Economy News: May 2013

31.5.13

Posted: 31 May 2013 12:21 PM PDT

A friend of mine sent a thought provoking link to a book-in-progress called Robots Will Steal Your Job But That's OK.

The author, Federico Pistono, periodically writes a new chapter and I just signed up for updates.

The introduction caught my eye.

Introduction

You are about to become obsolete. You think you are special, unique, and that whatever it is that you are doing is impossible to replace. You are wrong. As we speak, millions of algorithms created by computer scientists are frantically running on servers all over the world, with one sole purpose: do whatever humans can do, but better. These algorithms are intelligent computer programs, permeating the substrate of our society. They make financial decisions, they predict the weather, they predict which countries will wage war next. Soon, there will be little left for us to do: machines will take over.

Does that sound like some futuristic fantasy? Perhaps. This argument is proposed by a growing yet still fringe community of thinkers, scientists, and academics, who see the advancement of technology as a disruptive force, which will soon transform our entire socioeconomic system forever. According to them, the displacement of labour by machines and computer intelligence will increase dramatically over the next few decades. Such changes will be so drastic and quick that the market will not be able to abide in creating new opportunities for workers who have lost their jobs, making unemployment not just part of a cycle, but structural in nature and chronically irreversible. It will be the end of work as we know it.

Most economists discard such arguments. Many of them don't even address the issue in the first place. And those who do address this issue claim that the market always finds a way. As machines replace old jobs, new jobs are created. Thanks to the ingenuity of the human mind and the need for growth, markets always find a way, especially in the ever-connected and globalised mass market we live in today.

In this book I will try to avoid picking either side based on belief, gut feeling, or hunch. Rather, I will attempt to engage in informed logical reasoning, based on the evidence we have so far.

The book is divided into three parts. First, we will explore the topic of technological unemployment and its impact on work and society – I chose to focus on the US economy, but the same argument applies to most the industrialised world. In the second part we will look into the nature of work itself and the relationship between work and happiness. The last part is a bold attempt to provide some practical suggestions on how to deal with the issues presented in the first two parts. Doing a thorough examination of each section would require a monumental effort, possibly resulting in thousands of pages, far exceeding the purpose of this book. My intention is not to write a complete academic report, but rather to initiate a discussion about what I think will soon be one of the biggest challenges that we have to face as a society and as individuals. Too often we treat various issues as separate subjects, not realising the interconnected nature of our reality. This mistake has made us weak and vulnerable. Over the last 70 years, we have set the stage of our own demise. We have become increasingly discontent, the quality of our relationships have diminished, and we have lost track of what really matters. Today, as the comedian Louis CK has noted: "Everything is amazing, and nobody is happy!" It is time to take a step back and think about where we are going.

Let us begin the journey. ...

Part I is on Automation and Unemployment, and consists of five chapters. Parts II and III are not yet posted. Inquiring minds may wish to follow the journey.

What If?

In the following short 4-minute video Federico Pistono asks "What if the jobs cannot come back? What if it is intrinsically impossible for the jobs to come back? What if unemployment is structural?"

Here is a 17 minute video that is also worth a look. Pistono argues "no one is safe" while asking "what happens if Walmart fully automates?"

Here is my favorite snip from the video: "As much as 80% of the people hate their job. That's four out of five spending most of their useful life doing something they don't particularly enjoy. We are in kind of a work paradox because we work long and hard hours, on jobs we hate, to buy things we don't need, to impress people we don't like. Genius!"

Structurally High Unemployment

For several years I have been writing about the concept of "Structurally High Unemployment" but Pistono goes far beyond that. He explores the idea this is not just another creative destruction phase that will be followed by another job boom, but rather this is the end, computer intelligence is why, and that's a great thing!

Pistono's socialistic vision of the future is that robots will do everything, there are infinite resources, no one has to work, and we all live happily ever after.

To say I disagree about that Pollyanna endgame is putting things mildly. And since I believe there is no work-free nirvana, here's the key question: what if Pistono is half-right, that no job is safe, that no jobs are coming, but robots do not provide the "But that's OK" nirvana Pistono imagines.

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

Bad Weather in France to Blame For ...

Posted: 31 May 2013 10:15 AM PDT

Courtesy of my friend Bran who spotted these weather related anomalies in France. Via Google translate, it appears that French economists blame the weather for ...

Delayed maturation of fruits and vegetables
Disrupted cows
Public work productivity declines
Increased electrical consumption
Construction degradation
5 to 10% drop in tourist reservations
Decline in bridge traffic in May between 10% and 30%
30% drop in custom restaurants due to closed outside terraces

Sacrebleu!

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

Intellectual Dishonesty and Insanity on Steroids

Posted: 31 May 2013 02:36 AM PDT

I just finished reading The Smith/Klein/Kalecki Theory of Austerity by Paul Krugman and I believe it is the most disingenuous piece he has ever written.

