Economy News: September 2012

30.9.12

Mish's Global Economic Trend Analysis

What If I Am Wrong About Europe?
At Some Point the Hat Runs out of Rabbits; First Catalonia, Now Basque Separatists Call for Independent Country; El Pais Survey Shows 43% Catalans For Independence, 41% Opposed
Austerity Programs Hit France; Marchers Demand Vote on Treaty; Hollande Reneges on Campaign Promise

Posted: 30 Sep 2012 08:59 PM PDT

I have long stated the eurozone will breakup. Historically speaking, no currency union has ever survived in the absence of a political union.

Moreover, in It's Just Impossible I noted

The Bundesbank said there should be no banking union until there is a fiscal union.
Angela Merkel said that there should be no fiscal union until there is political union.
François Hollande said that there should be no political union until there is a banking union.
The German supreme court will not allow a political union nor a fiscal union, nor a banking union without a German referendum.

Mathematically Speaking

Mathematically speaking, I also fail to see how the eurozone can stay intact.

Specifically, please consider point number nine of Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions

9. Disruptive European Politics

European politics will become much more difficult and disruptive. The historical precedents are clear. During a debt crisis the political system becomes fragmented and contentious. If the major parties don't become radicalized, smaller radical parties will take away their votes.

Remember that the process of adjustment is a political one. We all know someone has to pay for the massive adjustment countries like Spain must make. The only interesting question is about who will be forced to take the brunt of the payment – workers in the form of unemployment, the middle classes in the form of confiscated savings, small businesses in the form of taxes, large businesses in the form of taxes and nationalization, foreigners, or creditors.

Deciding who pays is a political process, and because the stakes are so high it will be a very bitter process. This means, among other things, that politics will degenerate quickly, and of course if Europe doesn't arrive at fiscal union in the next year or two, it probably never will. This conclusion is also the reason for my next prediction.

That prediction was made by Michael Pettis, and I am in complete agreement.

But what if I am wrong?

Can Politics Triumph Over Math and History?

What if the eurozone in spite of all obstacles stays intact? Daniel Hannan is a writer and journalist, and Conservative MEP for South East England since 1999 offers an interesting viewpoint for The Telegraph in Spain teeters on the brink

All of a sudden, the talk is of the breakdown, not just of the single currency, but of the parliamentary system on which it rests. Commentators across Europe fret that Spain, which emerged from dictatorship less than 40 years ago, might give up on multi-party politics.

Every round of economic figures is worse than the last. The deficit is massively larger than forecast. A bailout of unprecedented size is becoming inevitable, even as the prime minister gives his countrymen a 'one hundred per cent assurance' that he won't apply for one. (He said much the same thing a few days before applying for the last one.)

Hundreds of thousands of people are protesting, some violently. ....

The real tragedy of the euro is not that it will come crashing down upon the financial system, as Smaug upon Esgaroth, splintering it to sparks and gledes. The tragedy, rather, is that the monetary union will limp on, condemning hundreds of millions to gradual immiseration.

I am still trying, as gently as I can, to suggest that there is an alternative to the euro-imposed bailout racket. I did so again in our most recent parliamentary session, as you can hear in the clip above.

The trouble is that, while Spaniards recognise the folly of imposing cuts while at the same time bailing out banks, they shy away from the logical conclusion: that leaving the euro is now the least bad option.

The real threat to Spanish democracy is not internal but external; not a pronunciamiento but a Brussels-imposed civilian junta, as happened in Italy. Mario Monti, the EU's proconsul in Rome, indicated yesterday that he 'might seek a second term'. Oddly, I don't remember him seeking the first.

Sad Reality

The sad reality is Spain and Italy may linger on just as Greece did, destroying their countries in the process.

Consider once again what I said on September 26, in Firebombs, Teargas, Riots Near Greek Parliament; 57% Say Greece Should Abandon Pledges Made to Troika

Sentiment Has Turned

Sentiment in Greece has turned, and likely turned for good. 57% of Greeks have had enough of austerity to the point they would rather default.

Turn back the hands of time a bit and think how this might have played out if Greece simply left the euro and defaulted three years ago as it should have. Tourism would likely have increased and if Greece had implemented true structural reforms rather than tax hikes, its economy would be stable or recovering now.

