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Wednesday, January 4, 2012

Mish's Global Economic Trend Analysis

US, EU Wage Economic War on Iran; Greece Lifts Objection to Oil Embargo; Warmongers United; Will Cooler Heads Prevail?
Brussels Recommends Sucking Spain Dry with Increased VAT; France to Raise Sales Tax to Protect Jobs; Is There Any Point or Reason for the Eurozone?
"Social VAT" Trade Wars Heat Up Between Spain and France
What is Greece's Least Bad Option?

US, EU Wage Economic War on Iran; Greece Lifts Objection to Oil Embargo; Warmongers United; Will Cooler Heads Prevail?

Posted: 04 Jan 2012 09:31 PM PST

One might think the US and EU would have enough economic problems already to risk oil soaring to stratospheric heights by an embargo of Iranian oil.

Unfortunately, common sense never gets in the way of bureaucrats and fools or their foolish missions.

Bloomberg reports EU Governments Moving Closer to Iran Oil Embargo as Greece Lifts Objection

European Union governments moved closer to halting oil purchases from Iran, stepping up the confrontation over the Islamic republic's nuclear program.

EU foreign ministers are aiming to announce harsher sanctions on Iran's energy and banking industries at their next meeting on Jan. 30 after Greece lifted its objections to an oil embargo.

"We want to tighten sanctions on Iran -- the things that have been mentioned are the oil sector and the financial sector," EU spokesman Michael Mann said by telephone in Brussels today.

French Foreign Minister Alain Juppe said in Lisbon today that he hopes a decision about an embargo on Iranian oil exports may be adopted at the Jan. 30 meeting of foreign ministers.

The U.S. today welcomed the push toward an embargo.

"This is consistent with tightening the noose around Iran economically," State Department spokeswoman Victoria Nuland said at a briefing in Washington. "The place to get Iran's attention is in the oil sector."

US, EU Wage Economic War on Iran

By some misguided thinking it is OK for the the US to block Iranian oil but not OK for Iran to defend itself or retaliate.

As far as I am concerned, an embargo is an act of war, and only Congress can declare war.

Thus, one seriously has to wonder if the the US is purposely attempting to goad Iran into blocking the Strait of Hormuz, just so the US can flatten Iran.

Warmongers United

Flushed with the "success" of wasting trillions of dollars in Iraq, fighting weapons of mass destruction that did not exist, the US now wants to do the same to Iran.

Oil is Fungible

The best news out of this mess is that oil is fungible, and perhaps embargo disruptions are already priced in. Regardless, as long as Iranian oil gets through, anywhere, prices will not get out of hand.

With that in mind, it would not surprise me one bit to see China send ships to the Gulf, stating flat out that China will defend its right to not have the US interfere with China's oil needs.

Will Cooler Heads Prevail?

I would love to see someone cram this illegal action so far down Obama's throat it makes him puke. The only problem I see with China asserting Iran's right to ship oil (and it's quite a major problem), is that such actions by China could lead to WW III, just what neocon nutcases want.

By the way, the only candidate from either party against these illegal military and economic actions is Ron Paul.

In an addendum to my Predictions for 2012, under the category of Energy, I stated "My prediction is cooler heads prevail."

Perhaps I will be quite wrong on that particular call, quite soon.

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

Brussels Recommends Sucking Spain Dry with Increased VAT; France to Raise Sales Tax to Protect Jobs; Is There Any Point or Reason for the Eurozone?

Posted: 04 Jan 2012 11:13 AM PST

Political hacks are on a roll in Brussels. Spanish unemployment is 22.8%, yet Brussels recommends Spain hike its VAT.

Via Google Translate, please consider Brussels Again Recommend Rise in Spain's VAT

The European Commission hopes to discuss in the coming weeks with the new government of Mariano Rajoy new fiscal consolidation measures to compensate for the deviation from the deficit target in 2011 that could exceed even the 8% vs 6% agreed, and has advanced the VAT increase is one possibility among others.

"We were informed last week by the Spanish authorities of a sizeable deficit, which should be 6% in 2011 and might be about or more than 8% according to latest statistics we have received from Madrid. At the moment, we have no elements to confirm these figures. We are not in a position to state here that the figure will be higher or lower than 8%, "said at a news conference the European Commission spokesman, Olivier Bailly.

Asked whether Brussels remains the recommendation for Spain to raise the VAT, the spokesman insisted that "Spanish authorities are responsible for deciding planning to take other measures to offset the deficit diversion in order to meet the target of 3% in 2013 who are committed to comply ", but insisted that raise VAT is one of the recommendations of Brussels.

"We made several recommendations in the past, including last June. The VAT is one of them. There are many others," explained without going into details.

Raising taxes in the midst of an economic depression (which Spain is in), is pure insanity. Tax hikes will suck dry the already slim chance of a Spanish recovery.

France to Raise Sales Tax to Protect Jobs

Eurozone economic insanity is staggering as this update on the "Social Vat" tax proves. Please consider France Plans To Raise Sales Tax, Following Germany's Lead

French President Nicolas Sarkozy's government said Tuesday that it would borrow yet another page from Germany's economic textbook in a bid to make France's products more competitive and finance the nation's wide-reaching and heavily indebted social-welfare system.