Krugman comes out blazing with the statement "Noah Smith recently offered an interesting take on the real reasons austerity garners so much support from elites, no matter how badly it fails in practice."

He then cites various sources who suggest "business interests hate Keynesian economics because they fear that it might work".

While halfheartedly dissing a similar thesis in Naomi Klein's Shock Doctrine, Krugman goes on to say the "thesis really helps explain a lot about what's going on in Europe in particular."

Paul, Please Be Serious

The first problem I have with the article is Krugman knows damn well that no Austrian-minded economist on the planet supports what is commonly, and mistakenly (on purpose) referred to as "austerity".

Please take a look at what Austrian economists want vs. what the nannycrats in Brussels delivered.

What Austrians Want

Lower taxes
Less regulation
End of Fractional Reserve Lending
Sound money
Smaller government
Work rule reform
Pension reform
Free trade

What Brussels Delivered

Higher income taxes
Higher VAT
Proposed financial transaction taxes
More regulation
No free trade
Little if any work rule reform
Little if any pension reform
Reluctant (at best) cuts in government jobs
Reluctant (at best) cuts in government spending
No sound money
No end of fractional reserve lending
Bailouts at taxpayer expense

Insanity on Steroids

Krugman and others parade that mess as "austerity". It's not austerity. Rather, it's insanity on steroids, and every Austrian economist on the planet knew it would not work.

Yet, month in and month out we have to listen to the likes of Krugman saying or implying "I Told You So".

Well, la de frickin' da. I told you so too. And so did thousands of others, Keynesians and Austrians alike.

Krugman would have you believe it's austerity as implemented vs. Keynesianism. Well, it's not, and he knows it, because any thinking mind knows tax hikes in the middle of a recession is insanity.

Idiots Do Idiotic Things

I do not know for sure why the idiots in Brussels forced those measures on Greece, Cyprus, Spain, Portugal, or Ireland, but the most likely explanation is simply "idiots do idiotic things".

To jack this into a belief that politicians did these things out of fear Keynesian policies might work is more than a stretch of the imagination, it's preposterous.

About Those Keynesian Solutions

No, Paul, we do not fear Keynesianism or Monetarism will work, because theory and practice alike say neither will work. If they did work, Japan would not be a basket case after 20 years of trying.

I have asked this simple question of Krugman for what seems like a decade "When does it stop Paul? When?"

Krugman has never answered, but one can presume "never". Japan is supposed to keep on spending money it does not have on wasteful projects "until it works". The US supposedly needs to do the same.

The average 7th grader knows that paying people to dig holes and then others to fill them back up again is economic idiocy, but the average Keynesian doesn't.

With Japan leading the way, we are about to witness the results of such foolishness, but the comfort to the US is Japan will blow up first. Will that change Krugman's mind?

Hardly. And I have an ironic suggestion: Krugman does not want to try Austrian solutions out of fear they might work.

Given the world has tried his methods and they have failed, what else should one believe?

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

30.5.13

Mish's Global Economic Trend Analysis

Simmering Feud Between France and Germany Erupts Into Verbal Warfare; France Tells Brussels to Shove It

Posted: 30 May 2013 11:03 AM PDT

The simmering feud between France and Germany erupted into a heated political exchange following Pressure on Hollande to take bold action to revive the French economy, calling for new pension and labour market reforms.

"The commission's list of recommendations for Paris, which it expects to be delivered in return for allowing France two extra years to meet its budget deficit targets, covered all the hard issues the socialist government faces: cutting public spending; restoring badly diminished competitiveness, opening up restricted markets, reforming the tax regime and loosening tight labour market regulations."

France Tells Brussels to Shove It

The exchange got quite interesting when Merkel Allies Bashed Hollande Over Needed Reforms

Leading members of Angela Merkel's ruling Christian Democratic Union in Germany have fiercely criticised François Hollande, accusing the French president of "shaking the foundations of the European Union", only hours before the two leaders met in Paris in a bid to repair their troubled relations.

Deep German concern about the French government's resistance to economic reform and hostility to EU pressure emerged after Mr Hollande said it was not for the European Commission "to dictate" reforms to Paris.

"There is no need for European recommendations; what's needed is obvious. It's not for the commission to dictate what we have to do," Mr Hollande said in response to the commission, whose call was part of its annual assessment of budget plans for all 27 EU members.

The French president's "vehement criticism of the European Commission's reform proposals . . . contradicts the spirit and letter of European agreements and treaties", said Andreas Schockenhoff, a deputy chairman and foreign policy spokesman of the CDU in the German parliament. "Someone who talks like that is shaking the foundations of the EU."

