Economy News

4.12.14

Mish's Global Economic Trend Analysis

Roubini Sees "Mother of All Asset Bubbles", But Claims Bubble Will Not Burst Until 2016
Putin Threatens Currency Speculators; Six Ways to Know a Currency is in Deep Trouble
4 Million Homeowners Still Underwater, Total Negative Equity $157 Billion

Roubini Sees "Mother of All Asset Bubbles", But Claims Bubble Will Not Burst Until 2016

Posted: 04 Dec 2014 01:51 PM PST

How big can the current asset bubble get? Stocks, bonds (especially junk bonds), and equities are all in huge bubbles.

I know full well that calling the end is problematic. Economist Nouriel Roubini thinks he knows.

Roubini says we are in the "mother of all asset bubbles" but it's going to get even bigger, not popping until 2016.

Link if above video does not play: Roubini: We're in an asset bubble and it won't pop until 2016

We're currently in the mid-late stretch of this boom, "so next year we'll see economic growth and easy money. This frothiness that we've seen in financial markets is likely to continue from equities to credit to housing," says Roubini. He predicts an eventual crash, but not for at least a few years.

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

Putin Threatens Currency Speculators; Six Ways to Know a Currency is in Deep Trouble

Posted: 04 Dec 2014 10:51 AM PST

Here's a lesson about various ways to spot a currency that is in deep-deep trouble.

Crackdown on "currency speculators"
Accusations of foreign interference
Measures to stop capital flight
Repatriation amnesty in hopes money will return home
Currency action itself
Currency controls

Ruble Analysis

Let's check those six measures starting with today's report Putin Threatens Crackdown on Currency Speculators.

1. Putin Blames Currency Speculators

Vladimir Putin threatened to crack down on speculators against the rouble as he called on Russia to put its economic house in order to fight what he called an attempt by outside enemies to bring the country to its knees. "We have asked the central bank to take measures to make sure that speculators can no longer take advantage," Russia's president said in a speech on Thursday. "We know who those people are, and we have the means to rein them in. It's time to use these instruments."

2. Putin Blames Foreigners and Plays Hitler Card

"Hitler with his misanthropic ideas tried to destroy Russia and throw us back behind the Urals. Just remember how that ended," Mr Putin said. "If [Russia's annexation of Crimea] had not happened, they would have found another excuse for holding Russia back and Russia down. This has been happening for centuries — every time the west thinks Russia is getting too strong, they use these policies."

3. Measures to Stop Capital Flight

"We need to reverse the history of capital flight from our country, we need to end this era," Mr Putin said.

4. Amnesty for All

Putin promised an amnesty for offshore capital returning home, saying Russians bringing back money from abroad would not have to prove where they got it from.

5. Currency Action

Since July 2008 the Ruble had gone from 24Rub-per-US$ to 54Rub-per-US$. That is a decline of 55.55%. In the last six months alone, the Ruble has gone from 34Rub-per-US$ to 54Rub-per-US$. That is a 6-month decline of 37%.

6. Currency controls

Anton Siluanov, finance minister, reiterated the government's commitment to abstain from currency controls after Mr Putin's speech, but said that the government and the central bank would "co-ordinate" the actions of exporters on the foreign exchange market to reduce their collective influence on the rouble exchange rate.

Does that sound like the start of currency controls to you? It does to me.

If the US and Iran come to agreement ending sanctions on Iran, more Iranian oil will flow on the markets, likely pressuring prices further (assuming all other factors remain the same). A slowing global economy also pressures oil prices.

In turn, falling oil prices pressures the Ruble.

As bad as things look for Russia on the Ruble front, there is potential for things to get much worse.

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

4 Million Homeowners Still Underwater, Total Negative Equity $157 Billion

Posted: 03 Dec 2014 11:41 PM PST

In spite of a sustained rally in home prices, the October Black Knight Financial Services Mortgage Monitor shows Four million borrowers currently underwater.

Highlights

Black Knight found that even though underwater mortgages are now less than 8% of all mortgages, there are still roughly 4 million borrowers in negative equity positions, who are, on average, $39,000 underwater.
Underwater borrowers, representing nearly $800 billion in unpaid balances and $157 billion in negative equity, are 10X more likely to be delinquent than those with positive equity.
Underwater borrowers exhibit a 40% delinquency rate, as compared to just 4% for borrowers with equity
For those with combined LTVs of 150% or greater, more than 3 out of every four (77%) are delinquent
There are approximately 1.3 million underwater GSE-backed mortgages representing an aggregate $39 billion in negative equity; of these, 365K are delinquent
Much-discussed principal reductions on delinquent underwater borrowers would require up to $89 billion in write-downs; the GSE share alone would require up to $18 billion
Black Knight found some relaxation in credit requirements for refinance originations (though these are still high by historical standards)
Weighted average credit scores for GSE refinances have come down to 742 from a high of 766 in late 2011, while credit requirements on GSE purchase mortgages have remained tight since 2009
GNMA backed originations have also seen some relaxation in refi credit requirements, with weighted average credit scores down from 727 at the end of 2012 to 701 (which is still significantly higher than 2005's average of 628)
Looking at the refi market as a whole, Black Knight found that borrowers with 740+ credit scores make up 55% of 2014 refi market, as compared to just 29% in 2005

Sustained Improvement in Negative Equity

Over the past two and a half years, there has been a sustained and continual improvement in negative equity, from 33.5 percent of borrowers being underwater in January 2012 to less than eight percent today

Only 1.2 percent of active mortgages have current CLTVs of 150 percent or higher, down from 9.5 percent in January of 2012 (the bottom of the market in terms of national home prices).

