Economy News: September 2013

30.9.13

Mish's Global Economic Trend Analysis

Meaningless Partial Government Shutdown in Progress; What's Affected, What's Not
Strawberry Fields Forever; Is a Higher Minimum Wage Really the Answer? To What?
Record $217 Billion Corporate Bond Issuance in September; Verizon Leads the Way With Largest Bond Deal Ever at $49 Billion
Berlusconi Faces Party Revolt; Collapse of Italian Government Hangs in Balance; Rush For Votes is On
Spain's Retail Sales Fall 4.2%, 38 Consecutive Negative Months

Meaningless Partial Government Shutdown in Progress; What's Affected, What's Not

Posted: 30 Sep 2013 10:47 PM PDT

A partial government shutdown is now underway. I am unimpressed, and so are the futures. U.S. futures are up slightly, and so are global futures in general. Gold and the dollar are flat.

Given this is the 18th partial government shutdown, there is nothing at all to be excited about this evening.

History of 18 Government Shutdowns

Year	Start date	End date	Total days	Explanation
1976	September 30	October 11	10	Citing out of control spending, President Gerald Ford vetoed a funding bill for the United States Department of Labor and the United States Department of Health, Education, and Welfare (HEW), leading to a partial government shutdown. On October 1, the Democratic-controlled Congress overrode Ford's veto but it took until October 11 for a continuing resolution ending funding gaps for other parts of government to become law.
1977	September 30	October 13	12	The Democratic-controlled House continued to uphold the ban on using Medicaid dollars to pay for abortions, except in cases where the life of the mother was at stake. Meanwhile, the Democratic-controlled Senate pressed to loosen the ban to allow abortion funding in the case of rape or incest. A funding gap was created when disagreement over the issue between the houses had become tied to funding for the Departments of Labor and HEW, leading to a partial government shutdown. A temporary agreement was made to restore funding through October 31, 1977, allowing more time for Congress to resolve its dispute.
1977	October 31	November 9	8	The earlier temporary funding agreement expired. President Jimmy Carter signed a second funding agreement to allow for more time for negotiation.
1977	November 30	December 9	8	The second temporary funding agreement expired. The House held firm against against the Senate in its effort to ban Medicaid paying for the abortions of victims of statutory rape. A deal was eventually struck which allowed Medicaid to pay for abortions in cases resulting from rape, incest, or in which the mother's health is at risk.
1978	September 30	October 18	18	Deeming them wasteful, President Carter vetoed a public works appropriations bill and a defense bill including funding for a nuclear-powered aircraft carrier. Spending for the Department of HEW was also delayed over additional disputes concerning Medicaid funding for abortion.
1979	September 30	October 12	11	Against the opposition of the Senate, the House pushed for a 5.5 percent pay increase for congress members and senior civil servants. The House also sought to restrict federal spending on abortion only to cases where the mother's life is in danger, while the Senate wanted to maintain funding for abortions in cases of rape and incest.
1981	November 20	November 23	2	President Ronald Reagan pledged that he would veto any spending bill that failed to include at least half of the $8.4 billion in domestic budget cuts that he proposed. Although the Republican controlled Senate passed a bill that met his specifications, the Democratic House insisted on larger cuts to defense than Reagan wanted and for congressional and civil servant pay raises. A compromise bill fell $2 billion short of the cuts Reagan wanted, so Reagan vetoed the bill and shut down the federal government. A temporary bill restored spending through 15 December and gave Congress the time to work out a more lasting deal.
1982	September 30	October 2	1	Congress passed the required spending bills a day late.
1982	December 17	December 21	3	The Democratic controlled House and the Republican controlled Senate wished to fund jobs, but President Reagan vowed to veto any such legislation. The House also opposed plans to fund the MX missile. The shutdown ended after Congress abandoned their jobs plan, but Reagan was forced to yield on funding for both the MX and Pershing II missiles. He also accepted funding for the Legal Services Corporation, which he wanted abolished, in exchange for higher foreign aid to Israel.
1983	November 10	November 14	3	The Democratic controlled House increased education funding, but cut defense and foreign aid spending, which led to a dispute with President Reagan. Eventually, the House reduced their proposed education funding, and also accepted funding for the MX missile. However, the foreign aid and defense cuts remained, and oil and gas leasing was banned in federal wildlife refuges. Abortion was also prohibited for being paid for with government employee health insurance.
1984	September 30	October 3	2	The House wished to link the budget to both a crime-fighting package President Reagan supported and a water projects package he did not. The Senate additionally tied the budget to a civil rights measure designed to overturn Grove City v. Bell. Reagan proposed a compromise where he abandoned his crime package in exchange for Congress dropping theirs. A deal was not struck, and a three-day spending extension was passed instead.
1984	October 3	October 5	1	The three-day spending extension expired, forcing a shutdown. Congress dropped their proposed water and civil rights packages, while President Reagan kept his crime package. Funding for aid to the Nicaraguan Contras was also passed.
1986	October 16	October 18	1	A dispute over multiple issues between the Democratic controlled House and President Reagan and the Republican Senate forced a shutdown. The Democratic controlled House dropped many of their demands in exchange for a vote on their welfare package, and a concession of the sale of then-government-owned Conrail.
1987	December 18	December 20	1	Democrats, who now controlled both the House and the Senate, opposed funding for the Contras, and wanted the Federal Communications Commission to begin reenforcing the "Fairness Doctrine". They yielded on the "Fairness Doctrine" in exchange for non-lethal aid to the Contras.
1990	October 5	October 9	4	President George H.W. Bush vowed to veto any continuing resolution that was not paired with a deficit reduction package, and did so when one reached his desk. The House failed to override his veto before a shutdown occurred. Congress then passed a continuing resolution with a deficit reduction package that Bush signed to end the shutdown.
1995	November 13	November 19	5	In the shutdown of 1995 and 1996 President Bill Clinton vetoed a continuing resolution passed by the Republican-controlled Congress. A deal was reached allowing for 75 percent funding for four weeks, and Clinton agreed to a seven-year timetable for a balanced budget.
1995	December 16	January 6, 1996	21	Subsequently the Republicans demanded President Clinton propose a budget with the seven-year timetable using Congressional Budget Office numbers, rather than Clinton's Office of Management and Budget numbers. However, Clinton refused. Eventually, Congress and Clinton agreed to pass a compromise budget.
2013	October 1	Ongoing	Ongoing	Due to disagreement regarding inclusion of language delaying the Affordable Care Act,[10] the Government has not passed a funding bill. Negotiations have come to a stop and government shutdown is in progress. See also United States federal government shutdown of 2013.

What's Affected, What's Not

In contrast to a ridiculously overhyped mainstream media summation of what might happen (Please see More Government Shutdown Hype), inquiring minds might wish to consider a more realistic assessment.

If so, please consider What's changing, what's not, in a shutdown.

Here's a brief recap:

Campers in national parks with entrance gates will have to leave, a zoo panda-cam will be turned off, the airline consumer complaint-line will be shut down (but not air traffic control), routine food inspections will be off (but not meat inspections or high-risk inspections), some SNAP services may be shut down (but not school lunch programs), there will be delays in handing disability claims, and Friday's jobs report may or may not be delayed. Servicemen will be paid, homeland security personnel will stay on duty, Fannie Mae will keep on issuing mortgages with a full staff, but the FHA which handles about 15% of mortgages will have a reduced staff.