Norbert Barthle, budget spokesman of the CDU in the Bundestag, said the two-year extension granted to Paris in meeting the 3 per cent deficit target was more than Germany had expected.

"France won't be able to bank on such indulgence again," he added, saying that Mr Hollande had misunderstood the nature of European co-operation if he thought he could accept the benefit proposed by the commission but reject the conditions attached.

Reflections on the Obvious

Somehow it is OK for France to stipulate conditions on Greece, on Ireland, on Cyprus, on Portugal, and on Spain but not be told what to do itself.

Yes it is "obvious" what to do.

Slash pension benefits
Make it easier for companies to fire workers
Lower taxes
End agricultural subsidies
Raise the retirement age

Jobless Claims at New Record High

The problem is Hollande cannot see the obvious. Meanwhile, inquiring minds note French jobless claims hit new record in April.

The number of people out of work in France hit a record high in April, the daily Les Echos said on Thursday, casting more doubt on President Francois Hollande's pledge to reverse a long-running rise in unemployment.

The number of registered jobseekers rose by about 40,000 in April from March's previous high, the financial daily reported ahead of the official publication of the figures later on Thursday. It did not quote its sources.

The government is holding to its pledge to turn around the trend by year-end despite multiple forecasts to the contrary, hoping that the economy will start to pick up in the second half of 2013 and that subsidised jobs will help keep a lid on unemployment.

The European Commission, the OECD and France's own jobless benefit fund all see unemployment continuing to rise through 2014. The EU executive said on Wednesday it expects French unemployment to reach 10.6 percent this year after 10.2 percent last year and keep increasing to 10.9 percent in 2014.

"Obviously Obvious"

The odds of a major economic recovery in France in 2013 with socialists in control are essentially zero, and subsidizing jobs is the wrong approach in the first place. Both of those statements are "obviously obvious", except to socialist fools and Keynesian clowns.

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

EU Requires Spain to Raise Vat

Posted: 30 May 2013 02:27 AM PDT

The last thing a country in recession should do is raise taxes. Well, Spain is in a depression, not a recession yet the EU requires Spain to raise the VAT and lower pension benefits within a year.

One year. That is the time that the government has to undertake major reforms. The European Commission has published today the document with recommendations to the European Council on the National Reform Plan. Includes advice on pensions, taxes, government spending, administrative reform, etc.. There is virtually nothing that Brussels (and the governments of EU members) does not create the need to change, accelerate or deepen.

On Wednesday Brussels gave Spain more time to reach a budget deficit of 3%, but warns that to achieve this, it is still necessary to continue with the fiscal effort.

Brussels calls for "a systematic review of the tax system by March 2014." Normally, these words have meant raising taxes on consumption (VAT or special) to relax the pressure on other that penalize wealth creation, such as income tax or social contributions. But in the current document there are only requests to raise taxes.

The above snip did not do full justice to the idiocy of the latest Brussels demands. The only thing I support is pension reform.

Tax hikes will do nothing but cause another plunge in revenues and another rise in unemployment.

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

29.5.13

Mish's Global Economic Trend Analysis

S&P Dividend Yield Below 10-Yr Treasury Yield (1.93% vs. 2.19%); Looking for Value?

Posted: 29 May 2013 10:45 AM PDT

In an email note today economist Steen Jakobsen notes the "S&P Dividend Yield is Below the 10-Yr Treasury Yield (1.93% vs. 2.19%)"

S&P Dividend Yield

click on chart for sharper image

Steen asks "Why own stocks at lofty PE of 18 when you can get better yield and a free put option via fixed income'?"

Curve Watchers Anonymous notes this chart of US treasury yields.

US Treasury Yields Over Time

click on chart for sharper image

$TYX - 30 Year Rate
$TNX - 10 Year Rate
$FVX - 05 Year Rate
$IRX - 03 Month Rate

Five Curve Watchers Anonymous Comments

The normalized S&P PE is an extremely lofty 24
Forward estimates are ridiculously optimistic (they always are except at major bottoms)
Earnings will revert to the mean
The S&P Dividend Yield under 2% is not at all attractive
Stock are certainly not cheap by any realistic measure

A Look at Select Miners

Newmont Mining Corporation (NEM) has a trailing PE of 9.91 with a dividend yield of 4.40% (about 43% of earnings)
Goldcorp Inc. (GG) has a PE of 15.41 and a dividend yield of 2.2% (about 34% of earnings)
Barrick Gold Corporation (ABX) has a dividend yield of 4.2%

Looking for value? Then don't look where the herd is looking.

By the way, someone occasionally asks "who is curve watchers anonymous?" One person went so far as to do a search and wondered why the only references were to my blog. The reason is simple, I made up the name and have been using it for years.