Instead, the country is in ruins, tourism is down, and in an on-again-off-again fashion, absolute chaos breaks out.

Another round of austerity and tax hikes can only make things worse at this point, and the people know it. This will pressure political parties to not go along with Samaras.

If another round of elections were held today, there is no way Samaras would win. Instead, the radical left, and radical right (both of which want to exit the euro), would be fighting over the pieces.

The nannycrats in Brussels and Chancellor Merkel are to blame for this sad state of affairs.

Finally, please note that the big fear of the nannycrats and Merkel is not that Greece leaves the euro per se, but rather Greece leaves the euro and the Greek economy starts to recover.

Well, here's the deal and it is something I said years ago: the sooner Greece abandons the euro, tells the Troika to go to hell, and defaults, the better off it will be

Same Track, Wrong Track

Spain, Greece, Portugal, and Italy are all on the same track and the wrong track. All need work rule reform and lower taxes. Instead, the countries have been short on productivity improvement, short on pension reform, short on work rule reform, and long on tax hikes.

It is no wonder their economies are imploding. It is no wonder protests are getting louder. Yet the political class, beholden to the banks and the IMF have taken the wrong track.

In the end, I highly doubt I will be wrong.

In the meantime, however, Telegraph writer Daniel Hannan appears to be correct in his assessment the "the tragedy is that the monetary union will limp on, condemning hundreds of millions to gradual immiseration."

Mike "Mish" Shedlock

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At Some Point the Hat Runs out of Rabbits; First Catalonia, Now Basque Separatists Call for Independent Country; El Pais Survey Shows 43% Catalans For Independence, 41% Opposed

Posted: 30 Sep 2012 12:27 PM PDT

Calls for the splintering of Spain have picked up steam. Euskal Herria Bildu (EHB, a left-wing, Basque nationalist party) has called for "A Great National Act" in Favor of Independence according to El Pais.

EH Bildu has called "a great national political act" in favor of the independence of the Basque Country for the next October 13 in the BEC Barakaldo (Bizkaia), announced its candidate for lehendakari, Laura Mintegi in an appearance before the media at EA headquarters in Bilbao.

Mintegi explained that the purpose of the meeting is to claim a free Basque state in Europe. The nationalist left has led in recent times to BEC, in a space with a capacity for 15,000 people, some of his most important acts to demonstrate their ability to mobilize. force.

The sovereignist coalition vindicate independence there to say "clearly and directly" to those "who do not want to hear, who kidnap our rights in the name of the Constitution imposed on us" you want "a free state in Europe."

Mintegi has defended "the pressing need to build a framework sovereign" in the Basque country that allows this community to have the tools to address their own economic, social and employment. "Only from the sovereignty we orient our policies towards true social justice," said the candidate.

In his view, "it is truly reckless remain at the expense of a corrupt system like Spanish, you're sacrificing the rights and freedoms of all the people to ensure the interests of a political and economic elite." With the "corrupt system" called on "break ties".

El Pais Survey Shows 43% Catalans For Independence, 41% Opposed

According to El Economists, Catalan Separatists Not Quite at Absolute Majority.

About the option of independence for Catalonia, El País published a survey in which, in case of a referendum, 43% would vote for secession, compared with 41% who would decide against.

The complete data interpretation contrasted with other numbers registered in June, when only 21% of respondents said anti-secession and another 21% abstained. The current difference can be understood as a translation of abstention towards not to Catalan independence, which in June this survey enjoyed the favor of 51%.

Various surveys seem to be fluctuating wildly so I am not sure any of the are accurate at the moment. That said, it is clear anger over austerity measures is picking up steam. Protests in numerous countries is proof enough.

At Some Point the Hat Runs out of Rabbits

I am sticking to my long held belief that "Eventually will come a time when a politician will hold up a copy of the EMU treaty, declare it null and void, and the debt null and void right along with it. That politician will be elected."

Yields have come down since my July 24, appearance on Capital Account: Discussion of Social Media Panic in Italy, Soaring Yields in Spain, and the Upcoming 20th Euro Summit, Bound to be Another Failure so it appears there was another rabbit left at the time.