The proposal, which the government said would be implemented before this spring's presidential election, calls for reducing the amount companies contribute to the state-run health-care and pension systems. To make up for the lost income, the center-right government would raise France's value-added tax--a levy similar to sales taxes in the U.S.--which is currently as high as 19.6%.

The government says the measure, often referred to as "social VAT," would act as a powerful tool to protect French jobs, which are increasingly being relocated to lower-cost countries.

French companies would enjoy lower labor costs, while imported products--which would share the higher VAT burden--would help finance France's welfare system. The country's state-run health-care and pension systems are expected to have recorded a combined deficit of EUR18 billion ($23.3 billion) last year.

Social VAT "is good for France and it is good for jobs," French Labor Minister Xavier Bertrand told France 2 television.

Germany increased VAT to 19% from 16% in 2007 to shift part of the burden of social welfare onto consumers.

"Social VAT is antisocial because it is the consumer that will pay," Socialist Party spokesman Benoit Hamon said.

The French VAT proposal comes as Sarkozy struggles against rising unemployment, a slowing economy and a surging trade deficit that is projected to have reached EUR75 billion last year.

"We shouldn't talk nonsense," Jean-Claude Mailly, the secretary-general of Force Ouvriere, France's third-largest labor union, said on French radio. "It's not with one or two points of VAT that we will compete with Chinese products."

Moreover, as France can't get near China's labor costs, social VAT would be more of a competitive assault on France's euro-zone neighbors.

The measure is equivalent to a currency devaluation because it effectively increases the price of imports and decreases the price of exports. In the past, France repeatedly devalued the franc against the mark to make its economy more competitive.

If other countries followed suit, inflation would still be pushed up without any gain in competitiveness, said Eric Heyer, economist at the OFCE, the French economic think tank.

"We created a single currency to avoid competitive devaluations," Heyer said.

Is There Any Point or Reason for the Eurozone?

"We created a single currency to avoid competitive devaluations". Indeed, that was one purpose wasn't it? The other purpose was to increase trade. Now France is imposing a sales tax specifically to protect French jobs from Spanish competition.

Just how is Spain supposed to pay back French and German banks if other European countries seek to block Spanish exports?

I suggest Spain should not even try. It is futile. Since, Spain is going to leave the Eurozone anyway, it would be better to do it sooner rather than later as these actions by France proves.

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

"Social VAT" Trade Wars Heat Up Between Spain and France

Posted: 04 Jan 2012 08:10 AM PST

Trade wars are on the horizon everywhere I look. Election politics have brought them to the forefront in France.

Via somewhat choppy but understandable Google Translation, please consider France to Increase the 'Social VAT' Before the May Presidential Election

The French government intends to implement the so-called 'social VAT' levied on products imported from countries with low production costs in order to apply a reduction in social contributions, before presidential elections next spring, as confirmed Budget Minister and government spokesman Gallo, Valérie Pécresse.

"The social tax to create jobs in France and to prevent imported products sold in our country at low cost is going to apply, and we will do before the presidential election," he said Pécresse told France Info.

The minister also said that this Budget proposal will be discussed with the French unions in the social summit is scheduled to be held on 18 January at the Elysee Palace.

In this regard, Bertrand defended the implementation of this measure by the "general interest" of employment and the country, and stressed that in France there are "too many burdens on the job." As an example, said that for every $ 100 of gross wages, account charges 39 euros in Germany, while France is 50 euros.

"I prefer to penalize imports, which have long criminalized the financing of social protection is now to finance social protection", had an impact.

Opposition criticism

Sarkozy's proposal to establish the social tax, announced in his speech on December 31 has been widely criticized by the opposition, including the Socialist Party, which sees as a "social and economic mistake."

Social and Economic Mistake

The interesting thing is the Socialist Party understands the proposal to be a "social and economic mistake" (which of course it is).

When attempting to buy votes, no one cares about mistakes of any kind, and unfortunately private citizens (not politicians) suffer the consequences.

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

What is Greece's Least Bad Option?

Posted: 04 Jan 2012 12:24 AM PST

Inquiring minds might be wondering what is the best way forward for Greece. To some extent, the question is akin to asking "would you prefer to lose a one hand and one eye or your left leg?"

I have been thinking about the Greece "least bad" question for quite some time, but what brought about this post is a "by the editors" article on Bloomberg.

Please consider Greece's Least Bad Option Looks to Be Internal Devaluation: View

Greece and some other euro-area economies face years of financial struggle even if they manage to restructure their debts. Their prospects are so bleak that, according to one school of thought, they would be better off outside the euro system, despite the immediate costs of leaving.

We disagree, and not just because the immediate costs of an exit would be enormous. Even after that penalty was paid, resurrecting national currencies and regaining control of monetary policy would create as many problems as they solved.

....

Inside the system, the peripheral countries have learned a harsh lesson: They must hold growth in wages to the euro area's rate of inflation plus any increase in national productivity. In countries such as Greece, this demands a new approach to wage bargaining by employers and unions. Overall, though, it should be no more difficult than managing a floating currency. And on this path the reward for success is greater: lower inflation rates and, with luck, faster economic growth.

None of this alters the fact that Greece, so slow to learn the new rules, would have been better off not joining the euro system in the first place. But it did join, and its best bet now is to make it work.