Disclosure

I have investments in various miners as well as physical gold and silver at GoldMoney. Please do your own due diligence. You may also wish to consider Five Alternatives to FDIC "Insured Deposits"

I prefer GoldMoney to other precious metal holding companies but that is an admittedly biased opinion as I have a relationship with them. Anyone wanting additional information on GoldMoney: Please Email Mish

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

28.5.13

Mish's Global Economic Trend Analysis

Spain Records Largest First Quarter Deficit in History; Tax Revenues Plunge 6.7% Year-Over-Year; Surprising Comments from German Finance Minister Wolfgang Shäuble
Book Supporting Euro Exit Becomes Instant Bestseller in Portugal; AfD Update
Speculative Gold Bets at 5-Year Low; Metal Will Get “Crushed” Says Credit Suisse

Spain Records Largest First Quarter Deficit in History; Tax Revenues Plunge 6.7% Year-Over-Year; Surprising Comments from German Finance Minister Wolfgang Shäuble

Posted: 28 May 2013 10:17 PM PDT

Spain keeps digging a bigger and bigger hole as the latest economic reports show.

In spite of massive tax hikes, overall revenue is down 5.3% YoY
Tax collections are down 6.7% YoY
VAT collection is down 9.9% in spite of a September increase in the VAT rate
Non-interest expenses are up 1.1% from a year ago
As compared to the first quarter of 2011, tax revenues have plunged by 58%
As compared to first quarter of 2011, personal income tax and other direct taxes have fallen almost 35%.

Those numbers are courtesy of Libre Mercado which reports Spanish Government has Largest January to April Deficit in History.

Surprising Comments from German Finance Minister Wolfgang Shäuble

So what does Shäuble have to say about this?

Please consider these Google-translated snips from the Libre Mercado report Wolfgang Schäuble supports Rajoy's policies and Cites "impressive" Results of the Spanish reforms.

Schäuble is convinced that "Spain has made enormous progress in recent years under the Government of Mariano Rajoy". So much so that now Spain "has a strong economy, reduced labor costs, has significantly increased its exports and has done a good job in restructuring its banking sector, also after the trial of the Troika".

Spain, on the right track

In this sense, on financial reform, says that "all international agencies agree that Spain is on the right path" also "regarding to the recapitalization of the banks." Asked if it is all done in the Spanish financial system reform, Schäuble gave their trust to the minister of economy and competitiveness Spanish: "It is my duty to give advice to my colleague and friend Luis de Guindos , he knows better than me what has to do ".

Over four-page interview in the Journal of Vocento, Schäuble never tires of positive messages about the Spanish economy. Not only speaks of "tremendous advances" for Spain Rajoy has achieved, but doubts that at one point made investors wary of the Spanish economy "no longer exists", not least because "Spain reject outright the possibility of not repay the loans made." "The state capital need could not be funded under acceptable conditions. This is the only reason that Spain has had to seek help from the European Stability Mechanism to recapitalize their banks," he added before insisting that "the figures and results "of Spain and its reforms" are impressive. "

What is Shäuble smoking?

Most likely Shäuble's comments are some sort of election ploy for chancellor Angela Merkel. If that's not it, he has lost his mind.

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

Book Supporting Euro Exit Becomes Instant Bestseller in Portugal; AfD Update

Posted: 28 May 2013 10:08 AM PDT

In an interesting development in the battle to see which country is bright enough to exit the euro first, a book urging a return to the Escudo (the prior Portuguese currency) became an instant a bestseller in Portugal.

The Wall Street Journal reports Idea of Euro Exit Finds Currency in Portugal.

A book by a Portuguese economist achieved a small feat on its release last month: It instantly topped Portugal's bestseller list, overtaking several diet books and even the popular erotic novel "Fifty Shades of Grey."

The book, "Why We Should Leave the Euro" by João Ferreira do Amaral, has helped ignite a public debate in Portugal about the real cause of the country's economic pain: Is it only the hated austerity needed to secure European bailout loans, or is the euro?

Public lectures, TV debates, newspaper columns and some politicians are starting to explore a question that until recently was confined to university seminars: whether the country has a realistic path to recovery inside the euro.

Portugal "has no chance of growing fast within a monetary union with a currency this strong," Mr. Ferreira do Amaral said in a recent interview. "Thankfully, this issue has stopped being taboo, and there is now a lot of discussion here and abroad." The book is in its fourth edition, selling more than 7,000 copies so far—a lot for an economics tract in the small Portuguese market.

Mr. Ferreira do Amaral is getting some high-profile backers. This month, Supreme Court of Justice President Luís António Noronha Nascimento called for Portugal and other Southern European countries to quit the euro, warning the gap between Europe's richer and poorer states will keep widening otherwise.