However, the government of Portugal recently had to back off announced austerity measures following a mass protest, and additional protests elsewhere have become more frequent and more violent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Austerity Programs Hit France; Marchers Demand Vote on Treaty; Hollande Reneges on Campaign Promise

Posted: 30 Sep 2012 10:16 AM PDT

Following protests in Portugal, Spain, and Greece, a wave of Leftists march in Paris against austerity.

Thousands of leftists marched through Paris on Sunday demanding a referendum on the EU's new fiscal discipline treaty in the latest of a series of anti-austerity protests in countries hit by the eurozone crisis.

The demonstration, the biggest political rally in France since May elections brought Socialist president François Hollande to power, followed protests on the streets of Madrid and Lisbon on Saturday.

The communist-backed Left Front and 60 other organisations backing the Paris march said tens of thousands of supporters turned out for the protest, timed to coincide with the opening this week of a parliamentary debate on ratification of the fiscal treaty, which Mr Hollande had originally vowed to renegotiate.

Jean-Luc Mélenchon, the Left Front leader, said austerity policies were "dangerous for all the people of Europe". Demanding a vote on the treaty, he added: "Democracy is sicker than we thought."

analysts worry that the recent upsurge in political unrest in Portugal, Spain and Greece – where the neo-Nazi Golden Dawn party has risen to third in national surveys – could be a sign of more trouble ahead as repeated rounds of austerity bite even further into daily lives.

"The cracks are showing in Spain's social and economic fabric," said Nicholas Spiro, a London-based sovereign risk consultant. "The risk is that in seeking to retain as much domestic ownership of the terms attached to any [EU rescue] programme, the government [of prime minister Mariano Rajoy] overdoes it and sparks an even more intense social and political backlash."

In Portugal, tens of thousands of trade unionists turned out in Lisbon's central square for a peaceful protest against terms of the country's €78bn EU-IMF bailout.

Greek unions have also vowed to hold big protests if the government moves forward with a new €13.5bn austerity programme agreed last week by the coalition government.

The recent upheavals in Portugal – where there had been widespread bipartisan support for the bailout since it was launched 16 months ago – has come as a particular shock to eurozone leaders, forcing Lisbon to reverse a rise in social security taxes designed to hit mandated budget targets.

Hollande Reneges on Campaign Promise

Recall that Hollande ran on a platform to rework the Merkozy Treaty.

We now clearly see that was just another campaign lie. However, Hollande has followed through on all of his economically destructive ideas including massive tax hikes, lowering retirement age, and pressuring companies to not lay off workers.

Destructive follow-through of the worst ideas, with no follow-through on the best campaign ideas is typical of presidential elections everywhere.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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29.9.12

Mish's Global Economic Trend Analysis

JPMorgan, Bank of America Forgive Debts that No Longer Exist; Wonderful News! But For Whom?

Posted: 29 Sep 2012 06:18 PM PDT

In February, five of the nation's largest banks agreed on a $25 billion settlement over widespread, systemic mortgage fraud and related issues.

The $25 Billion Deal, announced with huge fanfare, was supposed to help up to a million struggling homeowners, primarily via debt forgiveness.

Let's flash forward a few months to see how debt forgiveness is working out in practice.

Today, the New York Times notes Banks Forgive Debt That Isn't There.

GREETINGS, unhappy homeowners! Here's some wonderful news: "We are canceling the remaining amount you owe Chase!" says a letter that JPMorgan Chase sent recently to thousands of home loan borrowers. "You are approved for a full principal forgiveness of your Home Equity Account," says another, from Bank of America.

Jackie Esposito, of Guilford, Conn., got a letter like that. But she wasn't elated — because she doesn't owe the money anymore. She and her husband filed for bankruptcy three years ago. The roughly $64,000 they owed Chase has been legally wiped out.

Others have received similar letters about phantom debts. A borrower in Florida received word this month that Chase was erasing $190,065.10 of debt that had already been wiped out. Bank of America told a Virginia resident that a $231,767 home equity loan was being forgiven, even though the debt was discharged last May.

Are the banks' forgiveness letters a way to gain credits for debts these institutions are improperly claiming to have extinguished? The banks say no.