Bloomberg Right About One Point

Bloomberg is right about one thing, that Greece should not be in the Eurozone. However, Spain, Portugal, Ireland, Italy, France, and Germany should not be in the Eurozone either.

In short, the Eurozone is a fatally flawed mechanism doomed to failure. No country should be in the Eurozone, as constructed.

Some may disagree with that prognosis, but even if they are correct, what is the likelihood that German voters and the German supreme court will ever accept the "transfer union" that can make the Euro ever work?

For the sake of argument let's assume 25%.

Now, in the current state of European politics (and more importantly Greek politics), what are the odds Greece can stick with the mandates set by the Troika?

Once again, for the sake of argument, let's assume 25%.

For the record, I think both of those are on the high side, but assuming both happen, the odds Greece stays in the Eurozone are .25 * .25 or 6.25%.

Regardless of how one calculates the odds, the same arguments that Bloomberg makes today could have been made (and were made by many parties) two years ago, a year ago, six months ago, and two months ago.

Water Under the Dam

At every critical juncture, the consequences for Greece to "stay in the Eurozone" have done nothing but get worse. The lesson here is the sooner a country tells the EMU to "go to hell", the better off the consequences.

That is all water under the dam. The question is "what to do now?"

Clearly if Greece is going to exit (and I think it will), the sooner the better. However, let's ponder the 6.25% chance that the Eurozone stays intact, including Greece.

Greek Exit Means Hyperinflation, Staying in a Decade's Long Depression

If Greece exits the Eurozone, I suspect Greece would enter a period of hyperinflation. The country and the Drachma will be ruined. On the other hand, if Greece stays in the Eurozone, it will face decades long austerity measures and a permanent depression for a decade.

At least in the former case, Greece may get this over and done with in a time-frame of 2-3 years.

Is that outcome worse than massive austerity measures and a permanent depression for a decade, in which Greek voters may decide at any time they have had enough?

Perspective of the EMU

From the perspective of Greece, the best approach was to exit 2 years ago, 1 year ago, six months ago and now.

Interestingly, the same applies for the rest of the Eurozone. Had Greece left two years ago the consequences on the Eurozone banking system may have been 40 billion Euros. In an attempt to prevent what now appears inevitable, the Troika responded with a 100 billion Euro bailout and now needs a second bailout of at least equal size.

Will another 100 billion Euro bailout help? 200 billion? 500 billion? How? And at whose expense?

Moreover, even if bailouts could in theory help, will Greece be able to stick with the austerity plan (and resultant depression) for a decade?

Conclusion

The worst option for Greece and the banks is for Greece to stay the course for years (as it has) then eventually give up (which it will).

The best option from the point of view of Greece (as well as the EMU) is for Greece to default and kiss the Eurozone goodbye, right now.

Unfortunately, misguided politicians, Eurocrats, ECB officials, and analysts have gotten in the way, with dire consequences for Greece, European banks, and the entire Eurozone.

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

Tuesday, January 3, 2012

Mish's Global Economic Trend Analysis

Live Real Time Interactive Map of Iowa Caucus
World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe
Manufacturing ISM Highest Since June; Expiring Business Tax Credits Explain Why; Enjoy it While You Can As US Decoupling Won't Last

Live Real Time Interactive Map of Iowa Caucus

Posted: 03 Jan 2012 05:59 PM PST

Google Elections has a nice Interactive Map of the Iowa Caucus.

Click on the above link to see live results.

Joe Trippi writing for Fox News says Prepare to Be Surprised By Iowa Caucus Results and that high turnout favors Ron Paul.

Watch Dubuque: The county in the northeast corner of the state is heavily Catholic and an area Romney scored well in four years ago. If Rick Santorum isn't winning here it means the Santorum surge isn't real or isn't big enough to matter. The state is 23% Catholic – if Santorum, a pro-life Catholic himself, consolidates the Catholic vote in Dubuque and elsewhere the Iowa surprise could be a Santorum win.

Turnout: The higher the turnout the more like it is that Ron Paul wins the state. Ron Paul pulls in college students as well as Democratic and Independent and voters who do not typically vote in GOP caucuses. If they show up, turnout will be unusually high and the surprise could be the GOP suddenly having to deal with a libertarian uprising in their party.

Settling for Romney: Iowa, after all the ups and downs of the year, could "settle for Romney" with voters worried about defeating Obama they could make their decision on electability like the experience I had with Mondale. – But even in this scenario (as I learned with Fritz) the surprise will be who took second.

Call it the curse of the frontrunner, but Romney is supposed to win, so the story coming out of Iowa if he does win might be on the unexpected second place finisher emerging as the "other candidate."

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

World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe

Posted: 03 Jan 2012 01:09 PM PST

With everyone watching debt rollovers in Europe, let's instead take a look at the total global debt rollover and debt issuance problem.

Bloomberg reports World's Biggest Economies Face $7.6T Debt

Governments of the world's leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan's $3 trillion and the U.S.'s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg.