The critical date when more serious cutbacks would happen is somewhere around October 17 or perhaps October 22 (I have seen both dates). I expect this mess to be resolved by then.

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

Strawberry Fields Forever; Is a Higher Minimum Wage Really the Answer? To What?

Posted: 30 Sep 2013 05:05 PM PDT

Japan Times reports the Latest Robot can Pick Strawberry Fields Forever

Fruits of ingenuity: Agricultural machinery maker Shibuya Seiki and the National Agriculture and Food Research Organization demonstrate a robot that can pick ripe strawberries at the annual Auto-ID and Communication Expo at the Tokyo Big Sight convention center Wednesday. | AFP-JIJI

The device, unveiled Wednesday, can pick a piece of fruit every eight seconds by using three cameras to determine which strawberries are ready to pick. A mechanized arm then darts out to snip each one free and place it into its basket.

The 2-meter robot moves on rails between rows of strawberries, which in Japan are usually grown in elevated greenhouse planters.

It "calculates the degree of ripeness from the color of the strawberry, which it observes with two digital cameras," said Mitsutaka Kurita, an official at Shibuya Seiki, the developer of the machine.

"It also uses the images from the two cameras to calculate the distance from the target, then approaches the strawberry it is aiming at," he said.

A third camera takes a detailed photo of the fruit, which it uses for the final calculation before moving in to snip it.

Strawberry farming is highly labor-intensive, requiring 70 times the work of rice farming and twice that of tomatoes and cucumbers, according to the National Agriculture and Food Research Organization, which helped develop the robot.

The robot will go on sale early next year for about ¥5 million. Strawberries are available all year round in Japan and typically fetch ¥500 for a small basket.

Forever?

In his December 2012 Outlook, Pimco's Bill Gross also wrote Strawberry Fields – Forever? It's worth a recap now.

Whoever succeeds President Obama, the next four years will likely face structural economic headwinds that will frustrate the American public. "Happy days are here again" was the refrain of FDR in the Depression, but the theme song from 2012 and beyond may more closely resemble Strawberry Fields Forever, as Lennon laments "It's getting hard to be someone but it all works out." Why is it so hard to be someone these days, to pay for college, get a good-paying job and retire comfortably? That really was the economic question of the 2012 election towards which very few specifics were applied from either side.

There are numerous structural headwinds that may reduce real growth even below the New Normal 2% rate that Bernanke has just confirmed, not only in the U.S. but in developed economies everywhere.

They are:

1) Debt/Delevering
Developed global economies have too much debt – pure and simple – and as we attempt to resolve the dilemma, the resultant austerity should lower real growth for years to come. There are those that believe in the "Brylcreem" approach to budget balancing – "a little dab'll do ya." Just knock a few percentage points off the deficit/GDP ratio, they claim, and the private sector will miraculously reappear to fill the gap. No such luck after 2–3 years of austerity in Euroland, however. Most of those countries are mired in recession and/or depression.

2) Globalization
Globalization has been an historical growth stimulant, but if it slows, then the caffeine may wear off.

3) Technology
Technology has been a boon to productivity and therefore real economic growth, but it has its shady side. In the past decade, machines and robotics have rather silently replaced humans, as the U.S. and other advanced economies have sought to counter the influence of cheap Asian labor.

Erik Brynjolfsson and Andrew McAfee at MIT have affirmed that workers are losing the race against the machine. Accountants, machinists, medical technicians, even software writers that write the software for "machines" are being displaced without upscaled replacement jobs. Retrain, rehire into higher paying and value-added jobs? That may be the political myth of the modern era. There aren't enough of those jobs. A structurally higher unemployment rate of 7% or more is the feared "whisper" number in Fed circles. Technology may be leading to slower, not faster economic growth despite its productive benefits.

4) Demographics
Demography is destiny, and like cancer, demographic population changes are becoming a silent growth killer. Numerous studies and common sense logic point to the inevitable conclusion that when an economic society exceeds a certain average "age" then demand slows. Typically the dynamic cohort of an economy is its 20 to 55-year-old age group. They are the ones who form households, have families and gain increasing experience and knowhow in their jobs. Now, however, almost all developed economies, including the U.S., are gradually aging and witnessing a larger and larger percentage of their adult population move past the critical 55-year-old mark.

Yen vs. U.S. Dollar

At What Cost Does It Pay to Hire Robots to Pick Berries?

A strawberry fields robot sells for 5 million yen. The cost in US dollars is 5,000,000/98.35 or $50,838.

The minimum wage in the US is $7.25/hour. A picker at minimum wage (counting corporation Social Security contribution of 6.2%) would cost $15,080 + $935, or about $16,015 per year (plus Obamacare, plus benefits, if any).

At minimum wage, the robot would pay for itself in three years (assuming a robot replaced one person working full time for a year).

At a $15.00/hour wage that unions are clamoring for, the robot would pay for itself in half that time.

Is a Higher Minimum Wage Really the Answer? To What?

The higher the minimum wage, the higher the benefit level, and the lower the interest rate (thank Bernanke for that one), the more it pays to hire robots.

The math is simple enough, and it is happening now.

Of course, a single robot may replace more than one human worker, and without griping about minimum wages.

With that, I offer a musical tribute.

Beatles Musical Tribute

Link if video does not play: The Beatles Strawberry Fields Forever

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

Record $217 Billion Corporate Bond Issuance in September; Verizon Leads the Way With Largest Bond Deal Ever at $49 Billion

Posted: 30 Sep 2013 12:53 PM PDT

Corporations are scrambling to raise cash to complete buyouts or simply because they can. Barron's reports September Sees Record $217 Bln Corporate Bond Issuance

September isn't completely finished just yet and it's already produced a record $217 billion in U.S. corporate bond issuance, an 18% bump from the previous single-month record, according to Janney Montgomery Scott. The secondary market fed off the activity of the primary market, translating to $394 billion in total trading, about 70% of which was in investment grade credits.

Five days ago Bloomberg reported Verizon and Sprint Lead Record Month for U.S. Bond Issuance.

Sales of corporate bonds in the U.S. reached an all-time high this month, with phone companies Verizon Communications Inc. and Sprint Corp. leading offerings of about $193.7 billion.

Verizon issued $49 billion on Sept. 11 in the biggest corporate bond deal ever while Overland Park, Kansas-based Sprint raised $6.5 billion on Sept. 4 in the largest high-yield sale since 2008, according to data compiled by Bloomberg. Offerings broke the previous monthly record of $177.3 billion set in September 2012.

Following the Fed's surprise decision to leave the program untouched, yields on the Bank of America Merrill Lynch U.S. Corporate & High Yield Index dropped to a six-week low of 4.05 percent yesterday.

"Issuers are saying 'let's strike now because we have the wind at our back,'" Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. "There's no reason to wait."

Yields from the most creditworthy to the riskiest U.S. borrowers declined from a 15-month high of 4.37 percent on Sept. 5, index data show. Yields touched an unprecedented low of 3.35 percent on May 2.

Largest Bond Deal Ever

Also consider Verizon Raises $49 Billion in Largest Corporate-Bond Sale.

Verizon Communications Inc. (VZ) sold $49 billion of bonds in eight parts in the biggest company debt offering ever.