But Chase appears to be claiming to release a lien on Ms. Esposito's property that it does not hold. And under the mortgage settlement, it could receive a credit.

As for Ms. Esposito, she said she found the bogus loan forgiveness letter from Chase especially upsetting because of the years she has spent trying to have the bank modify her first mortgage. She pays 9 percent on her loan and cannot refinance it into a lower-rate mortgage, given her recent bankruptcy.

Chase won't help her modify her loan, Ms. Esposito said, but it is happy to help by forgiving a loan that has already been discharged and releasing a lien that is already gone.

Wonderful News! But For Whom?

If these events are happening on a broad scale, and I suspect they are, that $25 billion settlement will end up costing peanuts.

Bear in mind, I have little sympathy for people who themselves purposely took out loans they knew they could never pay back, nor do I have sympathy for people who were willing partners in bank fraud.

Regardless, I wondered at the time how the banks would take a $25 billion hit without getting crushed. Well, now we know.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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China New Export New Orders Decline At Fastest Pace in 42 Months; China's Precarious Rebalancing Act

Posted: 29 Sep 2012 09:29 AM PDT

HSBC China Manufacturing PMI™ shows Output falls at fastest pace since March.

Key points

New export orders fall at fastest rate in 42 months

Output and input prices continue to fall

Purchasing activity declines amid weak demand and lower production requirements

Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand, while lower workloads were linked to a fall in backlogs of work.

After adjusting for seasonal factors, the HSBC Purchasing Managers' Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 47.9 in September, up slightly from 47.6 in August, and signalling an eleventh successive month-on-month deterioration in Chinese manufacturing sector operating conditions. However, the latest data signalled the rate of deterioration eased marginally.

The rate of reduction in manufacturing output in China accelerated during September, signalling the strongest contraction since March. A number of respondents that reported a fall in production levels attributed this to lower order volumes as both domestic and international demand weakened. However, the rate of reduction in new export orders remained stronger than the decline in overall new orders. Panellists commented on tough trading conditions in a number of key trading markets.

China's Precarious Rebalancing Act

Discounting the continually over-optimistic comments from Markit economists in general, I would otherwise be puzzled by comments of Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC who said: "Chinese manufacturing growth is likely to be bottoming out. However, the sharper contraction of new export orders and the lingering pressures on job markets mean that Beijing should step up easing to support growth and employment. Fiscal measures should play a more important role in the coming months."

What indication is there that manufacturing growth is bottoming out? In the first place, China manufacturing is in contraction, not growth. Moreover, the European recession is strengthening and a US recession is underway (just not recognized yet in my opinion). Thus it would be logical to assume China's export-driven economy is going to take another hit.

Trade matters with Japan, and the debate over ownership of islands in the East China Sea are also unsettling. For a discussion, please see Japan PMI: Output and New Orders Contract Further

Is Beijing going to step up and support employment and growth? I do not have the answer to that, but China needs to rebalance, and that rebalancing act will be painful. The transition to a consumer-led economy from an export and infrastructure-building economy will be slow and painful, but also very necessary.

For further discussion of the need to rebalance and the problems facing China please see.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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28.9.12

Mish's Global Economic Trend Analysis

Japan PMI: Output and New Orders Contract Further
France Piles €20 Billion in Tax Hikes on Businesses and Wealthy
Can the Fed Fight Droids and Win? Apple's SIRI, Driverless Trucks, What's Next? Riveting Video: Are Droids Taking Our Jobs?

Japan PMI: Output and New Orders Contract Further

Posted: 28 Sep 2012 01:55 PM PDT

The global economy continues to weaken most everywhere you look. The focus of this post is Japan where the Markit/JMMA Japan Manufacturing PMI™ shows Modest deterioration in operating conditions recorded in September.

Key points:

Output and new orders both down again, albeit at slower rates
Weaker underlying demand and strong yen impact on export orders
Charges cut at sharpest rate for over two years

Summary:

Operating conditions in Japan's manufacturing sector continued to worsen at a modest pace in September. Output and new orders both fell amid reports of a general stagnation of economic activity in domestic and overseas markets. Manufacturers continued to deplete inventories, while they made further sharp inroads into their work outstanding. Payroll numbers were little changed.