Whether the debate gains traction depends on the economy, analysts say. Portugal's government insists the long-awaited recovery will arrive in 2014, but many economists doubt that. If the recession continues, politicians will need to enact even more budget cuts to meet EU deficit targets. "It may become too hard for politicians to sell austerity measure after austerity measure," says Antonio Costa Pinto, political scientist at the University of Lisbon. "This could create the perfect environment for a shift of ideas."

A year ago, only 20% of Portuguese wanted to leave the euro. It would be interesting to see a similar poll in a few weeks after debate over the book escalates.

Exit Discussion in Multiple Countries

Beppe Grillo Supports "Referendum on the Euro Within a year"
1000 professionals and economists signed on to a Euro Exit Manifest and Jose Carlos Diez says "Spain Must Have a Plan to Exit the Euro"
The anti-Euro AfD party is gaining traction in Germany.
The UK Independence Party UKIP is Jubilant following Local Elections

AfD Update

On April 23 I wrote Political Prediction: Merkel Loses Chancellorship in September as Support for AfD Soars. At that time, I noted "I have been watching the iPhone app Wahl-O-Meter and AfD has risen from 5% of the vote to 6.6% now."

Wahl-O-Meter support for AfD now clocks in at 8.9% and the Green Party is down to 10.5% from 11.4%. Wahl-O-Meter is not a statistically valid poll, yet I have been told by reader Bernd (not AfD party leader Bernd Lucke) that Whal did better than polls in predicting results of previous German elections.

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

Speculative Gold Bets at 5-Year Low; Metal Will Get “Crushed” Says Credit Suisse

Posted: 28 May 2013 12:07 AM PDT

Sentiment is never a perfect timing instrument.Yet, with Hedge Fund Bets on Gold at Five-Year Low I am comfortable stating the gold bull market is not over.

Hedge funds are the least bullish on gold in more than five years as speculation about the pace of money printing by central banks whipsawed prices, driving volatility to a 17-month high.

Money managers cut their net-long position by 9 percent to 35,686 futures and options as of May 21, the lowest since July 2007, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts rose 6.7 percent to a record 79,416. Net-bullish wagers across 18 U.S.-traded commodities slid 2.1 percent, as investors became more bearish on coffee and wheat.

Investor sentiment is "negative towards gold," and physical demand has started to slow, Suki Cooper, a New York-based analyst at Barclays Plc, said in a May 24 report. The metal will get "crushed" and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.

"I would be underweight the commodities at this point until we start seeing a pickup in global growth and a self-sustaining recovery here in the U.S.," Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $130 billion. "The global economy has been decelerating, and China is struggling."

Metal Will Get "Crushed" Says Credit Suisse

Unlike copper, gold is not an industrial commodity so a slowing global economy is simply not that pertinent. It appears to me that neither Ric Deverell at Credit Suisse, nor Chad Morganlander at Stifel Nicolaus has a clue about what the fundamental driver for the price of gold is.

Granted sentiment is poor, but bull markets tend to end on good news with extreme positive sentiment (such as we see now with US equities), and bear markets end on bad news and extreme pessimism.

Speculative positioning in gold is at a 5-year low on little over a 30% drop in price. That is hugely negative sentiment for such a routine drop. Bull markets do not end that way. They end with the masses becoming true believers.

I strongly suspect the bull market in gold will not end until after the public embraces gold in a major way.

Mike "Mish" Shedlock

27.5.13

Mish's Global Economic Trend Analysis

Evolution of Spanish Public Debt and Pension Promises

Posted: 27 May 2013 06:24 PM PDT

Inquiring minds may be interested in a chart of Spanish public debt over time to see how the policies of Spain and the Troika are working out in practice.

Evolution of Spanish Public Debt Over Time

I picked that chart up from estrategiastendencias.

My stab at a translation of text regarding public debt reads "Spanish banks are deluded. They must think we are going to save them from the assets that they have purchased."

Pension Benefits Need to Drop 22-45%

Regarding pensions, here is a Mish-modified translation of various paragraphs from site: "Pension benefits need to drop between 22% and up to 45% on average to avoid bankruptcy of the system. The projected costs and revenues of Social Security until 2050 and the population pyramid ensures an inevitable adjustment to retirement benefits. We are up Spain creek without a paddle. The state does not have money for anything."

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

Dutch Defined Benefit Pension Plans, Second Largest in Europe, Face Forced Cuts

Posted: 27 May 2013 10:57 AM PDT

Things are getting rather interesting in the Netherlands as low interest rates have increased pension deficit liabilities. Unlike the US and other parts of Europe where deficits are ignored, Dutch law requires 105% funding and the plans fell from 152% funded in 2007 to 102% funded today.

This has forced pension plans to cut benefits by as much as 7% for some trades. As might be expected, this has given rise to a 50 Plus Party, which won election to the Dutch parliament for the first time last year on promises to defend the interests of pensioners.

