Mish's Global Economic Trend Analysis

Panic!
Desperation Bazooka Tactics; Gold Soars Following Huge Headfake
China's Shadow Banking System Collapses Exposing Numerous Ponzi Schemes; Implosion Reaches Critical Mass

Posted: 13 Sep 2012 01:02 PM PDT

In my previous post Desperation Bazooka Tactics; Gold Soars Following Huge Headfake, I mentioned "This seems like desperation bazooka tactics. Specifically, the Fed is in a panic state over jobs."

I am not the only one to come to that conclusion. Saxo Bank economist Steen Jakobsen sent out a post moments ago, FED Did Panic......

They are now doing 'open ended' bond buying - no finite time or amount...hence this will go down as QE Extreme.

I remain of the view this is final phase...

I'm long stocks, gold, short us dollars next 24-48 hours but ..on the anniversary for LEHMAN... tonight could be the day where FED did too much.

Low yield and monetary policy stopped having an impact two years ago, tonight could be the night where after the rally low rates no longer impact stock and risky asset - the only cheap asset right now is: money ...every time this has been the case in history it has ended in bubble and tears.

Congratulations to Steen for predicting this outcome today. On a podcast with Chris Martenson yesterday, both of us stated the Fed would not do much this month but would at some point panic.

Well, panic the Fed did, and sooner rather than later.

Mish Interview With Eric King

Last evening, I had the pleasure of chatting with Eric King for about an hour regarding the state of the global economy and how central bankers would react.

The results are on King World News in a post released today before the FOMC announcement: Global Economic Plunge, Money Creation & Soaring Gold

Today Mish warned King World News that investors should prepare, "... for a big plunge in economic growth worldwide." Mish also said that despite the plunge in the global economy, "I expect to see gold breakout to the upside and I think we are starting to see that right now. The same thing is true for silver."

But first, here is what Mish, who runs the Global Economic Analysis site, had to say regarding the plunge in economic activity: "We are seeing a decline in the global economy. China has slowed down dramatically, so any commodity exporters which export to China are slowing down as well. We're already seeing this happen in countries like Australia. We are also starting to see the Australian housing market begin to crash."

Mish had this to say regarding gold: "I think that gold is about ready to blast higher. Now, the Fed has managed to stoke the stock market as well as inflate the corporate bond market.

But they [corporations] are not doing any more hiring, and Bernanke is puzzled over this. Well, he's puzzled over pushing on a string because people are still saddled with debt. Students are graduating with debt, but they are still unable to get jobs, so they are simply moving back home.

But Bernanke has ignited a rally in gold from around $800, to over $1,700 now. And we've seen the same thing in silver. We've also seen this in energy and food. But other commodities such as steel have plunged. This will impact the economies of exporting nations such as Australia and Canada very badly.

The bottom line is the monetary printing is out there, and gold is going to be the big beneficiary, and possibly silver as well. The chart of gold is beautiful. We have seen a perfect consolidation wedge forming for about a little over a year now.

I expect to see gold breakout to the upside and I think we are starting to see that right now. The same thing is true for silver. This big lift in gold recently has been because of what they are doing in the ECB.

God only knows what we are going to see from China. I expect all of the central banks to push on the string once more, but I don't expect to see any job creation as a result of that. Investors don't realize that we are in a global recession, but they will shortly.

Panic Over Jobs

So what is Bernanke panicked about? One word: "jobs". If you want a second word it's "recession".

I covered both aspects last Friday in "Yes Virginia, It's a Recession".

Recession Numbers Second Consecutive Month

Yesterday I was asked if the services ISM changed my view about the US being in recession. I responded that I wanted to see today's job report first.

Well I have seen it and the report is nothing short of a certified disaster.

Yes, Virginia, based on the household survey, and manufacturing reports, the regional Fed surveys the US is in recession.

The one survey that is different is the ISM services report. The question is why? This is speculation, but I believe ISM has too few companies in the survey, and perhaps large companies are still growing while medium and small-sized firms are not. The other possibility is the ISM report is an outlier for another reason.

Regardless, last month the the household survey had a decline of 195,000 jobs and this month the decline is 119,000. Thus, in the last two months, there are 314,000 fewer employed.

At turns, the household survey leads. I strongly suggest the economy has turned.

US Unemployment Rate -.2 to 8.1%

This month the number of people employed fell by 119,000.

In the last two months, the number of people employed fell by 314,000!

In the last year, the civilian population rose by 3,695,000. Yet the labor force only rose by 971,000.

This month the Civilian Labor Force fell by 368,000.

Last month, those "not" in the labor force increased by 348,000 to 88,340,000, another record high.

This month we set another record high with a whopping 581,000 dropping out of the labor force. If you are not in the labor force, you are not counted as unemployed.

In the last year, those "not" in the labor force rose by 2,723,000

Over the course of the last year, the number of people employed rose by 2,347,000.