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor's cut the U.S.'s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

2012 Debt Rollovers and Interest Payments

Country	2012 Bond, Bill Redemptions ($)	Coupon Payments
Japan	3000 billion	117 billion
U.S.	2783 billion	212 billion
Italy	428 billion	72 billion
France	367 billion	54 billion
Germany	285 billion	45 billion
Canada	221 billion	14 billion
Brazil	169 billion	31 billion
U.K.	165 billion	67 billion
China	121 billion	41 billion
India	57 billion	39 billion
Russia	13 billion	9 billion

Japan's Problem

Remarkably, rolling over US debt is unlikely to be a problem. The same cannot be said for Japan. Because of demographics, pension plans will be net sellers of Japanese bonds. Unless balance of trade or tax revenues increase enough in 2012 Japan will not be able to roll this debt over at 1%. A rise to 3% would consume nearly all of Japanese revenues.

Europe's Problem

The ECB elected to kick the can down the road with a 3-year long-term refinance operation (LTRO).

For example, please consider Spanish banks use ECB cash to cover maturing debt-sources

MADRID, Dec 22 (Reuters) - Spanish banks will use the majority of the cheap long-term cash from the European Central Bank to cover steep 2012 debt maturities, market and banking sources said on Thursday.

Spain's banks face a massive spike in their funding needs next year with around 130 billion euros ($170 billion) of debt coming to maturity. Many banks took on 3-year, government-guaranteed debt in 2008, making up a large part of borrowing.

"The banks that have taken part in the auction have primarily done so to finance the hefty maturities that fall next year, mostly in the first half," said one savings bank source.

Also consider Italy banks almost halfway to 2012 funding needs

MILAN, Dec 22 (Reuters) - Italy's banks are almost halfway towards meeting their funding needs for 2012 after they tapped 116 billion euros of cheap long-term cash from the European Central Bank on Wednesday.

The ECB's first ever offer of three-year loans on Wednesday drew heavy demand of 489 billion euros from 523 banks, raising hopes a credit crunch can be avoided and that the money could be used to buy Italian and Spanish bonds.

The ECB will follow up with another similar operation in February in a move designed to directly help banks which need to raise capital.

A study by local broker Intermonte said 42-44 percent of total Italian bank funding and 75-80 percent of wholesale funding for next year had been raised on Wednesday.

The euro zone banks also have about 920 billion euros of liquidity existing with the ECB which indicates Italian banks could have some 230 billion.

On top of this are funds the banks can raise through the wide range of cash operations offered by the ECB.

Dollar Swaps Soar

That "wide range of cash options" no doubt includes the fact that European banks can borrow money from the Fed at a cheaper rate than US banks can. Please consider Demand for Dollars from Fed's Discount Window Swells in Europe by 12,735% After Fed Cut Rates on Dollar Swap Lines

There is considerable debate as to whether European banks are using cash from the ECB to purchase sovereign debt and capitalize on massive spreads but Italian banks deny the charge as noted by this clip from Reuters:

There is speculation that some banks will use the ECB funds not to boost the real economy but for carry trades on investment in high-yielding government bonds. "We intend to support the real economy as far as is possible given the stiff ties imposed by EBA," the CEO of UBI Banca Victor Massiah told Reuters."

There is also debate as to whether or not the LTRO can stop contagion. For a detailed discussion, please consider European Bank-to-Bank Lending Mistrust Hits Second Consecutive High; ECB's LTRO Won't Stop Collateral Contagion.

For now, massive Fed dollar swaps coupled with the ECB's first ever 3-year LTRO have temporarily calmed European debt markets, how long that lasts remains to be seen.

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

Manufacturing ISM Highest Since June; Expiring Business Tax Credits Explain Why; Enjoy it While You Can As US Decoupling Won't Last

Posted: 03 Jan 2012 09:25 AM PST

The Institute for Supply Management released the December 2011 Manufacturing ISM Report On Business®

"The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey."

MANUFACTURING AT A GLANCE DECEMBER 2011
Index	Series Index Sep	Series Index Aug	%age Point Change	Direction	Rate of Change	Trend* (Months)
PMI	53.9	52.7	+1.2	Growing	Faster	29
New Orders	57.6	56.7	+0.9	Growing	Faster	3
Production	59.9	56.6	+3.3	Growing	Faster	4
Employment	55.1	51.8	+3.3	Growing	Faster	27
Supplier Deliveries	49.9	49.9	+0.0	Growing	Same	2
Inventories	47.1	48.3	-1.2	Contracting	Faster	3
Customers' Inventories	42.5	50.0	-7.5	Too Low	From Unchanged	1
Prices	47.5	45.0	+2.5	Decreasing	Slower	3
Backlog of Orders	48.0	45.0	+3.0	Contracting	Slower	7
Exports	53.0	52.0	+1.0	Growing	Faster	2
Imports	54.0	49.0	+5.0	Growing	From Contracting	1

OVERALL ECONOMY				Growing	Faster	31
Manufacturing Sector				Growing	Faster	29

Expiring Business Tax Credits Partially Responsible

Looking for an explanation for the rise in December? I have one (and was aware of a likely jump in PMI in advance): 2011 Expiring Business Tax Incentives

Expiring Business Tax Incentives

100% Bonus Depreciation – The bonus depreciation deduction for qualifying property placed into service after September 8, 2010 and through 2011 was increased to 100%. Once the incentive expires the depreciation rate reverts back to 50% bonus depreciation.