Please consider Yawning deficits force Dutch pension funds to cut payouts.

A combination of record low rates, sluggish economic growth and lives that last far longer than anyone imagined even a decade ago have resulted in yawning deficits. At the end of 2012, the funds were €30bn short of what is needed to cover promised benefits.

For the Dutch, the cutbacks are the first ever in a nation which has the second largest "defined benefit" system in Europe. But defined benefit provision, under which pensioners are guaranteed a portion of their salary for as long as they live, is unraveling under the pressure of the financial crisis and ensuing recession.

In April, under orders from the Dutch central bank, 66 of the country's 415 pension funds started cutting their payouts. The average cut is around 2 per cent of the monthly benefit, but that figure conceals a wide range.

Last September the parliament, under pressure from older voters, approved new rules that allow pension schemes to use a higher rate to gauge the pace at which inflation will erode liabilities.

This has lowered liabilities, and funding targets. The sector as a whole now has a coverage ratio of 105 per cent under the new rules, but just 101 per cent under the old rules, according to an analysis by Aon Hewitt.

As at 2007, a quarter of Dutch retirees were below the age of 60. Early retirement has proved extremely expensive for defined benefit schemes, especially as longevity has risen sharply. On average, Dutch men aged 65 can expect to live for another 18 years as of 2011, up from just 15.5 years a decade earlier.

Head in the Sand Solution

Burying your head in the sand is not a solution to the problem but that is exactly what the Dutch parliament did by assuming higher rates of inflation (and interest on bonds) in a low-yield world.

This is yet another consequence of central bank policy to drive down interest rates. When the US stock market heads south again (and it will), US pension plans, already trillions of dollars underfunded, will become even more underfunded.

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

26.5.13

Mish's Global Economic Trend Analysis

Large Risk of Instability in Japan; Rates Climb Even With Japan Buying 70% of New Issuance

Posted: 26 May 2013 10:00 AM PDT

When political leaders go out of their way to make mollifying statements on the economy, it's a sure thing the opposite is about to happen. Platitudes are flowing in Japan as Haruhiko Kuroda, Japan's central bank governor, says the risk of systemic instability is "not large".

The correct interpretation of course is "the risk of instability is huge". Please consider Haruhiko Kuroda says rates must stay low until economy improves.

Haruhiko Kuroda, Japan's central bank governor, said the country's financial system could cope with rising interest rates only once the economy improved, as he laid out the stakes in his attempt to tame the volatile bond market.

Japanese banks and insurance companies have accumulated vast holdings of government bonds whose value would fall sharply if investors demanded higher yields on newly issued debt. The BoJ calculates that a 1 percentage point rise in rates would lead to mark-to-market losses equivalent to 10 per cent of tier one capital at big banks, and 20 per cent at weaker regional lenders.

Mr Kuroda said he believed that Japanese financial institutions were "strong enough to deal with these negative effects even if such a situation occurred" and that the risk of systemic instability was "not large".

Rates on 10-year Japanese government bonds climbed to 1 per cent last week for the first time in a year. The market has gyrated since Mr Kuroda announced in April that the BoJ would dramatically increase its purchases of JGBs, to the equivalent of about 70 per cent of new issuance, in an effort to stimulate lending and investment and reverse more than a decade and a half of consumer price declines.

Rates Climb Even With Japan Buying 70% of New Issuance

Rates are climbing even with massive purchases by the bank of Japan. That tells you banks and pension plans are attempting to unload existing inventory as well.

There is no one to unload to, except the Bank of Japan. Yet given age demographics, pension plans are now net sellers of Japanese bonds. And Japan is still piling on more debt with a 10-trillion Yen ($128 billion) stimulus package.

Kuroda says "rates must stay low until the economy improves" but in spite of the improvement in the stock market, business investment and demand for loans shrank for the 5th straight quarter.

The only way rates can stay low with this borrowing is if the Bank of Japan buys 100% of new issuance and all existing bonds at a price the central bank likes.

This is theoretically possible, but only if Japan is prepared to suffer the consequences of a collapsing Yen.

Further Reading

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

25.5.13

Mish's Global Economic Trend Analysis

Corporate Share Buybacks: How Timely Are They?

Posted: 25 May 2013 08:52 AM PDT

Factset Buyback Quarterly has an interesting series of charts and facts on corporate share buybacks.

Here is my favorite chart in the series.

Aggregate Buybacks: Dollar-value share repurchases amounted to $93.8 billion over the fourth quarter and $384.3 billion for 2012. The fourth quarter total is in-line with that of Q3, but represented year-over-year growth of 9.6%.