The second-biggest U.S. telephone carrier issued fixed-rate debt with maturities ranging from three to 30 years as well as two portions of floating-rate securities, according to data compiled by Bloomberg.

The deal, which is about the size of all outstanding obligations of the Slovak Republic, is helping to fund New York-based Verizon's buyout of partner Vodafone Group Plc. (VOD)'s 45 percent stake in the largest and most profitable U.S. wireless carrier, Verizon Wireless. The sale is more than double the previous issuance record of $17 billion from Apple Inc. sold in April.

The 30-year securities, the biggest corporate bond ever issued, traded as high as 107.6 cents on the dollar as of 1:12 p.m. in New York from an issue price of 99.883 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The bubble in corporate bonds is massive. And it's one of the things that has helped lift the stock market as well.

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

Berlusconi Faces Party Revolt; Collapse of Italian Government Hangs in Balance; Rush For Votes is On

Posted: 30 Sep 2013 10:48 AM PDT

Late last week, former prime minister Silvio Berlusconi ordered five ministers to resign from Italy's government. They did, and as a result, current prime minister Enrico Letta's coalition government is on the verge of collapse.

Mr Berlusconi, leader of the centre-right Forza Italia party, said the resignations were a response to the government's decision on Friday to increase in sales tax from next month.

Mr Letta, prime minister, rejected Mr Berlusconi's explanation as an "enormous lie", and called the decision "mad and irresponsible and aimed exclusively at covering up his personal affairs" – a reference to Mr Berlusconi's criminal conviction for tax fraud which is likely to lead to a ban on holding public office.

Beppe Grillo, the comic-activist leader of the movement, who has ruled out supporting a government led by the Democrats, on Saturday night called for snap elections. But his autocratic style of leadership and a purge of several parliamentarians who refused to toe Mr Grillo's line have fuelled speculation that the Democrats might just be able to put the numbers together to form an alternative majority, including centrists led by former prime minister Mario Monti. Equally it is not clear whether all Mr Berlusconi's MPs will remain loyal to their billionaire leader of the past two decades who turns 77 this weekend and is facing a year of house arrest or performing community service.

Mr Napolitano, who holds the constitutional power to dissolve parliament, has repeatedly expressed his opposition to holding snap elections. But if Mr Letta's government were to fall and no alternative majority was in sight, then Italy could be faced with the unprecedented and extremely worrying prospect of staging elections before the end of the year at the risk of derailing the 2014 budget.

Rush For Votes is On

Today the rush for votes is on. Berlusconi, who has a long history of winning close votes may have overplayed his hand this time and Berlusconi faces party revolt over coalition collapse.

"Who is not with me is out," declared a headline in Monday's Il Giornale, a Milan daily owned by the Berlusconi family, as the former prime minister arrived in Rome to ensure party unity ahead of a crucial senate vote expected late on Wednesday.

The numbers game has begun in earnest as Enrico Letta, centre-left prime minister, prepares to address both houses of parliament in a last-ditch effort to keep his government in office after Mr Berlusconi pulled his five ministers out of their five-month-old coalition at the weekend.

Mr Letta's Democrats control the lower house but alone they are 54 votes short of an absolute majority in the senate following last February's deadlocked elections. With the likely support of leftist allies, four recently appointed life senators and 20 centrists led by former prime minister Mario Monti, that deficit is reduced to a dozen or so.

Mr Letta is openly banking on wooing disaffected members of Mr Berlusconi's Forza Italia party after all five ministers perfunctorily ordered to resign by Mr Berlusconi publicly expressed their misgivings and then slammed Il Giornale for running a front-page editorial that came close to accusing them of betrayal.

Although few doubt Mr Berlusconi's powers of persuasion and his tenacity, the prospect of their 77-year-old leader being banned from holding public office and serving one year under house arrest, or performing community service, has reinforced the sense that the centre-right is entering a post-Berlusconi era.

The nannycrats in Brussels do not want snap elections because it opens up all kinds of budget battles.

The vote is going to be close. And the closer it is, the more pressure president Napolitano will apply on a few holdouts to sway the election.

Italy 10-Year Bond Yield

Yield on the 10-year Italian bond spiked 24 basis points today to 4.66% but closed at 4.43%, up only 2 basis points (0.02 percentage points)

Perhaps this is a sign Letta has the votes. We will find out on Wednesday.

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

Spain's Retail Sales Fall 4.2%, 38 Consecutive Negative Months

Posted: 30 Sep 2013 02:57 AM PDT

Somewhere along the line the economic situation in Spain will bottom, but there are no real signs yet that a recovery is underway.

Courtesy of El Confidencial, via translation, please consider Retail sales fell by 4.2% and totaling 38 months in negative

Retail trade sales fell by 4.2% in August compared with the same month in 2012, expanding by 2.5 points year July's decline of 1.7%. The National Statistics Institute (INE) reports 38 months of consecutive annual decreases.

Employment in the retail sector fell by 1.9% in the eighth month of the year, two percentage points less than in July, with declines in all modes of distribution. The largest decreases were scored small chains and department stores, where employment contracted by 4.7% and 3.7%, respectively.

Retail sales fell in August in 15 autonomous communities. The largest annual declines occurred in Castilla y León (-9.2%), Basque Country (-8%) and Aragon (-7.7%), while only Balearics managed to increase its sales, with increases of 3 , 2% and 2.7%, respectively.

Employment in retail trade decreased by 13 communities during the eighth month of 2013, mainly in Madrid (-5.7%), Castilla y Leon (-3.6%) and Murcia (-3.1%). The only the recorded progress Balearic Islands and Valencia, with increases of 1%, 0.9% and 0.7%, respectively, while La Rioja remained unchanged in their occupancy.

The Spanish government has been talking recovery for several months, so where is it?

Eventually there will be a positive month or more, but after this decline, it will hardly constitute "recovery"

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

29.9.13

Mish's Global Economic Trend Analysis

More Government Shutdown Hype

Posted: 29 Sep 2013 03:31 PM PDT

The AP comments How budget showdowns could squeeze the US economy. The story is nearly all hype. Let's take a look.

Q. What exactly will happen within the next days and weeks?

A. The most urgent deadline is for Congress and the White House to agree to keep funding the government after the current budget year ends Monday. Otherwise, some of the government would have to shut down. The House and Senate are considering bills to fund the government past the deadline. But House Republicans want to cut off funding for President Barack Obama's health care law as a condition of passing the spending measure. Senate Democrats and the White House have balked. Unless one side essentially blinks, a partial shutdown of the government will occur.

Mish: That is accurate so far.

Q. What about the federal borrowing cap? First of all, what is it?

A. It's a legal limit on how much debt the government can pile up. The government accumulates debt two ways: It borrows money from investors by issuing Treasurys. And it borrows from itself, mostly from Social Security revenue.

Mish: It's important to note there is no social security fund whatsoever. Every penny and then some has been borrowed and spent. Here comes the hype.

Q. What if Congress can't agree to raise the cap in time?

A. It could be disastrous. No longer authorized to borrow, the government would have to pay its bills only out of the revenue it gets from taxes and fees. This would force the government to immediately slash spending by 32 percent, the Bipartisan Policy Center estimates. Most analysts think the government would delay paying each day's bills until it had accumulated enough money to pay them all.