Self-Employment Tax Reduction – In 2011, the self-employment tax was reduced on a temporary basis. Individuals who are self-employed only need to pay a Social Security tax of 10.4% (reduced from 12.4%) and 2.9% Medicare tax on qualifying income. Self-employed individuals can also take a deduction for the 6.2% employer's share of Social Security with a 1.4% employer's share of Medicare as an above-the-line deduction.

Section 179d Depreciation Provisions - The increase in expensing limits under Section 179d for 2011 at $500,000/$2,000,000 (equipment/property) will be phased out at the end of 2011. In 2012, the rates will reduce to $125,000/$500,000 (equipment/property) until December 31, 2012..

15 Year Straight Line Depreciation – This allows property owners and lessees to depreciate qualifying improvements to commercial office spaces, as well as restaurant leasehold improvements and new restaurant development.

Enhanced Charitable Deductions. This tax credit allows C-Corporations the opportunity to claim an enhanced charitable deduction for qualified computer contributions, book inventories to school and food contributions to food depositories.

Employer Wage Credit for Active Military Reservists – This tax credit provides eligible small businesses (companies with 50 or fewer employees) with a credit against the company's income tax liability for a taxable year in an amount equal to 20% of the sum of the wage payments made to activated military reservists..

New Markets Tax Credit – This tax credit offers a 39% credit on an equity investment to a Community Development Entity (CDE) that is claimed over a 7 year compliance period. The CDE must then make a Qualified Equity Investment or loan to a Qualified Business in a Qualified Low Income Community (LICs). Most commercial and mixed-use real estate development located in LICs are considered Qualified Businesses. The credit is designed to encourage investment in LICs that traditionally have limited access to debt and other sources of investment income.

Credit for Construction of New Energy Efficient Homes - This tax credit provides an eligible contractor which constructs a qualified new energy efficient home a credit of up to $2,000 per home. The credit is available for all new homes, including manufactured homes constructed in accordance with the Federal Manufactured Homes Construction and Safety Standards.

Energy Efficient Appliance Credit. This tax credit is available to companies that manufacture or produce qualifying models of refrigerators, dishwashers and washers/dryers. The credit is available for models produced in 2008, 2009, and 2010. The amount of the credit is dependent on the efficiency of the model and date the appliance was manufactured.

Alternative Fuel Vehicle Refueling Property Credit. This tax credit provides a 30% credit of the cost of any alternative fuel vehicle refueling property placed into service in 2011 (not including hydrogen stations). The credit is limited to $30,000 per location for commercial clean fuel property, and $1,000 per location for residential clean fuel property.

Some of the above incentives are minor but others likely had a major impact.

Think manufactures did not bring massive amounts of production forward to take advantage of these expiring credits?

Enjoy it While You Can As US Decoupling Won't Last

Manufacturers are producing at an unsustainable rate. The global economy is rapidly cooling led by Europe, Asia, and Australia. That is a lot of downside leadership.

Please note that Eurozone Manufacturing Contracts 5th Straight Month; New Orders Fall Faster than Output

The US will not decouple this year as noted in Major Slowdown in Global Trade Coming Up; Think the U.S., China, Germany, or U.K. will Be Immune?

Expiring tax incentives provided a nice, but unsustainable pop in manufacturing. Notice how prices and backlog of orders did not follow.

Regardless of how much tax credits affected the ISM numbers, the global slowdown will take a toll on US manufacturing.

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

Monday, January 2, 2012

Mish's Global Economic Trend Analysis

Major Slowdown in Global Trade Coming Up; Think the U.S., China, Germany, or U.K. will Be Immune?
Portugal Car Sales Plunge 60% in December, 31% for Entire Year; Spain Car Sales Plunge 17.7% to 1993 Levels
Eurozone Manufacturing Contracts 5th Straight Month; New Orders Fall Faster than Output
Obama Signs Legislation Killing Bill of Rights; Ron Paul, Rand Paul, Rachel Maddow Skewer Obama; Road to Tyranny; Complete List of Senatorial Cowards Backing the Bill

Major Slowdown in Global Trade Coming Up; Think the U.S., China, Germany, or U.K. will Be Immune?

Posted: 02 Jan 2012 09:41 PM PST

Starting with events in the U.K., the Eurozone, and then on to China and Japan, this post will tie together various idea all suggesting a major slowdown in global trade is on the way.

U.K. Retailers Squeezed to Extinction

Sales reports from retail associations are subject to spin in any direction depending on whether their motive is positive to encourage shopping because "everyone else is", or negative, hoping to get tax breaks or other concessions from politicians.

In this case, the director of the UK's retail federation says retailers face being "squeezed to extinction". Given several retail bankruptcies and more expected, the story rings true.

Please consider Retailers face being "squeezed to extinction"

As many as 40,000 are expected to lose their jobs, with more forced to work on reduced hours, as the full force of the consumer slowdown starts to makes its effects felt on the high street.

After the collapse of Barratts Priceless, the shoe chain, Hawkin's Bazaar, the toy shop and D2 Jeans last week, a clutch of other names are expected to go to the wall, said Stephen Robertson, the director general of the British Retail Consortium.

"This feels, talking to retailers, that there is more pressure than there was back in 2008. Back then there had been a relatively good run up until that point, and sales were certainly down, but margins were holding up.

"This time, it's not just about the poor sales performance it's about the underlying profitability. We have seen a blizzard of deals and promotions, so gross profit margins will have been punished."