On the price front, companies responded to the weaker demand environment by discounting their charges to a greater degree. These efforts were aided in part by a further modest reduction in input prices.

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers' Index™ (PMI™) improved to a three-month high of 48.0 in September (August: 47.7) but, by remaining below the 50.0 no-change mark, again signalled a modest deterioration in operating conditions.

Production and new order volumes continued to decline on a monthly basis. Although slightly weaker than in August, rates of contraction remained marked, particularly in the investment goods sector.

Looking ahead, the widening rift between Japan and China over disputed islands certainly cannot help yet Voice of America reports there is No Sign of Progress in Dispute.

September 26, 2012
A bitter territorial dispute between China and Japan showed no signs of improvement Tuesday, as foreign ministers from both countries held high-level talks to ease tensions.

Relations have sunk to their lowest point in years, with anti-Japan protests breaking out across China and many Chinese refusing to buy Japanese-made goods. On Wednesday, Japanese automakers Toyota and Nissan said they are reducing production in China because of lessened demand.

[Foreign Minister Yang Jiechi] warned that bilateral relations could not "return to the track of sound and steady development" unless Japanese officials "take concrete measures to correct its mistakes."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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France Piles €20 Billion in Tax Hikes on Businesses and Wealthy

Posted: 28 Sep 2012 10:15 AM PDT

It's now official. The top tax rate in France is now 75% for those who make over a million euros. Moreover, there is a new band of 45% for those who make over 150,000 euros. Don't forget the existing VAT on all purchases.

Europe is imploding and instead of fixing onerous work rules, France Hits Rich and Business to Slash Deficit.

Socialist President Francois Hollande unveiled higher levies on business and a 75-percent tax for the super-rich on Friday in a 2013 budget aimed at showing France has the fiscal rigor to remain at the core of the euro zone.

Of the total 30 billion euros of savings, around 20 billion will come from tax increases on households and companies, with tax rises already approved this year to contribute some 4 billion euros to revenues in 2013. The freeze on spending will contribute around 10 billion euros.

To the dismay of business leaders who fear an exodus of top talent, the government confirmed a temporary 75 percent super-tax rate for earnings over one million euros and a new 45 percent band for revenues over 150,000 euros.

Tough New Measures or Idiotic Measures?

The Financial Times reports France unveils tough budget measures

The measures announced on Friday included the controversial 75 per cent marginal tax rate on earned income above €1m a year, put in place for two years.

But, as promised by President François Hollande, France was largely spared the kinds of hefty cuts in public spending, pensions and salaries imposed in other eurozone countries struggling to contain their sovereign debt.

The official forecast of 0.8 per cent growth next year is above most independent forecasts, but Mr Pierre Moscovici [finance minister] said: "I am certain that if Europe steadies, then we are going to achieve this 0.8 per cent or more."

For starters, with government spending in France accounting for 55% of GDP, those are not "Tough Measures" those are idiotic measures. France needs to reduce government spending and ease work rules. Instead it has tightened pressure on companies laying off workers.

If Wishes Were Fishes

The French Finance minister is "certain that if Europe steadies, France will achieve 0.8 per cent growth or more". That is about as meaningful as this statement by me "I am certain that if I had a billion dollars, I would be a billionaire".

Simply put, neither Europe nor France is going to steady, but given France's growth is currently 0%, steady would not be enough anyway.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Can the Fed Fight Droids and Win? Apple's SIRI, Driverless Trucks, What's Next? Riveting Video: Are Droids Taking Our Jobs?

Posted: 27 Sep 2012 11:48 PM PDT

Today, a single farmer can produce as much goods as 100 farmers a half-century or less ago. That freed up labor for manufacturing and the service economy.

However, droids are now replacing humans in both manufacturing and services.

When does it stop?

Every time I go into a grocery store, I see more self-service checkout lanes and fewer manned ones. When RFID checkout comes into vogue, and it will quickly, an entire grocery basket will be scanned at once, and even fewer checkout clerks will be needed.

For a discussion of RFID, please see JCPenney to Eliminate All Checkout Clerks, Instead Using RFID Chips and Self-Checkout.