Even worse, the government could miss interest payments on Treasurys, triggering a first-ever default by the U.S. government. U.S. Treasurys are held by banks, governments and individuals worldwide. Ultimately, a prolonged default could lead to a global financial crisis.

At the same time, Social Security and other benefit payments would be delayed. Government contractors might not be paid and would likely lay off workers. Paychecks for military personnel could be delayed.

The government actually reached its borrowing limit back in May. Since then, the Treasury has taken a variety of measures to avoid exceeding it. But the cash generated by those measures will run out sometime between Oct. 22 and Oct. 31, the nonpartisan Congressional Budget Office estimates.

The date isn't exact because it isn't possible to foresee precisely how much revenue the government will receive and when.

Mish: The following AP statement is preposterous "Most analysts think the government would delay paying each day's bills until it had accumulated enough money to pay them all."

I am not aware of any analysts who have stated the government would delay paying all bills until it could pay them all.

Moreover, the suggestion that "the government could miss interest payments on Treasurys, triggering a first-ever default by the U.S. government" is equally nonsensical. US treasuries would be the last thing that would go unpaid.

Q. Will the economy escape harm if both deadlines are met?

A. Probably. But even brinksmanship can have consequences. The last major fight over the borrowing cap, in the summer of 2011, wasn't resolved until hours before the deadline. Even though the deadline was met, Standard & Poor's issued the first-ever downgrade of long-term U.S. credit. That, in turn, led to a 635-point plunge in the Dow Jones industrial average the next day.

In August that year, consumer confidence plummeted to its lowest level since April 2009, when the economy was in recession. Spending at retail stores weakened.

"The fallout nearly caused the fragile economic recovery to stall," says Mark Zandi, chief economist at Moody's Analytics.

Mish: The report goes on and on blaming everything but hornet attacks on what happened in 2009. I call it's ridiculous speculation at best. And the hype continues ...

Q. All this sounds pretty scary. Why aren't financial markets panicking?

A. Stock prices have fallen in six of the past seven days, partly because of the looming deadlines. But the price declines have been modest. Many investors likely feel they have seen this movie before and know how it ends: with another last-minute deal.

"After several rounds of fiscal brinksmanship ... markets may be somewhat desensitized to the headlines," Alec Phillips, an economist at Goldman Sachs, wrote in a note to clients.

Mish: It's not scary at all, but the AP sure did its best to make it sound that way.

A partial shutdown would hardly be disastrous. In fact I welcome such a shutdown as noted in Government Shutdown is a Fantastic Idea.

Fantastic Idea

If you think that a government shutdown is a fantastic idea (I sure do), then please contact your elected representatives and let them know.

But don't expect anything to come of it. After all, the money will last until the end of October, and that is a long time in politics.

Of course, to keep the government running now, the treasury is already borrowing against Social Security funds that are already spent! That's how absurd the setup is.

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

Giant Deadly Hornets Kill Dozens In China; Venom Dissolves Flesh and they Can Spray It

Posted: 29 Sep 2013 11:22 AM PDT

I have received hundreds of emails regarding my post Attack of the "Digger Bees".

Many suggested getting an EpiPen® (epinephrine) Auto-Injector‎ for Liz and we will do that.

Many pointed out that "digger bees" are not bees but rather wasps. That is something I knew but did not mention in my post.

I responded to some individuals that I like bees, and even have a "humble bumble" home for bumblebees, and I put out nests for mason bees.

With that backdrop, some of you may be interested in Giant Deadly Hornets Kill Dozens And Injure Hundreds In China.

Deadly hornets have killed at least 28 people in China following a string of recent attacks that have injured hundreds.

A number of tragic cases have been reported, including a mother and son who died after being surrounded by a killer swarm.

A man who tried to help them suffered kidney failure after the giant hornets chased him for 200 metres and stung him repeatedly on the head and legs, The Mirror reported.

In the city of Ankang alone, 18 people have died from the stings, while a further 212 people have been injured health official Zhou Yuanhong told Associated Press.

Experts are blaming the vicious attacks on Asian giant hornets, which terrifyingly grow up to 5cm in length. The mammoth insects also wield a stinger in excess of 6mm long.

The natural predators have jaws powerful enough to chew through regular protective bee suits and their venom, which they can spray, dissolves human flesh.

If their venom lands in the eyes, the eye tissue will melt, according to a National Geographic documentary.

Japanese Hornet Documentary

The documentary is a lengthy 45 minutes, but some may find it interesting. Link if video above does not play: Japanese Hornet Documentary.

Those giant "hornets" look like giant yellow-jackets to me. But yellow-jackets and paper wasps look alike. About.Com explains differences in a report on Wasps, Yellowjackets, and Hornets.

The vast majority of bees and wasps in our world pose no threat to people. Most prefer to go about their business, parasitizing or preying on other insects. The social wasps of the family Vespidae, however, can be a downright nuisance. Vespid wasps include paper wasps, yellowjackets, and hornets, all of which will defend their homes vigorously should we disturb them. Worse yet, they have a tendency to build their homes in the places we like to spend our time, so there's a good chance you'll encounter them.

Paper wasps, yellowjackets, and hornets are all masters of papermaking. In spring, the queen constructs a new nest by gathering wood fibers and turning them into a papery pulp, from which she builds a home. Paper wasps build open, umbrella-shaped nests, often found suspended from eaves or window casings on the outside of your home. Hornets are famous for their massive, enclosed nests which can be seen hanging from tree branches or other sturdy perches. Yellowjackets also make enclosed nests, but theirs are found below ground. Care should be taken to check for yellowjacket nests before using string trimmers or lawn mowers.

All the paper wasps, yellowjackets, and hornets produce new colonies each year in temperate climates; only the mated queens survive the cold winter months, tucked away in sheltered places. The queen emerges in spring, chooses a nest site, and builds a small nest in which she lays the first eggs. Once the first generation of workers matures, these wasps will expand the nest for succeeding generations. In late summer or fall, the old queen dies, and a new one mates before her siblings die off. The old nest usually degrades over the winter.

Behavioral Differences Between Wasps, Yellowjackets, and Hornets

True Bees

The above table neglected bees.

Honeybees, bumblebees, and mason bees, etc., go after pollen. The things you see flying around at picnics, garbage cans, and especially sweets and sodas are yellow-jackets. They are an outright nuisance, and can be deadly.

As far as "dissolving flesh" goes, I can actually attest to that. On one hand I was stung three times and skin was gone in all three places. Other stings were simple swollen and itchy for over a week.

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

28.9.13

Mish's Global Economic Trend Analysis

Is the U.S. Headed in the Right Direction?
Future of Medicine: Meet Sedasys - Your New Robot Anesthesiologist
The "Right Value" of the Indian Rupee
Government Shutdown is a Fantastic Idea

Is the U.S. Headed in the Right Direction?

Posted: 28 Sep 2013 08:33 PM PDT

Polling Report has an interesting data series on Direction of the Country.

Here is the question: "In general, do you think things in the nation are headed in the right direction, or have they gotten off on the wrong track?"

The polls were conducted by Bloomberg, CBS News/New York Times, NBC News/Wall Street Journal, ABC News/Washington Post, Gallup, Pew, and other polling agencies.

The Bloomberg National Poll (show below) was conducted by Selzer & Company. Sept. 20-23, 2013. Sample size was 1,000 adults nationwide. The margin of error is ± 3.1.