Participation Rate fell .02 to 63.5%;

There are 8,031,000 workers who are working part-time but want full-time work, a decrease of 215,00. This one the only bright spot in the report.

Long-Term unemployment (27 weeks and over) was 5.033 million a decline of 152,000 (likely an artifact of the decline in the labor force).

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

I am going to reiterate my belief that the household survey tends to lead and today's panic suggests the Fed believes that as well. Here are two key Household Survey figures.

In the last two months employment dropped by 314,000.
In the last two months the labor force fell by 518,000 while those not in the labor force rose by an amazing 929,000!

Household Survey Data

click on chart for sharper image

In the last year, the civilian population rose by 3,695,000. Yet the labor force only rose by 971,000.

Those not in the labor force rose by 2,723,000 to yet another record high 88,921,000.

That is an amazing "achievement" to say the least, and one that has the Fed in panic mode.

Addendum:

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Desperation Bazooka Tactics; Gold Soars Following Huge Headfake

Posted: 13 Sep 2012 10:23 AM PDT

The Fed came out blazing today with desperation bazooka tactics, not that it will matter one iota to jobs or housing (because it won't).

Specifically, the Fed announced it would ...

Increase Mortgage Backed Securities (MBS) at Pace of $40 Billion Per Month
Extend Operation Twist
Increase Longer-Term Securities by Total of $85 Billion Per Month Through December
Keep the target range for the federal funds rate at 0 to 1/4 percent
Anticipate that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Please consider a few snips from the FOMC Official Press Release.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Desperation Bazooka Tactics

This seems like desperation bazooka tactics. Specifically, the Fed is in a panic state over jobs.

It also leaves me wondering, if this does not work (and it won't), what else can the Fed do?

Promise to hold rates low forever? Buy every treasury and agency?

Gold's Response

After the market makers cleared every stop to the downside, gold blasted higher.

That is one hell of a downside headfake, to the tune of $40, after which gold moved $75 in the other direction.

US Dollar's Response

Curiously, the US dollar barely budged in comparison, but is heading lower after initial wild gyrations in both directions.

In contrast, gold never looked back following the initial and certainly unwarranted $40 drop.

Addendum:

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China's Shadow Banking System Collapses Exposing Numerous Ponzi Schemes; Implosion Reaches Critical Mass

Posted: 13 Sep 2012 01:07 AM PDT

A collapse of property schemes, commodity schemes, and other investments schemes in China is well underway. The Ponzi schemes all had one thing in common: they needed an ever-growing pool of suckers to pay the returns promised to investors.

Well, the pool of greater fools finally ran out, and Shadow Bankers Vanished Leaving China Victims Seeing Scams

China's slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments. The slowdown also is putting pressure on the government to rein in private lending to avoid a spate of defaults that could increase the number of victims and lead to social unrest.

Suicide, Bankruptcy

The shadow bankers are now disappearing, committing suicide or reneging on agreements, leaving thousands of victims in their wake. In the first half of the year, more than 58,000 lawsuits involving disputes over 28.4 billion yuan in private lending were filed in Zhejiang province, where Wenzhou is located, up 27 percent from the same period in 2011 and the most in five years, according to the provincial supreme court. One-fifth of the cases were in Wenzhou, where authorities have set up a special court to handle the surge.

Private-lending victims nationwide filed more than 600,000 lawsuits valued at 110 billion yuan in 2011, an increase of 38 percent from the previous year. In the first half of 2012, the number of filings rose 25 percent to 376,000, according to People's Court, a newspaper run by China's Supreme Court.

In Wenzhou, an export hub where almost 90 percent of families have taken part in underground lending, more than 100 people have fled, committed suicide or declared bankruptcy since August 2011, and at least 800 lending brokers have gone bankrupt, Xinhua News Agency reported in May. Home prices there declined 16 percent in July compared with a year earlier, the fifth consecutive monthly decline, according to the National Bureau of Statistics of China.

Banks also are feeling the pinch. The industry's nonperforming loans increased for three consecutive quarters through June to 456.4 billion yuan, the longest streak of deterioration in eight years, according to the China Banking Regulatory Commission.

Loans overdue more than one day jumped 27 percent in the first half at the nation's five largest lenders, including Industrial & Commercial Bank of China Ltd., the country's biggest, and Bank of Communications Co., according to data compiled by Bloomberg based on semi-annual earnings statements.

Implosion Reaches Critical Mass

China's shadow banking is not a new topic, and the implosion now appears to have reached critical mass. Here are a few more Bloomberg articles.

China Shadow Bankers Go Online as Peer-to-Peer Sites Boom

China Slowdown Stymies Plan to Curb Shadow-Banking Risks

China's Top Court Suspends Death Sentence for 'Rich Sister' Wu

Shadow Banks on Trial as China's Rich Sister Faces Death

China Credit Squeeze Prompts Suicides

China to 'Strictly Control' Shadow Banking Risks, Liu Says

Addendum:

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Mike "Mish" Shedlock
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13.9.12

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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