With each technological advance more and more goods and services are produced by fewer and fewer people. In isolation, that drives down costs, and in the process, standards-of-living have soared.

Because of ever-increasing productivity, it's easy to show that deflation is the natural state of affairs.

But what does that mean looking ahead? Will there be any jobs left? If so where? And what happens to the Fed's effort to prevent falling prices?

Riveting Video: Droids Taking Our Jobs

Let's start off with an entertaining, yet scary video by Andrew McAfee who asks Are droids taking our jobs?

Working Age Population vs. Projected Jobs

Notice the widening gap. Moreover McAfee states "If these predictions are accurate, that gap is not going to close. The problem is I do not think these predictions are accurate. In particular, I think my projection is way too optimistic. ... Because when I look around I think we ain't seen nothing yet when it comes to technology."

Video Discussion Points

Free Language Translation
Apple's SIRI
An article on Forbes about Apple, written by an algorithm (It's not decent it's perfect says McAfee). I tracked down the article: Forbes Earnings Preview: Apple, written by "Narrative Science".
Jeopardy: IBM Watson computer vs. Human who won 74 times in a row
If SIRI functionality increase according to Moore's Law (which it will) it will be sixteen times better than today, six years from now
Google Autonomous Car

Google Autonomous Toyota Prius Car

Managing the Transition to a Workerless Society

"There are 3 and a half million truck drivers and they will be impacted by this technology. .... We are going to transition into an economy that is very productive and just does not need a lot of human workers. Managing that transition is going to be the greatest challenge that our society faces" says McAfee.

In spite of that gloom for 13 minutes, McAfee concludes on a positive note, quoting Freeman Dyson: "Technology is a gift of God. After the gift of life, it is perhaps the greatest of God's gifts. It is the mother of civilizations, of arts, and of sciences."

Play the 14 minute video. It is riveting.

Can the Fed Fight Droids and Win?

The Fed wants to increase jobs and wages. It is fighting a battle it cannot possibly win. Forcing down interest rates while hoping to force up labor costs simply increases desire of companies to replace humans with droids.

We would get there anyway, as technology always improves. However, the Fed, by attempting to do the impossible, is actually speeding up the loss of jobs.

Living Wages

Who (besides the Fed and seriously misguided economists) does not like falling prices?

The problem with the "living wage" concept is not that wages are too low, but rather excess money from the Fed has driven up costs of goods and services.

People have been conditioned (by the Fed) to believe they need higher wages. What they really need is lower prices.

Technology, demographics, attitudes, and increasing lifespans, all mandate a need for lower, not higher prices.

If the Fed "succeeds" in further driving up prices, it will destroy the middle class because the technological rampage is sure to increase job losses for skilled labor, at least for the foreseeable future.

The Fed cannot defeat droids. Unfortunately, the Fed does not understand it is exacerbating the problem. Sadly, the Fed does not even understand the nature of the forces it is fighting.

Addendum:

It never fails. Someone misses obvious implications of what I said. One person ranted and raved that increased productivity is a good thing. Of course it is.

I specifically stated "standards-of-living have soared" as a result of technology. And of course that is a good thing.

My problem clearly is not technology and the deflationary effect that has on wages and prices (both good things), my problem is the Fed's attempt to counteract those forces. The result has been an increase in the wealth effect of those with first access to money, namely banks, the already wealthy, and government bureaucrats.

If you are looking for a reason the 1% have done so well lately, simply look at the policies of the Fed coupled with technology that is going to reduce the need for human labor "for the foreseeable future".

I have stated many times there will be another wave of job creation based on new technologies (most likely energy) at some point in the future but I do not know when that may be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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27.9.12

Mish's Global Economic Trend Analysis

California Hit Parade Rolls On: Atwater Scrambles to Avoid bankruptcy
Real Per Capital "Core" Durable Goods Orders
Durable Goods Orders Ex-Transportation "Unexpectedly" Drop, Down Third Month, July Revised Lower; GDP +1.3% Second Quarter; June Recession Call Looking More Likely
Reader from Netherlands Says Last Election Not as Pro-Euro as Media Portrays; 81 in 150 Against More Bailouts

California Hit Parade Rolls On: Atwater Scrambles to Avoid bankruptcy

Posted: 27 Sep 2012 08:04 PM PDT

The California hit parade keeps on rolling as yet Another California city scrambles to avoid bankruptcy.