Delinquencies by Bucket

While the overall share of underwater mortgages continues to decline, delinquency rates are increasing among the remaining negative equity mortgages.

For the severely underwater – 150 percent or higher current CLTVs – over three out of every four borrowers (77 percent) are delinquent.

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

3.12.14

Mish's Global Economic Trend Analysis

Yield Curve Casts Doubt on "Robust Recovery" Theory

Posted: 03 Dec 2014 04:33 PM PST

A week ago Fed Governor Dudley announced "U.S. Economic Outlook Looks Brighter". My response was Ring! Ring! Goes the Bell.

Today, Curve Watcher's Anonymous offers a few charts that show the bond market ringing a bell in disbelief of Dudley.

Yield Curve as of November 28, 2014

Curve Analysis

The yield curve flattened, then inverted prior to the last recession.
The yield curve steepened well ahead of the end of the recession.
Since then, the yield curve has steepened twice and flattened twice.

What's Next?

Starting at the beginning of 2014, short-term yields (2-year and 5-year) have risen while long-term (30-year and 10-year) have declined.

In a strengthening economy, yields on the long end of the curve typically rise faster than yields on the short end.

Those waiting for the typical recession indicator (an inverted yield curve where short-term bonds yield more than long-term bonds) may as well be waiting for Godot with the Fed holding 3-month rates near zero percent.

Nonetheless, expectations of a major Fed tightening cycle are pretty much the norm. If the Fed hikes (which I doubt), then I fully expect to see action similar to the first yield-curve flattening box in the above chart. If the Fed continues to hike, expect a quick inversion.

Regardless, the bond market does not believe this happy talk from the economic cheerleaders, and neither do I.

30-Year Yield Minus 5-Year Yield

10-Year Yield Minus 5-Year Yield

10-Year Yield Minus 2-Year Yield

The first chart shows two incidents since 2010, where declines in yield reversed. However, both occasions ended when the Fed stepped on the gas.

If the Fed does so again, will the stock market respond the same way?

Feelin' lucky?

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

Enter the Carpetbaggers: Ukraine's New Finance Minister a US Citizen, New Economy Minister from Lithuania

Posted: 03 Dec 2014 09:29 AM PST

Carpetbaggers Take Over Ukraine

Now that Ukraine's gold has been sold off, the only thing left to complete the plundering is to send in the carpetbaggers. That process is now underway. Ukraine's just-named "Finance Minister" is a US citizen, and Ukraine's new "Economy Minister" is from Lithuania.

To get around legal issues associated with having foreigners in top level government positions, Ukraine made the appointees Ukrainian citizens.

Reuters explains Foreign Technocrats Given Ukrainian Citizenship Before Cabinet Vote.

Ukrainian President Petro Poroshenko on Tuesday granted citizenship to three foreign technocrats nominated for cabinet positions in a new government hoping to tackle severe economic and defense threats.

Parliament is expected to vote on nominees for cabinet positions on Tuesday with Kiev under pressure to form a new government quickly.

Ukraine has been offered billions of dollars in aid by international lenders if it implements a program of economic reform and Poroshenko said the administration would benefit from international specialist input.

Meet Your New Carpetbagger Technocrats

Natalie Jaresko, a U.S. citizen and chief executive of private equity group Horizon Capital, will take over as "Finance Minister". She has worked in Ukraine for more than 20 years after holding various economic positions in the U.S. State Department.
Aivaras Abromavicius, a Lithuanian citizen and a partner in investment firm East Capital, will take over as "Economy Minister".
Aleksander Kvitashvili, a Georgian citizen who has served as health minister and labor minister in Tbilisi will take over as "Health Minister"

Jacob Dreizin Comments

Reader Jacob Dreizin a US citizen who speaks Russian and reads Ukrainian offered these select comments.

Ukraine has a new finance minister, Natalie Jaresko. She is a former U.S. State Department official. After leaving State Department, she ran a Ukraine-based private equity firm. Her company site (Horizon Capital) is down now. I guess everyone was trying to look at her bio. She was only granted Ukrainian citizenship today, so she could legally hold the position.

The post of "Economy Minister" was just given to an asset management firm partner from Lithuania, and the "Health Minister" is from Georgia. The choice of nationality is not surprising. It's an attempt to give the EU direct access to Ukrainian economic policy, specifically "reforms" or lack thereof, as well as to poke a stick in Putin's eye.

These moves show that Ukraine is willing to be turned into a Western colony in exchange for whatever financial scraps can be tossed its way. While it's true that Ukraine is in desperate need of a total overhaul, any country that turns its economy over to foreigners wholesale is going to be pillaged wholesale. Greece is a perfect example.

Finally, I should also mention that a number of Ukrainian power plants are down to their last few days of coal. And the winter is just starting.

Jacob

With Ukraine's gold long gone (see ZeroHedge report With Its Gold "Vaporized", A Furious Ukraine Turns On Its Central Bankers), the carpetbaggers will soon take control of anything worthwhile that is left remaining.