"It might not be an official recession, but we are in a retail recession," he said. Last month De Mello predicted 20,000 retail job losses in 2012, based on a 1pc rise in shop vacancy rates.

"Dear George" Ritual Lies About Price Inflation

Every few months, Mervyn King, Governor of the Bank of England has been forced to write to Chancellor George Osborne to explain why UK inflation is so much above target.

And every time, Mervyn King has trotted out the same set of excuses, proving the BOE (central bankers in general) do not really care about inflation mandates, they simply do what they want.

For a humorous analysis please consider Inflation: The truth about those Dear George letters

Many cultures have bizarre ceremonies which once had a function but become mere empty rituals. One of Britain's goes by the name of 'inflation targeting'.

Every year the Chancellor stands before the House of Commons and in his Budget statement declares he is instructing the Bank of England that consumer price inflation should be two per cent.

He does this in the full knowledge that he has no desire whatsoever that the Bank should actually try to get inflation to two per cent – because that would mean increasing interest rates to a level he thinks might threaten growth.

Every few months the Bank's Governor, Sir Mervyn King, writes to the Chancellor. His letters say, roughly: 'Inflation is above target, because we didn't try to get it to the target, because meeting the target would have been a bad idea.'

Chancellor George Osborne then sends a reply, which amounts to the following: 'Good. I'm glad you didn't try to meet the target I set you. You are quite right in thinking that would have been a bad idea.'

The arrangement has become a farce. In fact, during the past 45 months the consumer price index has been below two per cent in only six of them.

UK Price Inflation Peaks, Deflationary Pressures Mount

If Mervyn King hits his inflation target, he will not care much for the reasons why:

UK Retailers are in a massive price squeeze, unable to pass on costs
Huge numbers of layoffs are coming up
UK Manufacturing is in contraction second straight month
All of Europe is headed for a nasty, prolonged recession

By the way, the impacts of the above four points on the UK deficit will not be pretty, However, if it's any consolation, I believe UK price inflation peaked in October at 5%.

Official Recession Coming Up

The recession many not be "official" just yet, but it has likely already started with the UK PMI in a second straight month of contraction.

Figures from the seasonally adjusted Markit/CIPS PMI recorded a UK manufacturing sector contraction of 47.6 in November; this is the lowest recorded level since June 2009.

Commenting on the report, David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said: "It looks like it's going to be a bleak winter for UK manufacturers with the PMI showing very little to be positive about at the moment. Exports orders, which UK manufacturers are increasingly dependent on, continue to decline as the Eurozone crisis impacts demand in US and Asia as well as Europe.

Slowdown in European Trade Coming Up

In general, Eurozone nations are in deep trouble because of tax hikes and various austerity measures. Indeed, all of Europe is in trouble, even the non-eurozone countries like the UK and the trade surplus countries like Germany.

Sampling of Links to Consider

Slowdown in Global Trade Coming Up

Any country dependent on European sales is in trouble and that includes China.

In turn, China will need fewer imports of raw materials from places like Australia and Canada. China will also need less technology from Japan and that has Japan worried.

Please see Japan Proposes Nonsensical Deal to China: "I'll Loan You a Nickel if You Loan Me a Nickel"; Japan Worries About Servicing Its Debt for details.

Think the US will Be Immune?

One has to be a major Pollyanna to think the US will be immune from all of this.

I can already show the US has been impacted: China to Withdraw Support for Foreign Investment in Autos; Three Reasons China Will Not Be a Boon to Global Auto Sales

Chinese Regime Change Dynamics

To top it off, a regime change is coming this year in China. It is highly likely China will be a shift away from construction, real estate, and fixed investment as a means of growth and that too will reduce China's needs for commodities from Australia as well as truck equipment from Caterpillar.

For a look at Australia, please consider 4 out of 5 Australians Worry about Debt; New Reality - Owing More on Your Home Than You Own; Shocking Year for Corporate Collapses

This macroeconomic chain-of-events portends a major slowing in global trade with huge worldwide consequences and missed budgets everywhere you look.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Portugal Car Sales Plunge 60% in December, 31% for Entire Year; Spain Car Sales Plunge 17.7% to 1993 Levels

Posted: 02 Jan 2012 04:04 PM PST

Things are not starting off on a good foot for Portugal or Spain, the two countries where the European sovereign debt crisis is most likely to strike early in 2012.

Portugal Car Sales Plunge 60% in December Compared to Year Ago

Via Google Translate, please consider The sale of passenger cars dropped 31.3% in Portugal in 2011

The sale of passenger cars in Portugal fell to 31.3 percent in 2011 compared with the previous year to sell a total of 153,433 units, reported the Automobile Association of Portugal (ACAP).

This marked reduction was driven by the results of last December, when sales fell 60% over the same month last year.

The market for vehicles, including light commercial vehicles and heavy with cars, registered a contraction of 29.9% over 2011.

Spain Car Sales Plunge 17.7% to 1993 Levels

Also from El Economista via Google Translate, please consider Car sales fell 17.7% in 2011 in Spain, near 1993 levels

Registrations of cars and SUVs in Spain stood at 808,059 units in 2011, resulting in a decrease of 17.7% compared to previous year's figure, according to manufacturers' associations (Anfac) and sellers (Ganvam).