Atwater, a city of roughly 28,000 in California's Central Valley, may declare a fiscal emergency as soon as next week, but it is trying to avoid becoming the fourth California city to file for municipal bankruptcy this year, its mayor said.

Under California law, a local government must either declare a "fiscal emergency" or go through a 60-to-90 day confidential negotiation process with its creditors before it files for municipal bankruptcy. Since late June, three Golden State cities-Stockton, San Bernardino and Mammoth Lakes-have filed for bankruptcy protection.

"We are planning to stay current on our ... bonds," said Mayor Carol Joan Faul in a telephone interview with Dow Jones Newswires. "We are hoping to avoid" bankruptcy, she said, "but as far as I'm concerned, we may have to declare a fiscal emergency" on Oct. 3.

According to its fiscal 2011 financial statement, Atwater had roughly $95 million in outstanding debt, a mixture of bonds related to its sewer as well its now-defunct redevelopment agency. Ms. Faul said Atwater intends to make an upcoming bond payment of $2 million on its sewer bonds.

Atwater is Burnt Toast

Once things reach this stage, one does not even need to look at the details because it's a done deal.

Yet, I did look further and as expected, public unions appear to be smack in the middle of things as noted in a Reuters article on Potential Atwater Bankruptcy.

Atwater's economy is "pretty bleak" and starving the city of so much revenue its leaders must consider a drastic overhaul of the services, said Jim Price, vice president of operations at Gemini Flight Support at Atwater's Castle Airport.

"Police and fire, you keep them - and everything else is going to have to be privatized," Price said. "I just don't know how they can do it any other way."

RAISING REVENUE, CUTTING COSTS

Atwater's officials are just beginning to consider their options, Faul said, noting the city must consider raising 20-year-old rates for water services and 10-year-old rates for garbage services while clamping down on costs.

Union representative Nancy Vinson said she expects the city will seek concessions from its roughly 30 non-safety employees, who gave up 10 percent of pay last year through furloughs.

"They could ask for a wage reduction, they could ask for a different contribution to the retirement system, they could ask for a higher health benefit contribution," Vinson said. "We have not been unwilling to talk to them."

Atwater must also seek concessions from its roughly 50 safety and management-level employees, Vinson said, adding she is concerned city officials are moving too fast on a plan for declaring a fiscal emergency.

Atwater's Choice: Bankruptcy Today or Bankruptcy Later

Atwater can enter bankruptcy today, saving taxpayers a lot of money, or it can waste taxpayer money for years, scrambling to make bond payments and then default.

Either way, Atwater is burnt toast. Attempts to make bond payments is a fool's mission.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Real Per Capital "Core" Durable Goods Orders

Posted: 27 Sep 2012 03:04 PM PDT

Courtesy of Doug Short, here is an excellent pair of charts on Real Per Capital "Core" Durable Goods Orders

Core Durable Goods

click on either chart for sharper image

Core Durable Goods Percent Decline From Peak

Doug Short does excellent work. Click on the top link to see additional charts.

I have little to add other than this is how recessions start, an opinion expressed earlier in Durable Goods Orders Ex-Transportation "Unexpectedly" Drop, Down Third Month, July Revised Lower; GDP +1.3% Second Quarter; June Recession Call Looking More Likely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Durable Goods Orders Ex-Transportation "Unexpectedly" Drop, Down Third Month, July Revised Lower; GDP +1.3% Second Quarter; June Recession Call Looking More Likely

Posted: 27 Sep 2012 08:07 AM PDT

"Unexpected" weakness and downward revisions are hallmarks of the beginnings of recessions. And so it it with durable goods. Economists had forecast a gain, instead there was a 1.6% drop. Moreover July was revised lower as well.

Bloomberg reports Orders for U.S. Goods Excluding Transportation Unexpectedly Drop

Orders for goods meant to last at least three years, excluding volatile demand for such things as airplanes and automobiles, fell 1.6 percent last month after a greater-than- previously estimated 1.3 percent decrease in July, the Commerce Department reported today in Washington. Total bookings plunged 13 percent, the most since January 2009, paced by a decline in demand for civilian aircraft.