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

2.12.14

Mish's Global Economic Trend Analysis

Incredible Populist Positions in Podemos' "Economic Manifesto"; Populism Explained

Posted: 02 Dec 2014 01:09 PM PST

As noted last week, Spain's top-polling political party, Podemos, released an "Economic Manifesto" that called for "Debt Restructuring" and for Spain to "Abandon the Euro Trap".

The manifesto is 600 pages long and I did not dig into the details any further.

Via translation from Libre Mercado, here are some additional details to consider:

Public Banking: Credit and finance is an essential public service. Public banks will be subject to strict conditions to ensure their submission to the above principle.
Financial Transaction Tax: Transaction Tax on all financial transactions, progressive so as to weigh on shorter transactions.
Minimum Wage Rules: Minimum wage increase coupled with rules stipulating the maximum difference between the highest wages and the average wage in companies.
Labor Reform: Repeal recent labor reform.
Pension Reform: A minimum and maximum contribution base to ensure that the system is progressive and trading for real income in the case of autonomous and self-employed.
Higher Business Taxes: Extraordinary increase of corporate social contributions via higher taxes on businesses.
Work Rules: 35 hour work-week, retirement at 65, with flexibility in case someone wants to keep working longer.
Mortgage Reform: Restructuring household debt to provide the greatest possible stability to the system and repair the damage received by families in previous years.
Flat Tax on Everything: Improve income tax collection by having an extensive single rate tax on all types of income, but elimination of joint taxation of marriages.
Wealth Tax: Central government taxation of wealth.
Budget Rules: Delete Article 135 of the Constitution, the newly inscribed constitutional obligation limiting public deficit.
Work Sharing to Protect Women: We must change the pattern of distribution of working time paid by imposing shorter hours but also by regulating the distribution of housework and unpaid care. Unequal distribution is the main source of discrimination against women and one of the major impediments to advancing equality.
Cooperative Business Models: They want to democratize business by introducing co-management by employees.
Restructure Debt: Europe must adopt debt restructuring, especially in the peripheral countries to achieve sustainable debt levels.
Minimum Income: A guaranteed minimum income system as a subjective right of all people, to eradicate child poverty.
Universal Right to Nourishment: Recognition in the Constitution of the right to food as a universal human right.

Thanks to reader "Bran" for some of the above translations.

Did Paul Krugman secretly write that manifesto? Regardless, this plan makes the socialist nannycrats in Brussels look like extreme right-wingers.

If Spain abandons the euro and adopts anything close to this platform, expect a complete collapse in the Spanish economy.

Populism Explained

These populist ideas are taking hold for the simple reason the burden of the euro crisis is falling on the average worker, while the banks, the bankers, and the political classes were bailed out.

It should be no wonder that with each passing day, radical left and radical right parties attract voters.

Eventually, there is going to be a revolt in Spain, Greece, or Italy. Podemos is a strong candidate to lead the opening salvo.

For the current setup in Greece, another strong candidate to lead a populist revolt, please see Greece Needs Another €10 Billion Bailout; Syriza Leader Prepares for Power

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

Greece Needs Another €10 Billion Bailout; Syriza Leader Prepares for Power

Posted: 02 Dec 2014 11:07 AM PST

Since the beginning of September, yield on the Greek 10-Year bond has gone from 5.53% to 8.05% with a spike high of 9.28%.

Inquiring minds may be wondering what's going on. More than likely yields are up for a number of factors.

Rise of Syriza
Chance of new elections
Greece needs another bailout

Points number 1 and 2 go hand in hand.

Alexis Tsipras, head of the Greek radical-left party Syriza is in a substantial lead in the polls. Syriza wants to end austerity and threatens to renegotiate the bailout.

The next election for prime minister is not scheduled until June 2016, but a February 2015 presidential election (a largely ceremonial position) threatens to upset the cart. Greek law requires a backing of 180 members of parliament to nominate a president, but support for current prime minister Antonis Samaras has dwindled to only 150 seats.

If Samaras falls short, parliament will dissolve and then a new election for prime minister will take place.

Syriza Leader Prepares for Power

Given the above election backdrop, Syriza Leader Alexis Tsipras Prepares for Power.

Alexis Tsipras, leader of Greece's far-left Syriza party, recently traveled to Frankfurt and Rome to meet European leaders. He is softening his confrontational tone with Greece's international lenders. Tsipras has a drafted an agenda for the first 100 days of a future government.

The 40-year-old former student Communist is acting like a prime minister in waiting.

Syriza, once a fringe far-left movement, is now the most popular party in Greece, representing the many voters who feel punished by the country's EU/IMF bailout. Last May, Syriza won the European elections, beating the ruling center-right New Democracy, and putting into question its political legitimacy.

In May, the party easily won European elections and gained the governor's seat for Greece's most populous region. Today, it polls higher than any other party, leading by a margin of between 4 and 11 points over Prime Minister Antonis Samaras's conservatives. One poll shows Tsipras as the most popular political leader in the country.

"The big change has begun. The old is on its way out. The new is coming," Tsipras thundered in a recent speech to parliament. "No one can stop it."

Key to Syriza's ascent, party officials say privately, is a calculated effort to moderate the radical leftist rhetoric that prompted Der Spiegel to name Tsipras among the most dangerous men in Europe in 2012.

