly then and it is silly now (in reverse).

The US will not decouple from the global economy. China is slowing and faces a hard landing, Europe is in recession, and a Fed inspired rally in commodities will end in pain given the slowdown in China and Europe. Gold may be the exception.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Crude Futures Have Risen Significantly, So Why are Gasoline Prices Relatively Low?

Posted: 01 Dec 2011 04:06 PM PST

West Texas Intermediate Crude is back above $100 from a plunge to $76 at the beginning of October. Brent is $112. So why are gasoline prices lagging the rally in crude?

Reader Tim Wallace writes

Hello Mish

I am now paying $3.15 for gasoline here in North Carolina while the price of oil flirts now around $100 for the past several weeks. Historically I would have expected to see the price now moving up towards $3.50 per gallon.

So why is the price so "low" - a relative term - with the oil price escalating since summer?

The only reason I can assume is per the attached spreadsheets - the demand of gasoline is once more heading down, once again at a rate that brings it well below the crash of 2008/2009.

I have attached the database from the EIA with two charts I added at the front. The first chart shows the annual year on year changes in usage in thousands of barrels from 2005 to today. You can see the constant growth the first three years of the chart as all data points show growth above the zero line. We then have the plummet of '08 on '07 - the same time period oil was going speculatively through the roof.

You can see that '09 was also below the zero line, showing that all growth from 2004 on was gone. We finally had growth last year, although marginal compared to the three positive years prior to the downturn. Now this year we are once again plummeting, in fact well below 2005 supply levels. This is possibly what is putting pressure on price as companies try to keep the volumes up to support their top lines. If this is so, domestic profits will take a hit this year.

The second graph shows the total annual usage with 2011 pro-rated to the year end based on 47 weeks of data.

Tim

click on charts for sharper image

Gasoline Usage

Gasoline Usage Growth

What About Cash-for-Clunkers and Better Fuel Mileages in General?

I asked Tim Wallace how cash-for-clunkers and better fuel mileages may have played into the decline. Here is his response.

There are over 250,000,000 vehicles registered in the USA. In the average year there used to be about 6% are "retired" - scrapped - out of the fleet. In the Cash for Clunkers year the scrap rate was 14,000,000 cars, coming close to 5.6% "retired".

People are holding on to cars longer as is shown by the reducing number of car sales each year, and in fact for the first time in history the fleet may be shrinking as well.

Also note cash-for-clunkers happened in 2009. The entire resulting fleet was on the road in 2010.

What happens to the graph in 2010? UP.

As with all things in our economy, if the economy is growing consumption will go up.

I could not even accept a slight growth like in 2010 as a sign of the resulting fuel mileage savings of new cars in a growing economy being suppressed by higher mileage vehicles as such a high percentage of sold vehicles are the lower mileage large ones.

No, look at the historical years prior to see what one should expect, the "gains" in mileage this past year over cars/trucks manufactured and put into the fleet in those years are not that great. And there are far FEWER of these "higher mileage" vehicles being added to the fleet as well.

My hard and fast assumption is a drop in demand due to reduced driving for whatever reason.

Thanks Tim!

Gasoline Futures

West Texas Intermediate Crude

Brent Crude

Neither gasoline futures nor gasoline prices at the pump can be explained by the action in crude prices. Falling demand, which should also affect profit margins, appears to be at play.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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EU Bank Writedowns to Exclude Pre-2013 Debt; French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%

Posted: 01 Dec 2011 09:30 AM PST

EU officials have hatched a plan to make banks and bondholders take losses for risks, not now of course, but after 2013. In the meantime, taxpayers will shoulder 100% of the losses for bank lending stupidity. On this confidence inspiring news, European bonds rallied sharply.

Bloomberg reports EU Bank Writedown to Exclude Pre-'13 Debt

The European Union may exempt bank debt issued before 2013 from proposals forcing investors to take losses at failing lenders, said a person familiar with the plan.

Excluding the debt is designed to prevent lenders' funding costs from rising, said the person, who declined to be identified because the discussions are private. The exemption could be extended if banks struggle to raise funds, the person said. The law would need approval from national governments and the European Parliament before taking effect.

Michel Barnier, the EU's financial services chief, has promised to propose draft rules to end the need for taxpayer bailouts of failing banks.

Under draft proposals obtained by Bloomberg News, holders of long-term unsecured senior debt in a collapsing bank would be first in line to take losses once a lender's capital and other subordinated debt is exhausted. Long-term bonds would be those with a maturity of more than one year.

A spokeswoman for the European Commission declined to comment on the draft law.

Short-term debt, with a less than one-year maturity, and derivatives should only be written down by regulators as a last resort if losses from longer-term debt aren't "sufficient to restore the capital of the institution and enable it to operate as a going concern," according to the draft.

"Exempting short-term debt and derivatives may be justifiable, but this would increase the use of systemically risky derivatives and excessive levels of short-term debt that contributed to the ongoing crisis," said Sony Kapoor, managing director of policy advisory firm Re-Define. Taxing them "may help alleviate some of these distortions."

Three Key Provisions

Taxpayers would be screwed for all losses up to 2013
The year can be extended
Writing down Derivatives is a last-resort

French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%

Please consider French Yields Drop Most in 20 Years, Spain Bonds Rise

France's 10-year yields fell the most since 1991 as the nation sold 4.3 billion euros ($5.79 billion) of bonds due between 2017 and 2041. Spanish notes rose for a fourth day as it auctioned 3.75 billion euros of securities, the maximum target. Italy's 10-year yields fell below 7 percent for the first time in a week as European Central Bank President Mario Draghi signaled the ECB may do more to fight the crisis as long as governments push the euro area toward a fiscal union.

"There's a generally brighter sentiment at the moment and Spain's was a very good auction with strong demand," said Norbert Aul, a European rates strategist at RBC Capital Markets in London. "There's still fuel in the tank from policy actions and the ECB will offer more next week."

French 10-year yields dropped 27 basis points, or 0.27 percentage point, to 3.12 percent at 4:01 p.m. London time. The 3.25 percent bond due October 2021 rose 2.205, or 22.05 euros per 1,000-euro face amount, to 101.030.

Ten-year Spanish rates fell 51 basis points to 5.72 percent after falling to 5.70 percent, the lowest since Nov. 9. Similar- maturity Italian yields declined 36 basis points to 6.66 percent, dropping below the 7 percent level for the first time since Nov. 24.

Spain 2-Year Government Bonds

Italy 2-Year Government Bonds

Portugal 2-Year Government Bonds

Germany 2-Year Government Bonds

Since the market likes a free lunch at taxpayer expense it's no wonder the debt markets rallied somewhat. However, to what extent the market will believe "no losses" and for how long remains to be seen. Spreads to Germany are still enormous across the board.

If this idea of "no losses" was believable, 2-year Spanish and Portuguese bonds should trade at the same yield as Germany.

It is interesting that Portuguese debt did not rally today. With a no loss guarantee, Portuguese 2-year debt is the leveraged-bet bargain of a lifetime at 18%.

The market clearly does not believe this "no loss" idea and neither do I.

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