To produce the table and graph below, I reordered the rows in date chronological order so that the most recent recent dates are last. These results are from Bloomberg polls, with dates as shown.

Click on the link above to see results from other polling agencies (in table, not chart form).

Date	Right Direction %	Wrong Track %	Unsure %
9/10-14/09	40	52	8
12/3-7/09	32	59	9
3/19-22/10	34	58	8
7/9-12/10	31	63	6
10/7-10/10	31	64	5
12/4-7/10	27	66	7
3/4-7/11	28	63	9
6/17-20/11	26	66	8
6/15-18/12	31	62	7
9/21-24/12	33	60	7
12/7-10/12	38	55	7
2/15-18/13	37	54	9
5/31-6/3/13	32	60	8
9/20-23/13	25	68	7

The Wrong Track

click on chart for sharper image

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

Future of Medicine: Meet Sedasys - Your New Robot Anesthesiologist

Posted: 28 Sep 2013 11:55 AM PDT

Johnson & Johnson's new sedation machine promises cheaper colonoscopies, but anesthesiologists, among the highest paid physicians, don't like it one bit. It's yet another case of robots replacing humans.

Please consider the New York Times article Robots vs. Anesthesiologists.

Anesthesiologists, who are among the highest-paid physicians, have long fought people in health care who target their specialty to curb costs. Now the doctors are confronting a different kind of foe: machines.

A new system called Sedasys, made by Johnson & Johnson, would automate the sedation of many patients undergoing colon-cancer screenings called colonoscopies. That could take anesthesiologists out of the room, eliminating a big source of income for the doctors. More than $1 billion is spent each year sedating patients undergoing otherwise painful colonoscopies, according to a RAND Corp. study that J&J sponsored.

An anesthesiologist's involvement typically adds $600 to $2,000 to the procedure's cost, according to a research letter published online by JAMA Internal Medicine in July.

By contrast, Sedasys would cost about $150 a procedure, according to people familiar with J&J's pricing plans. Hospitals and clinics won't buy the machines, instead paying a fee each time they use the device, these people say. The $150 would cover maintenance and all the costs of performing the procedure except the sedating drug used, which would add a few dollars, one of the people says.

As J&J prepares for a limited rollout, many anesthesiologists are sounding the alarm. They say the machine could endanger some patients because it uses a powerful drug known as propofol that could be used improperly. They also worry that if the anesthesiologist isn't in the room, he might not be able to get to an emergency fast enough to prevent harm.

During testing, none of the 1,700 patients sedated by Sedasys required rescuing, says Steven Shafer, editor in chief of the medical journal Anesthesia & Analgesia, who helped J&J develop the machine. He says that the machine's use is limited to healthy patients who aren't at risk for problems and that the machine has mechanisms to monitor patients and make rapid adjustments, such as boosting oxygen.

"These are all things an anesthesiologist would do," says Dr. Shafer, a professor of anesthesiology at Stanford University.

J&J is also developing a device that could cut anesthesiologists out of another popular procedure: surgery to insert tubes into the ears of children seeking relief from infections. J&J hopes that ear, nose and throat doctors will be able to insert its device with the push of a button, avoiding having to put the kids under anesthesia in a hospital.

Meet Sedasys - Your New Anesthesiologist

The median annual salary of Anesthesiologists is $286,000. That is ninth among all physicians and third among nonsurgeons surveyed by PayScale.com, a salary data and software firm.

Those costs are about to change. Here is a picture of Sedasys, who bills at $150 per use.

The image is from the Wall Street Journal report J&J's Sedasys Puts Challenge to Anesthesiologists

What cannot go on won't. And two of the things that cannot go on are spiraling education costs and spiraling healthcare costs.

I welcome these changes and assure you that more are coming. It's a good thing, but current Anesthesiologists won't see it that way.

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

The "Right Value" of the Indian Rupee

Posted: 28 Sep 2013 10:22 AM PDT

Reader Manish, from India, pinged me today regarding a statement made by India's Finance Minister that the Right Value of Rupee is 59-60 to a Dollar

Asserting that the right value of rupee is 59-60 to a dollar, Finance Minister P Chidambaram today said that government will make all efforts, including extending priority sector status to export credit, to boost shipments. "We think that based on the REER (real effective exchange rate) value, that (59-60) is the right level of the rupee and it should not overshoot its mark.

Manish writes ...

Hello Mish

The Indian Govt knows the 'right' value of the rupee. How? Maybe it's because the Indian Prime Minister is one of the world's foremost economists. Perhaps it's because our brilliant Harvard educated Finance Minister threw a dart on a board.

Anyway, I thought the idea was funny and thought you would too.

Manish

The "Right" Value in Pictures

Foolish Proclamations

Bureaucratic fools make proclamations based along the lines of what they want to see, even though they have no idea of the economic forces in play.

The notion that India's Finance Minister knows the true value of the Rupee is idiotic, and Manish knew in advance that I would agree.

Here's the deal: If governments worldwide would stop printing money and stop manipulating interest rates, we would find out in a flash what the true exchange rates should be.

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

Government Shutdown is a Fantastic Idea

Posted: 28 Sep 2013 12:06 AM PDT

Looking for a reason to support a government shutdown? If so, please consider Obama Stripped to Skeleton Staff in a Government Shutdown.

A U.S. government shutdown means President Barack Obama will have fewer people to cook meals, do the laundry, clean the floors or change the light bulbs, according to a White House contingency plan.

About three-fourths of president's 1,701-person staff would be sent home. The national security team would be cut back, fewer economists would be tracking the economy and there wouldn't be as many budget officials to track spending.

Of the total, 438 people work directly for the president. Under a shutdown, 129 could continue working, according to the contingency plan.

Biden, who has a staff of 24, would have had to make do with 12.

Obama's national security staff of 66 would be cut to 42. Similar staff cuts would be imposed at the White House Office of Management and Budget, the Council on Environmental Quality, the Council of Economic Advisers and the Office of National Drug Control Policy, which are all part of the president's executive office.

Fantastic Idea

If you think that a government shutdown is a fantastic idea (I sure do), then please contact your elected representatives and let them know.

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

27.9.13

Mish's Global Economic Trend Analysis

Bank Robbers and Middle-Class Tax Hikes

Posted: 27 Sep 2013 11:57 AM PDT

When asked why he robbed banks, William "Willie" Sutton allegedly replied "because that's where the money is." The story, however, is false.

Although he stole an estimated $2 million over his forty-year career, Horton denied ever saying that. A journalist made it up. His life was quite interesting though, including a stint of commercials for MasterCard, after his parole in 1969.

For further reading, please see some amusing Willie Sutton commentary on Snopes.

For the connection between bank robbery and middle class tax hikes, please consider Congress Dawdles on America's Unsustainable Path by Bloomberg writer Caroline Baum.

Economist Herbert Stein once said, "If something cannot go on forever, it will stop." We're still waiting. As Congress debates yet another short-term continuing resolution to avert a federal government shutdown down on Oct. 1, a grand bargain isn't even on the agenda. The debate that relates to the budget is over the automatic spending cuts to discretionary programs implemented in March. Spending on everything except health-care programs, Social Security and interest on the debt is on track shrink to 7 percent of GDP -- the smallest share since the late 1930s -- from a 40-year average of 11 percent, Elmendorf said. The number of people eligible for Social Security will rise by a third in the next 10 years.