The party still rails against austerity measures and a bailout-driven "humanitarian crisis". It wants to reverse minimum wage cuts, freeze state layoffs and halt state asset sales.

But Syriza no longer threatens to tear up the bailout agreement or default on debt. Instead, officials say it supports the euro and wants to renegotiate the bailout by using the same pro-growth arguments of partners France and Italy.

Tackling Greece's mountainous debt remains at the top of the party's agenda. But talk of a debt "default" is gone, replaced with "renegotiation". Syriza wants Europe to write off a big chunk of Greece's 318 billion euros of debt - worth 175 percent of GDP - on a recognition that Greece's problem is Europe's problem too.

Other proposals include linking debt repayments to economic growth, an aggressive ECB policy of buying government bonds and excluding the roughly 38 billion euros spent to prop up Greek banks from national debt.

Some European officials say this is pie-in-the-sky thinking. Bailed out twice with over 240 billion euros over four years, Greece's prospects have improved since it nearly crashed out of the euro but it still needs aid and lacks full market access.

One senior EU official, speaking on condition of anonymity because of the sensitivity of discussions between Greece and its lenders, said that Greece is not in a position to negotiate.

Greece in Need of Third Bailout

Having already thrown €240 Billion at Greece over the last four years, the Greek patient is still quite ill as Europe Debates Third Bailout Package for Athens.

"The era of bailout packages is ending," Samaras promised in September during an appearance in Thessaloniki. "Greece is now welcoming the new Greece."

Samaras knew the line would guarantee him applause from his audience, but the promise also came a bit prematurely. Following the announcement, Greece got a small taste of what it might mean were Greece were released from the oversight of the troika, comprised of the European Commission, the European Central Bank (ECB) and the International Monetary Fund. The more often Samaras spoke of a "clean solution," the more yields rose on long-term Greek government bonds. At the beginning of September, the rates had been 5.8 percent, but they soon climbed to almost 9 percent.

It was the financial markets' way of hinting that it is still too early to grant Greece full fiscal independence.

€2 Billion Shortfall

Last Wednesday in Paris, there was a minor uproar when troika officials made it known that they felt Greece hadn't fulfilled conditions for the payout of the final tranche from the second bailout package. Athens' international creditors determined the country will fall around €2 billion ($2.5 billion) short of reaching its commitment of not exceeding a budget deficit of 3 percent of gross domestic product.

Inefficiency often associated with Greece remains a fact of life in many areas, despite massive European development aid. The country still lacks important institutions, including a reliable national land registry office where the size of properties and their owners can be registered in a legally binding way.

'We've Lost Another Year'

Ongoing uncertainty about property ownership is considered to be one of the greatest hindrances to development in Greece. In response, the EU dispatched experts from the Netherlands to help Greece establish a functioning system. Earlier this year, the project was put out to a public tender, but the Greeks later simply cancelled it. The financing of the land registry offices was also suddenly questioned, even though they could actually help generate revenues for the country.

"We've lost over a year once again," says one fatigued EU official in Brussels. Although the government had agreed it would make progress on the land registry offices, the official speculates that the plan likely fell afoul of one of the local oligarchs that pulls the strings in the background. The vaguer the better for black market dealings.

Third Bailout

Progress is slow and tedious, and German Finance Minister Wolfgang Schäuble believes it has to be safeguarded with a third bailout package for Greece. At the end of last week, a group of finance ministry deputies from the euro-zone countries met in Brussels to discuss a so-called precautionary credit line for Greece that would be provided by the Euro Stability Mechanism, the common currency's permanent backstop fund.

There is already broad agreement on the scope of the aid. Greece is expected to be granted around €10 billion, and the ESM will not be required to raise any additional funds for it. Some €10.8 billion is still left in the current aid package for Greece. That funding had been earmarked for shoring up the capital resources of Greek banks, but so far it hasn't been used.

Now this money is expected to be redirected so that it can be used to provide financing for the Greek national budget. But unanimous approval from the ESM's board of governors is required before that action can be taken.

Cost of Protection

To avoid the loss of €40 Billion or so, the Troika threw hundreds-of-billions of euros at Greece, and then when that failed, more hundreds-of-billions in a second bailout.

We now see that did not work, so to protect the €240 total thrown at Greece, the EU is debating another €10 Billion.

Room to Negotiate

Curiously, a senior EU official, speaking anonymously said that "Greece is not in a position to negotiate".

Really?!

Watch what happens when Tsipras wins the snap election and demands haircuts.

Greece is at or close to a current account surplus excluding interest on €240 bailouts. Thus, no longer needing foreign support for funding, Greece is in a strong position to tell the Troika to go to hell. And I encourage Greece to do just that.

The major problem is Greece still needs massive reforms to make an abandon-the-euro scheme work. Unfortunately, those are exactly the reforms Tsipras will fail to deliver. Of course Samaras failed to deliver any significant reforms either.

Thus, the entire setup is unstable. Nonetheless, when faced with the prospect of Greece walking away from €240 billion, I expect there is going to be plenty of room to negotiate.