Sector Trends: The Information Technology and Health Care sectors spent the most on quarterly repurchases ($19.8 billion and $14.4 billion, respectively) in Q4 2012. However, of the sectors that averaged $2 billion or more in quarterly share repurchases since 2005, the Industrials sector showed the largest sequential and year-over-year growth (30.6% and 59.4%) in dollar-value buybacks.

Buyback Conviction: Dollar-value buybacks amounted to 79.1% of free cash flow on a trailing twelve month basis, which is the largest value since Q3 2008. The Consumer Discretionary and Consumer Staples sectors both spent more than 100% of their free cash flow (116.7% and 114.2%, respectively). The Energy and Utilities sectors spent $35.8 billion and $1.4 billion, respectively, on buybacks, despite generating negative free cash flow (-$25.7 billion and -$23.5 billion). The Consumer Discretionary sector also led all sectors in repurchasing the most shares relative to its size. Over the trailing twelve months, the sector repurchased shares that amounted to 4.5% of the sector's average shares outstanding over the year.

Timing Suspect at Best

One look at the above chart is all it takes to see most shares are bought back at high prices rather than low prices.

And check out the latest authorizations.

Looking Forward: Program Announcements & Buyback Potential Going forward, several companies in the S&P 500 have authorized new programs or additions of $1 billion or more since December 31st, including Gap (GPS), Blackrock (BLK), Marathon Petroleum (MPC), L-3 Communications (LLL), Visa (V), Allstate (ALL), Moody's (MCO), CBS Corporation (CBS), Dow Chemical (DOW), and AbbVie (ABBV). In addition, even larger authorizations were made by United Technologies Corp. (UTX), 3M Co. (MMM), and Lowe's (LOW), which all announced replacement programs worth approximately $5.4 billion, $7.5 billion, and $5 billion, and Hess Corporation (HES), which announced a $4 billion buyback program on March 4th. Finally, a number of banks were approved to buy back large amounts of common and preferred shares in 2013. JPMorgan Chase (JPM) which was approved for $6 billion in share repurchases, Bank of America (BAC) was approved for $5 billion in share repurchases plus $5.5 billion in redemption of preferred shares, and Bank of New York Mellon (BK), U.S. Bancorp (USB), State Street Corp (STT), and American Express (AXP) were also approved to repurchase greater than $1 billion worth of shares.

Why? Share prices certainly are not cheap.

Much of the buybacks are in conjunction with massive shareholder dilution via stock option grants to executives. The executives continually unload their shares and corporations buy them back.

Buybacks from the last two years generally look good, at least right now. But for how long? 2006 and 2007 buybacks looked good too, up until the crash.

Is this yet another case of "here we go again?"

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

24.5.13

Mish's Global Economic Trend Analysis

Beppe Grillo Supports "Referendum on the Euro Within a year"
Discussion in Spain on Leaving the Euro; Euro Exit Manifest
Greek Debt Unchanged Since 2010; EU to Give Greece Still More Time; More Time Is Useless
Another Look at Bernanke's Employment Recovery in Chart Form

Beppe Grillo Supports "Referendum on the Euro Within a year"

Posted: 24 May 2013 04:17 PM PDT

Via google translate from Corriere Della Sera, Beppe Grillo is in favor of a "Referendum on the Euro Within a year"

"Europe needs to be rethought. We consider just one year of information and then hold a referendum to say yes or no to the euro and yes or no to Europe. " Beppe Grillo to ride a strong theme of the last election campaign the 5 Star Movement. "Europe on the euro and the British teach us democracy. No party can claim the right to decide for 60 million people. "

"I want to go to Europe and re-discuss a Plan B to be in five years, "added the leader M5S, explaining:" When we do, then we are ready for a referendum and we decide whether to stay in the euro or not."

Sooner or later this sentiment is going to catch fire. And the sooner the better for Europe when it does.

Also see Discussion in Spain on Leaving the Euro; Euro Exit Manifest.

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

Discussion in Spain on Leaving the Euro; Euro Exit Manifest

Posted: 24 May 2013 11:07 AM PDT

Some common sense discussion is taking place in Spain regarding the necessity of Spain exiting the eurozone.

For example, please consider Opposition to the euro breaks: first manifesto to leave the single currency as translated from El Economista.

The political opposition that Spain remains part of the euro begins to crystallize. And the tool to achieve that end-Spain output of the single currency is again signing a manifest public that, for the moment, has already been signed by around 1,000 professionals convinced "the risks of deterioration and degradation that there are the enormous social suffering caused by the persistence of adjustment policies, austerity and privatization of the public ".

Among the signatories are former general coordinator of United Left (IU) Julio Anguita or economists Juan Francisco Martín Seco and Pedro Montes, Manuel Monereo addition, Manuel Muela and Carlos Martinez, president of Attac Spain, or exsindicalista Agustin Moreno. Written Signatories to the start for a first finding analysis: the level of unemployment is "catastrophic "the indebtedness of the Spanish economy to the outside is" unable to cope "and the evolution of public accounts leads inexorably to the" economic collapse of the state ".