Neither party wants to face reality: Middle-class taxes will have to go up because that's where the revenue is.

The Third Rail

The problem is Republicans refuse to cut defense spending, and Democrats refuse to cut entitlements. Little else matters except scrapping entire programs and neither Democrats nor Republicans seem willing.

Touching social security is considered to be the "third rail" by both parties. In case you do not understand the term, the "third rail" on Chicago's elevated "L" line (and no doubt other electric lines) is the hot one. Touch it and you will be electrocuted.

Republicans had a wonderful chance right before the last presidential election to hold Obama to his pledge to make "tough choices". Instead, they wasted the opportunity with absurd bluffs on shutting down the government.

The only reason we see trivial reductions in increases (not actual cuts), is because of sequestration. Even then, Republicans objected to miniscule cutbacks in the rate of increases in military spending.

Congress vs. Willie Horton

This brings us back to the beginning. What can't go on won't, but "we're still waiting". Yet, I see no reason to believe Republicans will give in on defense cuts and no reason to believe Democrats will cut entitlements.

So, if the setup is truly unsustainable, what's it going to be? The answer is middle class tax hikes, because "that's where the money is".

Willie Sutton was honest in his denial. Don't expect the same from Congress or state legislatures, especially Democratic strongholds like California and Illinois.

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

IMF Proposes Eurozone Fiscal Union, Banking Union, Harmonized Employment, Common Unemployment Scheme, Firewall Tax

Posted: 27 Sep 2013 11:28 AM PDT

In the biggest nannycrat proposal ever, the IMF announced it's vision for the United States of Europe (without using that name to describe the proposal).

Via translation from El Pais, please consider IMF suggests common unemployment benefits for the eurozone.

The IMF proposes more discipline, more fiscal integration, and the creation of a common unemployment benefit and risk sharing scheme to help the club of countries that have experienced damage in this crisis currency.

Fund staff argues that ommon fiscal governance, along with the banking union, are necessary to offset the "weaknesses in the architecture" of the eurozone, reinforce the club of 17 to future crises. In addition, the study argues that the most urgent step to acquire banking union goes through a firewall overall tax.

The pillars of a fiscal union , according to IMF staff, go through a series of mechanisms to pool the risks and avoid further costly bailouts, always subject to greater fiscal discipline. The tighter control over public finances of each country, which occur revenues and expenditures, is the condition of these forward-looking statements, both from the point of view of the IMF and Brussels.

Obedience and monitoring standards would allow the creation of a liquidity fund for troubled countries including a common unemployment benefit or "rainy day fund".

This fund would be nurtured with an amount equivalent to between 1.5% and 2% of the GDP of member countries, which is in line for a fund with Germany for its most troubled regions.

Harmonisation of Employment

But there is much work ahead for something like a common shutdown could crystallize into a eurozone labor markets as diverse. "A common insurance scheme would require a minimum of harmonization in taxation of employment plus pension rights, which would be a positive step towards a single labor market," the report warns.

The fiscal integration also requires a kind of Eurobonds or form of joint financing, led by the center of power and backed by global revenue, which would be possible once common tax structure is already underway.

A single monitoring mechanism should complement a firm commitment to establish a strong firewall " to anchor confidence in the banking system. " And this will require common money too: "While some insurance against banking fiascos be funded by the industry itself, a common fund for recapitalization, liquidation and deposit guarantee would reduce the risk of infection."

The True Vision - A United State of Europe

That is the most comprehensive vision for the United States of Europe we have seen yet. And I propose an immediate up-or-down vote, right now, in all of the 17 member countries.

I am quite sure the unemployed in Greece, Spain, Portugal, and Italy will be 100% in favor of a common unemployment scheme, especially if Germany would foot the bill. And France would always vote for more taxes as a matter of course, the bigger the tax hikes the better.

Common work rules would have to be along the lines of the French work rules of course. And who could possibly be against common pension schemes at the expense of Germany and the Northern European countries?

The more I think about this the more perfect the proposal is. It is complete with every nuance the nannycrats want. So let's not delay. We need an up-or-down vote right now, not by the governments of each country, but rather by the citizens of each county who can decide if they like all of the proposed benefits and taxes necessary to make the United States of Europe work.

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

26.9.13

Mish's Global Economic Trend Analysis

Italy on Verge of Downgrade to Junk; Silvio Berlusconi’s Supporters Threaten Mass Resignation from Parliament
Bulls and Bears Debate China: Property Bubble Expands Again; GDP Growth Picks Up; Economic Recovery Underway? No Says Michael Pettis
Unsold Merchandise Piles Up at Wal-Mart; Cuts in Orders Will Follow

Italy on Verge of Downgrade to Junk; Silvio Berlusconi’s Supporters Threaten Mass Resignation from Parliament

Posted: 26 Sep 2013 08:56 PM PDT

Silvio Berlusconi supporters threatened to resign form Italy's parliament en masse today, even though a week ago Berlusconi himself said he would not end the coalition. To someone in the US, such a ploy makes little sense, because as soon as you resign, you lose your vote.

Parliamentary rules described below suggest there may be some merit in the idea, but I still think a coalition collapse by ordinary means (withdrawing support) is more likely. Regardless, one way or another, the threat of a coalition collapse is back in the picture.

In response to the threat of a government collapse Standard & Poor's warned of a further downgrade "by one notch or more" if Italy could not demonstrate "institutional and governance effectiveness". Italian sovereign debt is just two notches above junk.

The Financial Times reports Italy PM Letta returns to resignation threat from centre-right

Fresh from assuring potential Wall Street investors that Italy was "young, virtuous and credible", prime minister Enrico Letta was heading back to Rome late on Thursday to save his coalition government from collapse after Silvio Berlusconi's supporters threatened a mass resignation from parliament.

The 76-year-old former prime minister – convicted last month for tax fraud and also appealing against a separate conviction for paying for sex with an underage prostitute – threw the government into chaos on Wednesday night when his centre-right Forza Italia party warned it would quit parliament if a senate committee voted to expel its leader from the upper house next month.

As Mr Letta has repeatedly warned, Italy can ill afford higher costs in servicing its €2tn of public debt, with its budget deficit for 2013 currently forecast to overshoot the 3 per cent limit agreed with the EU.

A mass resignation from parliament would cause legislative chaos just when the government must seek approval for its 2014 state budget. Parliamentary procedures dictate that each resignation must be voted on individually, a process that would have to be repeated if deputies nominated to replace them also resigned.

Renato Brunetta, lower house leader for Forza Italia, told the Financial Times he was already collecting resignation signatures from the party's 188 MPs. He declined to say how many he had received so far.

With the head of state adamantly opposed to dissolving parliament, politicians are scrutinising whether Mr Letta could find the 30 or so votes he would need in the senate to form an alternative majority. Opinion polls show that elections would lead to a repeat of February's hung parliament, with the anti-establishment Five Star Movement once again holding the balance of power.

Time Running Out For Letta Coalition

Even though Berlusconi is prone to change his mind frequently, and his supporters make threats they do not carry out, it appears this time, one way or another, the Letta coalition is nearly finished.

Italy's president, Mr. Napolitano, said he would not succumb to pressure to dissolve parliament and call new elections, but what other choice can he make, unless Letta picks up votes from Beppe Grillos's 5-Star Movement?