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

1.12.14

Mish's Global Economic Trend Analysis

Fed Governor Dudley "U.S. Economic Outlook Looks Brighter"; Ring! Ring! Goes the Bell
Huge Commodity Reversals; Is the Bottom In?
Big Three Contraction: Germany, France, Italy; Core Rots as Spain Improves; Eurozone Recession Coming Up

Fed Governor Dudley "U.S. Economic Outlook Looks Brighter"; Ring! Ring! Goes the Bell

Posted: 01 Dec 2014 11:08 PM PST

New York Fed President William Dudley says "Dreary Days for U.S. Economy May Be Over".

Despite some headwinds, Dudley is optimistic that America could grow closer to 2.5% to 3% in the coming year instead of the ho-hum 2% growth that has been a hangover of the Great Recession.

"The U.S. economic outlook looks brighter, with growth likely to be somewhat above the trend of the past five years," Dudley said in a speech on Monday

In fact, Dudley thinks the economy could soon be healthy enough for the central bank to lift interest rates off the ground.

He's signaling the Fed will likely be able to raise interest rates in 2015.

"While raising interest rates is often portrayed as a difficult task for central bankers, in fact, given the events since the onset of the financial crisis, it would be a development to be truly excited about," Dudley said.

"When the [Fed] begins to raise its federal funds rate target, this would indicate that the U.S. economy is finally getting healthier," he explained.

Dudley On the Economy

Fed Governors tend to be among the best contrary indicators you can find, so much so that I have to wonder if a bell just rang.

Ring, Ring Goes the Bell

William Dudley is ready to sell...

But I ain't buyin' it.

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

Huge Commodity Reversals; Is the Bottom In?

Posted: 01 Dec 2014 01:03 PM PST

Gold, silver, and oil put in pretty spectacular reversals today from Friday Noon. Let's take a look.

Gold 60-Minute Chart

Silver 60-Minute Chart

Brent Crude

Gold, Silver, Crude

click on any chart for sharper image

Prices approximate as of 2:40 PM Central.

Is the Bottom In?

These are enormous 1-day swings. Coupled with previous action, it's likely gold and silver have hit at least a short-term bottom, and likely much longer.

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

Big Three Contraction: Germany, France, Italy; Core Rots as Spain Improves; Eurozone Recession Coming Up

Posted: 01 Dec 2014 10:18 AM PST

The manufacturing PMI for each of Europe's top three countries is in decline. Recession will follow.

Germany

The Markit/BME Germany Manufacturing PMI - Final Data shows PMI at 17-month low, in contraction.

Summary: The seasonally adjusted final Markit/BME Germany Manufacturing Purchasing Managers' Index ® PMI fell from 51.4 in October to a 17-month low of 49.5 in November, signalling contraction in Germany's goods- producing sector. The headline PMI is now seven points lower than at the beginning of the year and remained below its long-run average of 51.9. The headline index reading followed an earlier 'flash' estimate of 50.0.

Comment: Oliver Kolodseike, economist at Markit and author of the report said "German manufacturers continued to record growth of production in November, but this expansion seems to be based on increasingly shaky foundations. In particular, output expanded despite lower backlogs, falling stocks of finished goods and the sharpest drop in new orders for almost two years."

France

The Markit France Manufacturing PMI Final Data shows French manufacturing sector contraction continues in November.

Summary: Operating conditions in the French manufacturing sector worsened further in November. The headline Markit France Manufacturing Purchasing Managers' Index ® PMI slipped to 48.4, from 48.5 in October. The latest reading was the lowest in three months and indicative of a moderate rate of deterioration. Production at French manufacturers fell for a sixth consecutive month in November. The rate of contraction was little-changed from the moderate pace recorded in October.

Output decreased in line with another drop in the level of new orders received by French manufacturers during November. The latest reduction in new work was the seventh in successive months, with the rate of decline accelerating to the sharpest since August. Panellists linked the latest drop in new orders to fragile economic conditions and tight household finances. New export orders fell again, albeit modestly and at a weaker rate than one month previously.

Comment: Jack Kennedy , Senior Economist at Markit , which compiles the France Manufacturing PMI ® survey, said "The French manufacturing sector showed no sign of shaking off its malaise in November, posting another month of modest contraction. The sector continues to struggle in the face of weak demand conditions, with another round of output price cuts failing to prevent new orders falling at a sharper rate. Data suggested that the domestic market remained the main source of weakness , reflecting the wider sluggish performance of the French economy."

Italy

The Markit /ADACI Italy Manufacturing PMI shows manufacturing output falls slightly, weakness in new orders continues, Employment falls at fastest rate since September 2013.

Summary: Italy's manufacturing sector continued to contract during November. Despite growth in export orders, output was reduced for the second month running as total new business fell again. Weakness on the demand side led to further contractions in manufacturers' purchasing activity and employment, with the latter dropping at a faster rate. Meanwhile, producer prices increased slightly as firms faced a rise in average purchasing costs. The headline Markit/ADACI Italy Manufacturing Purchasing Managers' Index PMI registered 49.0 in November, unchanged from October's 17-month low. The index has now registered below 50.0 – signalling deteriorating business conditions – in three of the past four months.

Core Rots as Spain, Ireland, Netherlands Improve

The Markit Eurozone Manufacturing PMI Final Data shows Eurozone manufacturing stagnates as big-three nations contract.