"There was broad-based weakness," said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. "What this now means is that capital expenditures are now going to probably fall for the first time since the recovery started. It remains a terribly challenging backdrop in the U.S."

The median forecast of 53 economists surveyed by Bloomberg projected a 0.2 percent gain in ex-transportation orders. The Commerce Department revised July data down from a previously reported 0.6 percent decrease.
Survey Results

The decline in total orders was more than twice as large as the 5 percent drop median estimate in the Bloomberg survey.

Other reports today showed the economy grew less than previously forecast in the second quarter and claims for jobless benefits dropped last week to a two-month low.

The world's largest economy expanded at a 1.3 percent pace in the second quarter after growing at a 2 percent rate from January through March. The revision, the third estimate for the quarter, compared with a prior estimate of 1.7 percent and the Bloomberg survey's 1.7 percent median forecast.

The reduction in growth reflected slower gains in consumer spending and farm inventories, the latter caused by the drought.

Civilian aircraft bookings, which are often volatile, slumped 102 percent in August after surging 51 percent the prior month, today's Commerce Department report showed. The size of the decrease may reflect some cancellations in prior months. Boeing Co. (BA), the largest U.S. aircraft maker, received an order for a single plane, down from 260 the month before.

Orders for non-defense capital equipment excluding airplanes, a proxy for future business investment in items such as computers, engines and communications equipment, rose 1.1 percent after decreases of 5.2 percent in July and 2.7 percent in June, the Commerce Department data showed.

Shipments of those goods, used in calculating gross domestic product, fell 0.9 percent after decreasing 1.1 percent in July.
Caterpillar Forecast

Exports dropped 1 percent in July as American companies shipped fewer automobiles, metals and consumer goods abroad, according to Commerce Department figures issued earlier this month.

Recession Call

I am very comfortable with pegging of the start of the recession in June and I expect more downward revisions in GDP and employment are on the way.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reader from Netherlands Says Last Election Not as Pro-Euro as Media Portrays; 81 in 150 Against More Bailouts

Posted: 27 Sep 2012 07:08 AM PDT

European nannycrats breathed a sigh of relief following the re-election of Dutch Liberal Prime Minister Mark Rutte on September 12.

The results "will likely inject a little more confidence into parts of the European political elite" as they step up efforts to contain the debt crisis, David Mackie, chief European economist at JPMorgan Chase & Co. in London, wrote today. "The risks of the Netherlands changing policy direction in a fundamental way appear to have receded, doubtless to private sighs of relief in Berlin and elsewhere."

Really?

Reader Bert who lives in the Netherlands analyzed the actual stated positions of every member of the Dutch parliament and came up with this analysis. Bert writes ...

Hello Mish

As you can see in the table below, according to statements made by political party leaders in the past few weeks, 81 of the 150 seats in the Dutch parliament will vote against any future bailout of Greece. The same thing is likely should the ESM need additional funds for other countries.

Here is my interpretation.

VVD ( classical liberal / conservative)
Party leader and current prime minister made several time's a clear statement: "note a dime to Greece anymore" and got support from Wolfgang Schäubele (German finance minister) for that statement.

PVV (freedom party)
Is totally against the Euro and even the EU in its current form

SP (socialistic / maoistic party)
Totally against Euro bail-outs and the Brussels dictates)

CrU (centre/left with a Christian inspiration)
Tried in the parliament to keep the Netherlands out of the ESM

SGP (a strong biblical inspired party)
Totally against "shared responsibilities" in the socialistic way

PvdD (party for the well-being of animals especially critical to the mass bio-industry) Very Europe critical, a statement from them: "Europe is in its present form not democratic"

There was a huge move from voters from the very EU skeptical PVV to the VVD (a pro Europe party), but this was simply because the PVV blew up the last centre/right government. Voters did not liked that, and it had nothing to do with being pro-Europe.

Close analysis of the true positions of the elected parliament tells the real story: the Netherlands are becoming more and more euro-skeptical and EU critical, not the opposite. Thus, media interpretation that the Netherlands voted for pro-euro is totally wrong.

All the best

Bert

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