Specifically, they say, more than six million unemployed, more than 2.3 billion euros of gross liabilities from the outside and a public debt of almost a billion euros, growing and already close to 100% of GDP, "are data defining an unmanageable mess, endanger destroy coexistence and social rights. "

"Spain Must Have a Plan to Exit the Euro"

Also note an article on El Econimista Jose Carlos Diez: "Spain Must Have a Plan to Exit the Euro"

Jose Carlos Diez, chief economist at Intermoney, feels Spain should not be the first country to leave but "should have a plan to do it." This was pointed out in a meeting he had with el Economista.

Spain should never be forced out. We are a big country in Europe, and we must enforce our political weight, seeking alliances to solve the crisis. But if Portugal or Italy decide to leave the euro, we must have a plan to get out that day, "he answered a question from a reader. "I hope that there is intelligent life in Europe and that day may never come," he added.

Euro Exit Manifest

The talk has started. That is the first step. Inquiring minds may wish to read the Euro Exit Manifest mentioned in the first link.

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

Greek Debt Unchanged Since 2010; EU to Give Greece Still More Time; More Time Is Useless

Posted: 24 May 2013 08:11 AM PDT

Greece was supposed to get it's debt to GDP ratio to 100% by 2012, then 100% by 2013, then 110% by 2014. Now Jeroen Dijsselbloem, president of the Eurogroup finance ministers, says Greece May Get Still More Time to meet fiscal targets.

And the alleged level of debt sustainability keeps rising all the while.

The euro zone may give Greece more time to meet fiscal targets agreed under its international bailout, the chairman of the euro zone finance ministers said in an interview published today.

"The Commission΄s approach regarding fiscal consolidation is more flexible, giving certain countries more time to meet their targets. I believe that this will be the case for Greece if needed," Jeroen Dijsselbloem told Kathimerini newspaper.

Greece΄s European partners agreed last year to extend the maturities and reduce the interest on the nation΄s bailout funds to help cut its debt mountain to a more sustainable level of 124 percent of GDP in 2020, from an estimated 173 percent this year.

Greek Debt Unchanged After Massive Bailouts and Haircuts

Note that the sustainable level of debt is now 124% of GDP, ratcheted up numerous times in the past couple of years..

Keep Talking Greece has some rather interesting facts about Greek debt in its report 2 bailouts + 1 haircut = Greek public debt at €309.4 billion in 1Q 2013, as much as in 2010

Two bailout agreements, total aid of 240 billion euro, and one bonds' 'haircut' later…. Greek public debt remains as high as it was in 2010 – the year in which Greece sought the 'rescue' by the International Monetary Fund.

2010: Public debt: 310.3 billion euro
2013: Public debt: 309.4 billion euro

The public debt is almost the same, we are all still sitting on the same old boat. Just the economic situation of the average Greek is much worse: bankrupt households, unemployment at 27% and 64% among youth 15-24 years old, recession and even deflation. Oh, and a sharp rise in suicides and homeless.

I hope nobody remembers Evangelos Venizelos, finance minister in March 2012, heralding after the Greek bond swap (53.5% haircut) "we got rid of 100 billion euro debt."

More Time Is Useless

By now it should be readily apparent the situation is totally and completely hopeless.

Greece will not reduce debt to 124 percent of GDP by 2020 from an estimated 173 percent this year, unless of course Greece defaults.

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

Another Look at Bernanke's Employment Recovery in Chart Form

Posted: 24 May 2013 12:38 AM PDT

Reader Tim Wallace took note of Bernanke's testimony on jobs (see Bernanke's Semi-Annual Tap-Dance of Distortions, Half-truths, Lies, and Hypocrisy to U.S. Congress) and sent me the following chart.

April Employment vs. April Employment in Previous Years

click on chart for sharper image

Tim writes ...

Hello Mish

Bernanke was touting the direction of employment using the familiar "7.5%" numbers and pointing to all the improvement. While granting that more people are working now than in 2010, we recognize that more people are working part time and less people are working overall than in 2008.

This got me wondering how long it took to recover to pre-recession employment numbers in the past.

Up until the recession of 1982, All drops in employment from one year to the next had fully recovered to new employment highs within 2-3 calendar years. In the recessions around 1982, 1991 and 2001, job recovery took about three calendar years.

In our current malaise, we have been at this 5 years and employment is still 2.2 million people below the employment number in April 2008. Moreover, part-time employment is up about 2 million workers. Thus, full-time employment is 4 million below the 2008 number, 5 years ago.

Tim

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