Summary: The slowdown in the eurozone manufacturing sector continued into November, according to the latest PMI surveys from Markit. At 50.1, the final seasonally adjusted Eurozone Manufacturing PMI ® was only slightly above the no-change level of 50.0 and below its earlier flash estimate of 50.4. Five out of the eight nations for which data are collected reported contractions in November, the highest proportion since the current recovery in euro area manufacturing began in July last year.

Comment: Chris Williamson, Chief Economist at Markit said "With the final PMI coming in below the flash reading, the situation in euro area manufacturing is worse than previously thought. Not only is the performance of the sector the worst seen since mid-2013, there is a risk that renewed rot is spreading across the region from the core. The sector has more or less stagnated since August , but we are now seeing, for the first time in nearly one-and-a-half years, the three largest economies all suffering manufacturing downturns. Germany's export engine has stalled, causing the steepest deterioration of new orders in the country since December 2012, and new business is also falling in both France and Italy, boding ill for production in coming months."

Markit Eurozone PMI Table

Eurozone Recession Coming Up

It's safe to assume Spain, Ireland, and the Netherlands will not stop a now baked-into-the-cake overall European recession.

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

30.11.14

Mish's Global Economic Trend Analysis

Simple Man's Macro View of the World

Posted: 30 Nov 2014 11:01 PM PST

I received an interesting email the Wednesday before Thanksgiving from Steen Jakobsen, chief economist for Saxo bank, regarding his macro picture of the world.

I purposely delayed posting it until now so more would see it than during a holiday-truncated week.

From Steen ...

Simple Man's View

One Trading View: Fixed income will outperform all assets. US 10-Year treasury yield will drop under 1.5% by 2015 Q3
One Economic View: Disinflation/deflation will be catalyst for asset sell-off
One Timing View: Q2/Q3-2015 low this cycle for all indicators
One Guaranteed View: Volatility will go up significantly

Core Trading Views

10Y Bond yields(US) will continue lower into Q2-2015. I see acceleration to down-side and mainly in the US where 10 Y could hit 2.00% and bottom out at 1.5% by Q2 as GDP comes off relative to "lift off" consensus.

European factors: Lower than anticipated growth in Germany (China rebalancing, lower US current account deficit and EZ overall) – Impact from Russia crisis only beginning to impact real economy and of course the deflation which ECB promised us would never happen.

US factors: Energy sector moving towards default and closing down capacity – subtracting 0.3-0.5% from GDP plus lackluster housing market despite record low mortgage rates plus contraction in monetary aggregates.

China: Despite Reserve Requirement Ratio (RRR) cut the economy is already at 5.0% in real terms and without reform in health care(why people save money), competition (anti-corruption) and deeper capital markets, the marginal change will continue to be negative.

Emerging Market: Strong US Dollar is the last thing the EM market needs. It's a de facto tightening of monetary policy at a time where "export markets" continue to weaken.

The world is barely surviving at an average yield of 1.5/2.0%. We have two drivers of growth: US and Emerging markets (EM). EM is under pressure as we end 2014 forced into the defensive by lack of reforms, but also a much stronger US Dollar, which means the "mean-reversion" trade is for 2015 is for a weaker US dollar to rebalance towards EM growth as the path of least resistance.

I have no doubt EM becomes major buy sometimes in Q2 when world is off the concept of ever stronger US dollar based on a growth lift-off which is never coming.

US growth has been 2% plus or minus since the financial crisis started, this year it will be 2%- next year? 2% - nowhere close to the 3-4% expected by the markets building on "surveys" and feel good factors. Trust me, as someone who spend too much time traveling this year, the world is worse off, not better.

I meet frustration, lack of access to credit and almost desperation when the question is on asset allocation, but 2015 looks like a year of change. FOMC will definitely continue to sell the "pipe dream" of normalization, BOJ is done and toast.

Why anyone believes printing money will leave Japan better off is a mystery to me.

In closing, I have very little positions – the stock market is on a mission to kill the shorts, which will probably succeed. The FX market believes in Santa Japan, and ECB continues to do nothing but talk, but for now it's enough to sell the product which is risk on at all costs.

The correction will be deeper and deeper as market is dislocated through zero interest rates and an investor crowd which is rewarded for throwing all conservative risk rules overboard in a year where we again have double digit gains on low interest rates.

Let's hope ECB plays ball for the market to buy some more time, for now we play musical chairs, and when the music stops more than one chair will be missing.

Positions

75% of risk is long Fixed Income (mainly US)
10% risk in equities, mainly mining plays (Alcoa & Fortescue) – looking to add VALE and others in sector on inflation expectations hitting rock bottom in Q1.
5% long Silver… bought on sell-off.
5% Natural Gas – preparing for long and cold winter.
5% Upside optionality in EUR calls, USD puts

How bad are things? Well, let me give you my starting slide from the presentations done in November:

Steen

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

Podemos "Economic Manifesto" Calls for Debt Restructuring, Spain to Abandon the "Euro Trap"

Posted: 30 Nov 2014 09:56 AM PST

The Podemos party, a far-left populist party in Spain led by Pablo Iglesias, has come from out of nowhere to lead the polls.

Podemos' economic manifesto includes debt restructuring, exiting the European Monetary Union, and a jobs program to end unemployment.

The plan was drawn up by Vincenç Navarro and Juan Torres, two Spanish economists.