During the last month of last year, deliveries of cars in the Spanish market reached 66,458 units, representing a decrease of 3.6% compared to data recorded in December 2010.

These figures show that 2011 was one of the worst year ever in terms of volume of registrations in Spain and Spanish car market place at levels close to those recorded in 1993 when 792,500 units were delivered.

Channels, the supply of private cars to customers stood at 387,831 units in 2011, representing a cumulative decline of 33.6%, while in December the figure was reduced by 8% to 35,657 units.

Ganvam Anfac and explained that these sales data in the particular channel shows that 48 of every 100 cars sold in Spain during the last year were purchased by individual customers, compared with 60% recorded in 2007.

Both associations noted that the drop in enrollment "has caused a significant drop in tax revenues for the acquisition of vehicles," so that the State has failed to enter EUR 450 million the previous year.

These economies are basket cases already. Tax hikes will make matters much worse.

For details, please see Spain's Budget Minister says "Serious Budget Shortfalls in All 17 Autonomous Regions"; Primer Minister Announces $19.3 Billion Package of Tax Hikes; Cockroaches and the Theory of the Unexpected.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eurozone Manufacturing Contracts 5th Straight Month; New Orders Fall Faster than Output

Posted: 02 Jan 2012 11:12 AM PST

There was a slight improvement in European manufacturing PMI for December but it is a meaningless illusion given prolonged contraction coupled with the fact new orders are sinking much faster than output.

The PMI is a diffusion index with reading below 50 in contraction, above 50 in expansion.

MarketWatch reports PMI data underline euro-zone recession fears

The final December reading of the Markit purchasing-managers index for the manufacturing sector rose to 46.9 from a 28-month low of 46.4 in November, matching an earlier estimate.

"Euro-zone manufacturing is clearly undergoing another recession," said Chris Williamson, chief economist at Markit. "Despite the rate of decline easing slightly in December, production appears to have been collapsing across the single-currency area at a quarterly rate of approximately 1.5% in the final quarter of 2011."

For the second month in a row, all nations covered by the survey reported a decline in output.

Williamson said it was particularly worrying to see new orders falling at a far faster rate than output. That indicates firms have relied on orders placed earlier in the year to sustain current production levels, he said.

PMI Readings

Germany 48.4
France 48.9
Netherlands 46.2
Austria 49
Italy 44.3
Spain 43.7
Greece 42.0

The Eurozone New Orders component came in at 43.5 so expect a plunge across the board in future PMI readings as manufacturing output contracts further to keep up with orders.

New austerity measures in Italy, Spain, Portugal, France, and Greece have yet to bite, and they will. Economists think the European recession will be over mid-year. I think they are in fantasy-land. More likely, the US follows Europe into recession.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama Signs Legislation Killing Bill of Rights; Ron Paul, Rand Paul, Rachel Maddow Skewer Obama; Road to Tyranny; Complete List of Senatorial Cowards Backing the Bill

Posted: 02 Jan 2012 12:10 AM PST

In 9 Things to Say Goodbye To, I lamented on the loss of privacy and free speech.

Unfortunately, the situation is much worse, thanks a huge group of senatorial cowards that wrote and passed a "defense" bill that allows US citizens to be arrested, detained, even sent to Guantanamo, Cuba without being charged with any crimes.

On New Year's Eve Obama Signed Defense Bill Despite 'Reservations'

Obama's Blatant Hypocrisy

The "reservations" Obama has are of his own making. Please consider this skewering of President Obama by Rachel Maddow.

Link if video does not play: Rachel Maddow Skewers Obama

The bill is a clear and direct attack on the Bill of Rights.

Link if video does not play: Rand Paul vs. John McCain

Road to Tyranny

Please consider this video from Larry Wilkerson, retired colonel and former Chief of Staff to Colin Powell.

Link if video does not play: Wilkerson: New Military Powers the Road to Tyranny

"Larry Wilkerson: National Defense Authorization Act that passed the Senate giving the military power for indefinite detention without trial is a draconian violation of our rights"

Ron Paul Say Defense Bill Establishes Martial Law In America

In an interview with Alex Jones on Prison Planet, Ron Paul says Defense Bill Establishes Martial Law In America

Bill Passes Senate 86 to 13

Unfortunately the Indefinite detention bill passed in Senate

Exactly 220 years to the date after the Bill of Rights was ratified, the US Senate today voted 86 to 13 in favor of the National Defense Authorization Act for Fiscal Year 2012, allowing the indefinite detention and torture of Americans.

As RT reported earlier, one provision in NDAA FY2012 will allow for the reinstatement of "enhanced interrogation techniques," essentially making waterboarding and forms of psychological torture a very possible reality for anyone America deems to be a threat, including its own citizens who, prior to the ruling, had the US Constitution on their side.

Among the corporations which have lobbied in support of NDAA FY2012 are several military contractors, including Honeywell and Bluewater Defense, who together have received millions of dollars in Pentagon guarantees this year alone.

"How long can you hold them? As long as it takes to make us safe," said Graham.

In his closing marks, Graham ironically recited that in respect to "civil liberties and the American way of life," US citizens must fight. "If we don't fight for it, we're going to lose it."