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

Bulls and Bears Debate China: Property Bubble Expands Again; GDP Growth Picks Up; Economic Recovery Underway? No Says Michael Pettis

Posted: 26 Sep 2013 12:24 PM PDT

Bulls think China is on the mend. I don't and neither does Michael Pettis at China Financial Markets.

Bullish Arguments

1. Property Prices Rising

The Financial Times reports China house price surge raises prospect of steps to cool market

Prices for new homes in Beijing, Shanghai and Shenzhen – the country's three largest cities – surged 18-19 per cent year-on-year .

The sharp increase in prices in the biggest cities is the latest evidence of a full recovery in the Chinese property market after it was smothered by several tightening measures this year. A series of land sales have set record prices since August, with real estate developers ramping up their competition for the best plots in the biggest cities.

2. China Rich in Reserves

The South China Post reports US meltdown shadow looms large over China but observers believe Beijing could use its massive foreign reserves to save financial system if shadow banking activity spirals out of control.

Mervyn Davies, a former head of Standard Chartered and British government minister, said: "China is very rich in reserves … At the end of the day, the [Chinese] banks do need recapitalising, which is not a huge challenge to them because the government can recapitalise the banks."

Echoing Davies' view, Hang Seng Bank's executive director Andrew Fung said: "Underlying assets of shadow banking on the mainland are very different from US subprime assets. It is more liquidity risk rather than credit risk. I do not see the risk of a big bank failure in China."

3. Hidden Debt Doesn't Matter

4. China's GDP Growth Picking Up

Pettis Replies ...

Pettis On Property Prices

I expected real estate prices to keep rising as long as credit is so freely available, but it is unclear to me why real estate prices have risen so dramatically in the past couple of months. Part of it may simply be that few Chinese see any real alternative to real estate as a way of saving. Deposit rates are still low and the stock market has been uncooperative.

We are often told that a fall in housing prices won't affect the real economy in China much because, unlike in the US, the amount of real estate financed by mortgages is quite low. This may well be true, although much of the leverage behind residential real estate consists of borrowing from friends and family and so is not recorded.

With 60% of household wealth consisting of real estate, I find it hard to believe that rising prices have not goosed consumption to levels higher than it otherwise would have been. If this is true, it is hard to imagine that falling prices might not have the opposite effect on household consumption, especially if prices drop anywhere near the same extent that they have dropped after other housing bubbles. It is premature, in other words, to write off the impact of falling housing prices on consumer behavior simply because Chinese housing purchases are not structured in the same way that American or European housing purchases are.

Pettis on Reserves

I disagree very strongly with Mervyn Davies' claim that because the PBoC is "very rich in reserves" it will not be much of a challenge to recapitalize the banks. China's reserves only matter to its credit position if China faced a problem of external debt.

It doesn't, and so the amount of reserves are almost wholly irrelevant, Because this argument seems to be reviving, it makes sense, I think, to repeat why central bank reserves cannot in any way help China resolve the crisis. I will leave aside the problems of whether the reserves are transferred in the form of foreign currency, in which case it does little to satisfy domestic RMB-denominated funding needs, or in RMB, in which case the PBoC must stop buying dollars in order to hold down the value of the RMB and in fact must sell dollars, which would cause the value of the RMB to soar, thereby wiping out the export sector in China.

A much more important objection is that the idea that reserves can be used to clean up the banks (or anything else, for that matter) is based on a misunderstanding about how the reserves were accumulated in the first place. There seems to be a still-widespread perception that PBoC reserves represent a hoard of unencumbered savings that the PBoC has somehow managed to collect.

But of course they are not. The PBoC has been forced to buy the reserves as a function of its intervention to manage the value of the RMB. And as they were forced to buy the reserves, the PBoC had to fund the purchases, which it did by borrowing RMB in the domestic market.

This means that the foreign currency reserves are simply the asset side of a balance sheet against which there are liabilities. What is more, remember that the RMB has appreciated by more than 30% since July, 2005, so that the value of the assets has dropped in RMB terms even as the value of the liabilities has remained the same, and this has been exacerbated by the lower interest rate the PBoC currently earns on its assets than the interest rate it pays on much of its liabilities.

In fact there have been rumors for years that the PBoC would technically be insolvent if its assets and liabilities were correctly marked, but whether or not this is true, any transfer of foreign currency reserves to bail out Chinese banks would simply represent a reduction of PBoC assets with no corresponding reduction in liabilities. The net liabilities of the PBoC, in other words, would rise by exactly the amount of the transfer. Because the liabilities of the PBoC are presumed to be the liabilities of the central government, the net effect of using the reserves to recapitalize the banks is identical to having the central government borrow money to recapitalize the banks.

Bailing out the banks, it turns out, is conceptually no different than transferring debt from the banks to the central government. China can handle bad debts in the banking system, in other words, by transferring the net obligations from the banks to the central government, and the large hoard of reserves held by the PBoC does not make it any easier for China can resolve any future debt problems. In fact if anything it should remind us that when we are trying to calculate the total amount of debt the central government owes, the total should include any net liabilities of the PBoC, and that these net liabilities will increase by 1% of GDP every time the RMB strengthens against the dollar by 2%.

Pettis on Hidden Debt

I want to address another related fallacy that pops up a surprisingly large number of times when I discuss the net liabilities of the central bank. I am often told that because these liabilities are hidden in the central bank books, and so no one really knows how much debt the PBoC adds to the central government's debt burden, they really shouldn't matter in our calculations.

Even those who do not understand why this reasoning is incorrect should know that it must obviously be incorrect. If it weren't, any country could solve all of its debt problems merely by borrowing in a non-transparent way through the central bank. As the Greeks and the Italians most recently showed us, non-transparent borrowing may cause us to recognize a problems later than we otherwise would have, but it cannot solve the problem.

The reason is because in any case debt must either be serviced or the borrower must default. If the assets which were funded by the debt do not create enough wealth with which to service the debt, and if the borrower does not default, then by definition there must have been a transfer from some other entity to cover the difference between the debt servicing cost and the returns on the asset.

Pettis on GDP

Debt always matters because it must always be paid for by someone – even if the borrower defaults, of course, the debt is simply "paid" by the lender. This is why the fact that debt in China seems to be growing much faster than debt-servicing capacity implies slower growth in the future.

And debt is almost certainly rising faster than debt-servicing capacity. This is the message of the most recent third quarter growth numbers. A number of sell-side analysts have taken the recent surge in growth as indicating that Chinese growth has bottomed out and that China is in the process of successfully managing the rebalancing. Many of them have once again raised their growth forecasts, after dropping them in the first and second quarters in response to slowing growth.

This can only indicate that they do not understand the rebalancing process. China can get as much growth as it likes as long as it has borrowing capacity.

There is nothing in the most recent batch of numbers to suggest that anything at all has changed in the Chinese economy. GDP growth is up because credit is up even more, and this is confirmed by reports that the surge on growth has been pretty narrowly limited to heavy industry and the state-led sectors, which tend to have the easiest access to credit and the least concern about the profitability of investment. Until Beijing is truly able to get control over credit expansion, and to tolerate the much slower GDP growth that will inevitably result, growth rates will stay in the 7-8% range and fluctuations within that range will mean very little.