Left to right: Pablo Iglesias (party leader), Carolina Bescansa (party member) and economists Vincenç Navarro and Juan Torres, present Podemos' economic program.

Via translation from Libre Mercado, Podemos Admits Its Economic program Unfeasible Under Current Euro.

Globalization and National Sovereignty Incompatible

The document includes harsh criticism of globalization, stating "democracy, national sovereignty and global economic integration are mutually incompatible."

Euro Trap

"Besides being quite integrated into the global economy, Spain is mostly integrated in the euro monetary union and this also represents a first order constraint when developing an economic program of government."

"Our membership of the single European currency means, as is well known, that do not have essential instruments of economic policy, as control over the amount of money or the external value of the currency. But not only that. It also means that other instruments which in principle could be at our disposal, such as fiscal policy and sectoral policies can only be used with great limitations and in some cases with hands completely tied."

"Spaniards should be aware that it is physically impossible that they can pursue policies that meet the national interest, within the euro as it is designed. Should know that the euro was conceived as a real trap, but nowhere is it written that people have to accept it without further."

Debt Restructuring

"Debt restructuring, especially the peripheral countries, is not a whimsical proposal but the result of a cooperative strategy which is much more favorable than that imposed so far and that can end a crisis far more serious and widespread. The only possible way out of this vicious circle is genuine restructuring of European and Spanish debt."

Job Creation Program

"Work towards full employment should be a priority of the government. This can be achieved by stimulating the private sector, and where this is not enough, through job creation by the state to correct the huge deficit of social infrastructure including the expansion of public services of the welfare state, now clearly underfunded in Spain."

"If Spain had one person in five in public services, as did Sweden in 2010, there would be more than three million and additional jobs in our country."

Mish Comments

Other than to call for Spain to abandon the euro, Podemos' economic manifesto is economic nonsense. However, the manifesto is bound to have popular appeal.

Everyone likes to believe in the Keynesian free lunch concept. It's logical to expect some country in the eurozone is going to at some point be willing to try just that.

I keep repeating... "Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the bail out debt foisted on their country to be null and void. That person will be elected."

It's quite possible Pablo Iglesias is just that person.

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

29.11.14

Mish's Global Economic Trend Analysis

Sanctions on Russia Bite Europe, China the Beneficiary

Posted: 29 Nov 2014 02:57 PM PST

European sanctions on Russia have hurt the EU far more than Russia. Moreover, Europe has lost key machinery contracts to China, and those contracts will likely stay with China even after sanctions are lifted.

Please consider Europe Feels Sting in the Tail of Russia Sanctions.

At a technology fair in Moscow last month, European executives faced the new reality of doing business in Russia since the West imposed sanctions: the number of companies at the international showcase had shrunk by half from a year ago.

"The impact on business couldn't be clearer. Fewer stands, fewer companies," said Mark Bultinck, a sales executive for Belgian digital screen maker Barco, which had a booth at the annual expo for the audiovisual industry.

The impact of the sanctions was already clear to Barco.

The company lost Russia's biggest shipbuilder as a client when the United States and the European Union blacklisted United Shipbuilding Corporation in July, meaning Barco could no longer sell screens to the company for its vessel training simulators.

Barco's experience shows how sanctions are having a broad impact not just on Russian companies but on European ones too and at a time when Europe's weak economy can ill afford it.

companies are at risk of losing contracts to competitors from China and elsewhere, according to Frank Schauff, chief executive office at the Association of European Businesses in Russia.

"Countries that have not imposed sanctions are able to jump in where the EU has left a gap," said Schauff. "The economic position that the European Union has in Russia is at risk and it is very difficult to gain that back if it is lost."

Lost Business

EU exports to Russia fell 19 percent to 7.9 billion euros ($9.91 billion) compared to July.
EU exports down 18 percent compared to August 2013.
Total EU exports fell 12 percent in the first eight months of this year compared to a year ago.
EU exports of machinery and transport equipment such as cars and tractors fell 23 percent compared to July.
Machinery and transport exports fell 21 percent from a year ago.
Manufactured exports fell 16 percent across the 28-nation bloc in August.
Italy's manufactured exports tumbled by almost half.

None of this should be surprising. It's exactly what one could have and should have expected at the outset. The only beneficiary of the inane sanctions has been China.

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

Italy's Unemployment Rate Unexpectedly Hits Record High 13.2%

Posted: 29 Nov 2014 08:21 AM PST

The string of unexpectedly bad news in the eurozone continues unabated as Italian Unemployment Rate Rises to Record, Above Forecasts.

The unemployment rate rose to 13.2 percent from a revised 12.9 percent the previous month, the Rome-based national statistics office Istat said in a preliminary report today. That's the highest since the quarterly series began in 1977. The median estimate of seven economists surveyed by Bloomberg called for an unemployment rate of 12.6 percent in October.

The youth unemployment rate for those aged 15 to 24 rose to 43.3 percent last month from 42.7 percent in September, today's report showed.

Expectations vs. Reality

Economists expected a drop in unemployment of 0.3%. Instead unemployment rose 0.3%.

Italian Prime Minister Matteo Renzi blamed the rise on an increase in the participation rate, with more people looking for a job.

Similar to the setup in the US, those who want a job but do not look for one are not considered unemployed. Instead, they are considered "discouraged workers".