Unfit for Office

Any Senator voting on a bill that would allow US citizens to be arrested, detained indefinitely, even sent to Cuba without being formally charged with any crime is no friend or supporter to the US constitution.

Note the absurd irony in Graham's statements. The fight for freedom can never be won by trashing freedoms or the Bill of Rights.

Senator Graham and Senator McCain are both huge hypocrites and cowards.

Indeed, all 86 Senators who voted for that bill are cowards, a hypocrites, and no friend to the United States or the US Constitution.

Even more disgusting, Senator Mark Udall introduced an amendment intended to forbid the indefinite detention of U.S. citizens and even that amendment was rejected by a vote of 38–60.

I do not have a roll call on that, but there are 60 extreme cowards who wrap themselves in a flag while pissing on the Constitution.

13 Courageous Votes

Nay ID Crapo, Michael [R]
Nay ID Risch, James [R]
Nay IL Durbin, Richard [D]
Nay IA Harkin, Thomas [D]
Nay KY Paul, Rand [R]
Nay MD Cardin, Benjamin [D]
Nay MN Franken, Al [D]
Nay OK Coburn, Thomas [R]
Nay OR Merkley, Jeff [D]
Nay OR Wyden, Ron [D]
Nay SC DeMint, Jim [R]
Nay UT Lee, Mike [R]
Nay VT Sanders, Bernard [I]

There you have it. Anyone not on that list voted to trash the constitution. I am particularly pleased by the votes of Senators Jim DeMint, Thomas Coburn, Rand Paul, Mike Lee, Michael Crapo, and James Risch.

Those are the only six Republicans willing to stand behind the Constitution.

Senator Rand Paul Explains His Vote

Link if video does not play: Rand Paul's Impassioned Plea

"Detaining citizens without a court trial is not American. ... Justice Scalia said the very core of liberty, secured by our anglo-saxon system of separated powers has been freedom from indefinite imprisonment at the will of the executive. Justice Scalia was, as he often does, following the wisdom of our founding fathers. ... As Franklin wisely warned, those who give up their liberty for security may wind up with neither."

Wikepedia has the Benjamin Franklin quote as follows "They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."

Benjamin Franklin is correct and Senator Rand Paul was a hero for fighting this bill. Sadly, Rand Paul failed to a collective group of cowards who do not know what the Constitution is about or why we need it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday, January 1, 2012

Mish's Global Economic Trend Analysis

Promises Go Out the Window as Spain Undertakes Huge Tax Increase Coupled With Biggest Budget Cut in History; Depression in Spain will Worsen

Posted: 01 Jan 2012 01:53 PM PST

Courtesy of Google Translate, please consider Rajoy approves the biggest cut in history and a large tax increase

Everyone knew it. Above all, Mariano Rajoy , who had already pointed to the environment for months that the deficit would be 8%. Not counted in public, but privately the PP did not talk about something else. And yet, throughout the campaign, and the investiture debate, said the PP government would not raise taxes. But at the moment of truth, the vice president, Soraya Saenz de Santamaria , and Rajoy, who avoided appearing, announced the second largest tax increase in recent history of Spain. And the biggest cut in public spending of democracy in one fell swoop: 8,900 million euros.

And that, he said, is only "the beginning of the beginning." The vice president announced that the estimated deficit will go to 8% , two points above the 6% expected, mainly because of the autonomous communities. She and the finance minister, Cristobal Montoro , dropped the previous government the responsibility for not having told what the situation was real to them or the Spanish.

This new deficit figure implies that the total cut to achieve the 4.4% in 2012, will be more than 36,000 million. It was the figure that ran for months in the PP-and well-published, but Rajoy made the debate with the official inauguration: 16,500 million. Before happened in Portugal, where the Conservatives won the election promising not to raise taxes and then did the opposite. Now comes Spain.

Rajoy promised until the last moment, even in the investiture debate , it would not raise taxes. "I will keep my election commitments," he repeated. "The greatest effort can not lie with the citizens, has to be from the Administrations" he said at the inauguration when asked if he would raise taxes.

Politically, the package is very measured to launch a very clear message: the cuts are huge, brutal, affect everyone and no doubt deepen the recession even Guindos ruled out reaching a fall of 2% of GDP, but to change the tax increases are progressive and are concentrated in high incomes.It has sought to tap equity without VAT, a tax is not progressive.

While the top rate of income tax in the new section to be created from 300,000 euros, up seven points at once, something unheard of, and will arrive in some autonomous-advancers his leg while the PSOE-ruled up to 55 %, a level high even by European standards. The Government also tried to point out that higher capital income is a six-point rise. And the rise in property tax is also designed especially for those with more expensive properties.

They are so strong that increases Guindos Montoro and insisted on trying to limit their impact: "They are temporary, are valid only in 2012 and 2013," he repeated.

Depression in Spain will Worsen

With those tax hikes and budget cuts, Spain is just back to where it claimed (lied) to be a couple months ago.

In theory these cuts will put Spain on target. In practice they won't. Unemployment rate is already 22.8% and it will rise. Spending will plunge and so will estimated revenues from VAT and other taxes. Expect more business bankruptcies as well, and those bankruptcies will impact the solvency of banks. In short, these moves will backfire and the depression in Spain will worsen.

Raising taxes at the onset of a depression or in a severe recession is one sure-fire way to make things worse.

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