China Shadow Banking Returns as Growth Rebound Adds Risks

Here's a link I picked up from Pettis in his email: China Shadow Banking Returns as Growth Rebound Adds Risks

China's broadest measure of new credit almost doubled in August from the previous month in a sign leaders are committed to meeting economic goals even at the cost of adding financial risks.

The first pickup in credit growth after an unprecedented four straight declines, the fastest gain in industrial output in 17 months and above-forecast exports signal better odds that Premier Li Keqiang will achieve his 7.5 percent expansion target this year. The data also mark a resurgence in shadow banking that poses risks for the financial system after a record credit boom in the first quarter.

Shadow lending, which allows banks to bypass controls and capital requirements, is flourishing in China because an estimated 97 percent of the nation's 42 million small businesses can't get bank loans, according to Citic Securities Co. The industry may be valued at 36 trillion yuan, or 69 percent of gross domestic product, JPMorgan estimated in May.

Bankers' acceptance bills and entrusted loans, two of the categories within aggregate financing, are "highly correlated with shadow banking activities," said Hu Yifan, chief economist at Haitong International Securities Group in Hong Kong.

Yesterday's figures showed entrusted loans of 293.8 billion yuan in August, a record in data going back to 2002, after 192.7 billion yuan in July. Bankers' acceptance bills were 304.5 billion yuan in August, compared to a 178.3 billion yuan decline in July.

So why is China's GDP growth rising again? The simple answer is shadow banking has revived. Is it sustainable? Of course not.

Debt is growing faster than it can possibly be paid back. In his email Pettis stated that he felt like a broken record, repeating the same story over and over again.

I don't mind, because it's clear that people have not gotten the message, especially in regards to using alleged reserves. Please re-read that section until you understand it.

One further point that Pettis has mentioned in the past but did not this time is that even if China could use reserves to stockpile things like copper, it would be horrendous pro-cyclical policy.

Balancing requires a slowdown in State-Owned-Enterprises as well as a slowdown in housing, roads, airports, many of which are empty or unused. Stockpiling goods when China's infrastructure is massively overbuilt, and driving up the price all the while, would not be a smart thing to do.

The Great Rebalancing

Michael Pettis taught me much I know about global trade.

I highly recommend Michael Pettis' his book "The Great Rebalancing".

The book covers global trade issues with a focus on current events in Asia, Europe, the United States, and the commodity producing nations.

Read the book and you will see that much of the "common wisdom" espoused by others on global trade issues is not "wisdom" at all.

In a chapter called "The Exorbitant Burden", Pettis debunks the nearly universal misconception that the United States receives a great benefit from having the world's reserve currency. That chapter alone, is well worth the price of many books.

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

Unsold Merchandise Piles Up at Wal-Mart; Cuts in Orders Will Follow

Posted: 26 Sep 2013 10:50 AM PDT

What happens at Wal-Mart this holiday season will likely happen at many prominent retailers.

The Wal-Mart story is not pretty: Wal-Mart Cutting Orders as Unsold Merchandise Piles Up.

Wal-Mart Stores Inc. (WMT) is cutting orders it places with suppliers this quarter and next to address rising inventory the company flagged in last month's earnings report.

Last week, an ordering manager at the company's Bentonville, Arkansas, headquarters described the pullback in an e-mail to a supplier, who said others got similar messages. "We are looking at reducing inventory for Q3 and Q4," said the Sept. 17 e-mail, which was reviewed by Bloomberg News.

Inventory Goal

Wal-Mart has said in filings that its "corporate goal" is "growing inventory at or less than the rate of net sales growth." For its U.S. segment, the company has hit that goal only twice in the past 10 quarters, according to data compiled by Bloomberg News. The last time was four quarters ago.

In the second quarter, U.S. inventory grew at 6.9 percent and U.S. sales grew at about 2 percent. In the same quarter a year earlier, inventory increased 3.6 percent while sales rose 3.8 percent. Target Corp. (TGT) stores and Dollar General Corp. (DG) held their second-quarter inventory gains to about twice the rate of sales growth versus triple the pace at Wal-Mart.

Inventory Increase

Bill Simon, chief executive officer of Wal-Mart's U.S. division, said last month that inventory increased due to "softer than anticipated sales trends, the delay in summer weather and timing shifts in the receipt of merchandise for back-to-school and the upcoming holiday season."

Even as Wal-Mart seeks to clear its inventory, holiday merchandise is showing up early at stores in states including Illinois, Texas, California and Colorado, according to workers at those locations. Some of them said there is already insufficient room for existing merchandise, forcing them to put the seasonal goods out as soon as they arrive -- about a month earlier than usual.

At a store in Boothwyn, Pennsylvania, on Sept. 14, pallets of Christmas tree lights sat in the middle of an aisle beside dozens of unopened cardboard boxes of Halloween decorations. A 28-inch light-up penguin was being sold for $19.98 beside plastic jack-o-lanterns selling for $1.

It's a similar scene in Hurst, Texas, said Donna Kennedy-Medford, who has worked at the store for two years.

"This year, there's more earlier than last year," she said of the Christmas items. "We have some of it in the back, and some of it has been put out on the floor in a haphazard fashion."

Wal-Mart is already struggling to keep shelves stocked, in part because stores lack the manpower to move items to sales floors from back rooms and shipping containers in parking lots. The U.S. workforce at Wal-Mart's namesake and Sam's Club warehouse chains fell by about 120,000 employees in the past five years, to about 1.3 million, according to regulatory filings. In that time, the company has added more than 500 U.S. stores through July 31.

Seasonal Merchandise

Because back rooms are often full, seasonal merchandise such as Christmas decorations sometimes must be moved directly to the sales floor, said Barbara Gertz, who has worked as an overnight stocker at the Wal-Mart store in Aurora, Colorado, for almost five years.

"The aisles in the back room are so backed up with stuff," she said. "We brought three pallets of Christmas trees out to the garden center. We usually do that in mid-October. We're filling it up pretty quick for only being mid-September."

Unloading Sweatpants

That's the case at Kennedy-Medford's store in Texas, where kids' clothes have sold for as little as 25 cents, she said.

"Just to get rid of things, a lot of stuff is going for a dollar," she said. "Sweatpants that used to be $8.96 are going for $2 just so we can unload them."

Other Issues

Wal-Mart clearly has issues beyond inventory control.

You can't help but laugh at this: "A 28-inch light-up penguin was being sold for $19.98 beside plastic jack-o-lanterns selling for $1."

Rather than send a message "penguins will go for $1.00 in January", Wal-Mart would be better of dumping them in the trash bin (where they arguably belonged even in October).

Nonetheless, Wal-Mart said it was adding 35,000 permanent workers and increasing the hours of an additional 35,000, as well as hiring 55,000 seasonal workers.

That seems like a lot of hiring for a company struggling with sales.

Some of Wal-Mart's problems are undoubtedly related to under-staffing, but most of the problems appear to be weak sales. And that problem can hardly be unique to Walmart.

Tough Holiday Season?

Here's the curious statement "U.S. chains are already bracing for a tough holiday season, when sales are projected to rise 2.4 percent, the smallest gain since 2009, according to ShopperTrak"

An allegedly "tough" holiday season is supposed to have 2.4% growth?!

I will take the under. But if sales do go up by that much, then massive as well as profitless unloading of junk at bargain prices will be the reason.

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