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

28.11.14

Mish's Global Economic Trend Analysis

Conflicting Shopping Headlines: NY Times "Brisk Sales", Yahoo "Black Friday Shopping Crowds Thin"

Posted: 28 Nov 2014 10:43 AM PST

Here's a pair of conflicting stories regarding Black Friday shopping.

Crowds Thin

Yahoo!Finance reports Black Friday Shopping Crowds Thin After Thanksgiving Rush.

Mall crowds were relatively thin early on Black Friday in a sign of what has become the new normal in U.S. holiday shopping: the mad rush is happening the night of Thanksgiving and more consumers are picking up deals online.

"It just looks like any other weekend," said Angela Olivera, a 32-year old housewife shopping for children's clothing at the Westfarms Mall near Hartford, Connecticut. "The kind of crowds we usually see are missing and this is one of the biggest malls here. I think people are just not spending a lot."

Brisk Sales

The New York Times reports Black Friday Sales Are Brisk, Retailers Say, Bolstered by Online Deals.

Parking lots at some shopping malls filled up around the country on Friday, as shoppers kept up the tradition of scouring stores for holiday deals even though some retailers had been open on Thanksgiving and even overnight.

Big retailers, many of whom kicked off sales Thursday evening, reported brisk traffic overnight. Walmart said that 22 million shoppers streamed through stores across the country on Thanksgiving Day, more than the number of people who visit Disney's Magic Kingdom in an entire year, the retail giant pointed out.

Still, as retailers jump-start their deals earlier and more sales move online, Black Friday itself is starting to fade in importance.

Target said its best-selling goods in store were the Element 40" TV, the Xbox One, iPads and Nikon's L330 camera. In the first hour of stores opening, Target sold 1,800 TVs per minute and 2,000 video games per minute, the retailer said in a release. Keurig's K40 brewer and Dyson's DC50 vacuum were other top sellers, Target said.

Economists are closely watching whether retailers can entice shoppers to spend during what retailers consider the biggest shopping weekend of the year, especially after a year of lackluster sales so far. A brightening economic outlook, and ever-cheaper gas prices, are starting to lift consumer confidence. But there are also signs of lingering wariness among consumers, after what has been an uneven economic recovery marked by anemic wage growth, especially for low-income households.

And online, which makes up a bigger share of holiday sales each year, retailers have been offering Black Friday deals for many days now, stretching what was once a one-day shopping frenzy into a week or more of sales.

Online retailers have also driven the heavier-than-ever discounting this year. Amazon has priced out many of the country's biggest retailers in the big-ticket holiday items, offering a Samsung 55-inch 4K flat-screen television for $899. Dealnews.com, which closely tracks Black Friday deals, declared Amazon's deal "without a doubt" the cheapest name-brand 4K television it had ever seen.

IBM Digital Analytics, which tracks online shopping transactions in the United States, said sales rose 12 percent between midnight and 6 p.m. Eastern time Thanksgiving Day.

Is traffic up or down? Perhaps it varies by region. Two safe bets: Online shopping is up, and Black Friday is losing importance as shopping is spread out over more days.

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

Japan Household Spending Down 4%, CPI Drops to 0.9%; Bankruptcies Soar in Yen Collapse

Posted: 28 Nov 2014 09:09 AM PST

In spite of the Yen falling 35% since 2011, Japan once again borders on deflation. Please consider Japan's CPI falls to 0.9%.

Japanese core inflation last month fell below 1 per cent to a 13 month low, just weeks before prime minister Shinzo Abe heads to the polls to garner fresh support to push back a scheduled rise in sales tax.

Core consumer prices, all prices excluding fresh food, slowed to an annual pace of 2.9 per cent growth year-on-year in October, in line with forecasts. Stripped of any impact of the sales tax rise in April, core prices are up 0.9 per cent.

Highlighting the scale of the challenges facing the Abe administration, data released on Friday also showed households further tightening their purse-strings.

Household spending fell 4 per cent year-on-year, the seventh consecutive decline since the national sales tax was raised from 5 to 8 per cent in April. Retail sales dropped 1.4 per cent, reversing two months of gains.

The drop in core inflation comes not even 10 days after Haruhiko Kuroda, Bank of Japan governor, warned that a fall below 1 per cent was "possible", in a reversal of comments made just four months ago.

Bankruptcies Soar in Yen Collapse

Here's an interesting note regarding bankruptcies that I picked up from ZeroHedge: As Japanese Bankruptcies Soar, Goldman Warns "Further Yen Depreciation Could Be A Net Burden"

According to a recent bankruptcy survey by Tokyo Shoko Research, there were 214 bankruptcies due to the weak yen in January-September 2014, which is 2.4 times the 89 seen in January-September 2013. Far more of the bankruptcies were in the nonmanufacturing sector—81 in transport, 41 in wholesale trade, 19 in services, and 11 in retail—than in the manufacturing sector (44), which is consistent with our analysis based on the input/output tables.

Surprisingly, the number of bankruptcies since 2013 due to yen depreciation far surpasses the number of bankruptcies in 2009-2011 due to yen appreciation.

Bankruptcies Caused by Falling Yen

The Japanese consumer is faced with a falling yen, much higher taxes, and counting taxes prices much higher. The only saving grace for Japan has been falling energy prices.

Yet, prime minister Shinzo Abe Wants inflation and more of it. It's madness.

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