Mish's Global Economic Trend Analysis

Portuguese Debt About to Implode? What About Spain?
Huge Miss in ISM; Largest Decline in New Orders in 4 Years; Weather to Blame?
Loan Rates in Argentina Reach 65% Annually; Is 65% a Good Rate?
Why are Taxpayers Subsidizing Big Mac Buyers?

Portuguese Debt About to Implode? What About Spain?

Posted: 03 Feb 2014 07:22 PM PST

Is Portugal about ready to implode?

That's what one hedge fund manager believes. For now, interest rate action suggests otherwise.

We will explore the case for implosion but first consider this chart of 10-year sovereign bonds.

Portugal 10-Year Sovereign Debt Yield

One certainly could have made a fortune plowing into 10-year Portuguese bonds. Does that mean Portugal is out of the woods?

I don't think so, and neither does Tortus Capital hedge fund manager David Salanic.

The New York times describes the setup in A Lonely Bet Against Portugal's Debt, but I am more interested in Tortus Capital's thesis.

Salanic maintains the status quo is not sustainable. Here is his overall thesis.

Portugal Debt Implosion Thesis

The Troika Program is off track. Portuguese bondholders are at the mercy of that market.
Portugal has excessive public and private debt financed from abroad. Portugal can neither grow nor devalue that debt.
Austerity fatigue has set in as the people carry the full burden of the adjustment.
Corporates are defaulting en masse and cannot sustain their debt burdens, leading to a vicious cycle of deleveraging.
The long-term outlook is bleak.
Debt-to-GDP is very high and growing one percent per month. Portugal is the third most leveraged country in the Eurozone.
Accounting for growth and interest expense, Portugal's debt is the highest in the Eurozone and is not sustainable.
Portugal can neither raise taxes nor cut expenditures, leaving little room to improve debt-servicing capacity.
40 consecutive years of deficit and 18 years without a primary surplus confirm that Portugal cannot sustain so much debt.
In the most optimistic case, the Portuguese sovereign has at least 30% too much debt.

Salanic does a fantastic job presenting his case in a 62 page document, Rehabilitating Portugal.

I recommend reading the presentation in entirety, but here are a few charts.

click on any chart for a sharper image

Solidarity

Missed Deficit Targets

Missed GDP Targets

Wishful Thinking

Subordination

Debt Financing

Credit Ratings

Inability to Outgrow or Devalue Debt

Corporate Debt Levels

Debt to GDP

Debt to Revenue

Interest Expense vs. Revenue

Target 2 Liabilities

ECB Liabilities

Mish Comments

That was a lot of charts, but there are another 40 or more in the article. I didn't count.

Other than target 2 imbalances (debt owed to other countries), Spain appeared at least as bad in most of the comparison charts.

Portugal alone is enough to sink the Eurozone given ECB leverage.

I have said repeatedly there is absolutely no way the Eurozone can stay intact and the above analysis strongly supports my claim.

That bond yields are so low in spite of the fundamentals is not an indication things are getting better. Rather, it is a strong sign of a bubble-supportive speculative mentality that central banks have fostered.

I do not know what the catalyst for a breakup will be, or when it happens, but Portugal is clearly back on my radar of things to watch.

Sincere thanks to Tortus Capital fund manager David Salanic for an outstanding report.

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

Huge Miss in ISM; Largest Decline in New Orders in 4 Years; Weather to Blame?

Posted: 03 Feb 2014 10:10 AM PST

Expectations for continued growth in the US remain overoptimistic.

For example Bloomberg reports the median forecast of 85 economists surveyed by Bloomberg called for a decrease in ISM to 56 from a December reading of 56.5.

Instead, the index plunged to 51.3, a number marginally above the expansion-contraction reading of 50.

Here are the numbers from the January 2014 Manufacturing ISM Report On Business®

ISM at a Glance

Series Data	Jan Index	Dec Index	Percentage Point Change	Direction	Rate of Change	Trend (Months)
PMI™	51.3	56.5	-5.2	Growing	Slower	8
New Orders	51.2	64.4	-13.2	Growing	Slower	8
Production	54.8	61.7	-6.9	Growing	Slower	17
Employment	52.3	55.8	-3.5	Growing	Slower	7
Supplier Deliveries	54.3	53.7	+0.6	Slowing	Faster	8
Inventories	44.0	47.0	-3.0	Contracting	Faster	2
Customers' Inventories	44.0	47.5	-3.5	Too Low	Faster	26
Prices	60.5	53.5	+7.0	Increasing	Faster	6
Backlog of Orders	48.0	51.5	-3.5	Contracting	From Growing	1
Exports	54.5	55.0	-0.5	Growing	Slower	14
Imports	53.5	55.0	-1.5	Growing	Slower	12

ISM Report Snips

PMI

Manufacturing expanded in January as the PMI® registered 51.3 percent, a decrease of 5.2 percentage points when compared to December's seasonally adjusted reading of 56.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

New Orders

ISM's New Orders Index registered 51.2 percent in January, a significant decrease of 13.2 percentage points when compared to the December seasonally adjusted reading of 64.4 percent. This represents growth in new orders for the eighth consecutive month, but is also the largest decline in new orders in the last four years. A New Orders Index above 52.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).

Production

ISM's Production Index registered 54.8 percent in January, which is a decrease of 6.9 percentage points when compared to the seasonally adjusted 61.7 percent reported in December. This month's reading indicates growth in production for the 17th consecutive month, but at a significantly slower rate than in December. An index above 51.1 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures.

Employment

ISM's Employment Index registered 52.3 percent in January, which is 3.5 percentage points lower than the seasonally adjusted 55.8 percent reported in December, and represents the seventh consecutive month of growth in employment, but at a slower rate than in December. An Employment Index above 50.6 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Weather to Blame?

The median forecast was for an index reading 56. It came in at 51.3, an enormous miss.

A number of ISM respondents and economists blamed the weather. Cold weather certainly did not help auto sales any, but didn't the economists know the weather was cold when they made their forecasts?

I think the economy is slowing more than economists realize, even if weather is partially responsible for this.

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

Loan Rates in Argentina Reach 65% Annually; Is 65% a Good Rate?

Posted: 03 Feb 2014 09:25 AM PST

Emerging markets continue to crumble, and the spillover on major economies is obvious. Problems always start somewhere, usually at the periphery.

Via translation from Lanacion, please consider Credit Is More Expensive.

Following the peso devaluation and sharp hike in interest rates by the central bank, interest rates on loans increased as much as 11 percentage points.

For a personal loan, private banks now charging at least 44% per year. Factoring in fees and other administrative expenses (up to 11 percentage points), the total financial cost exceeds 65% annually.

Public banks have with nominal rates for personal loans in pesos that range from 32% to 44%, with a total financial cost up to 55% annually.

Banks also shortened their terms and revised installments on credit cards

Is 65% a Good Rate?

If Argentina is in the midst of full-blown hyperinflation, then any loan rate is a good rate, because the peso will soon become worthless.

If banks believe that is likely, they may publish rates, but credit will completely dry up.

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

Why are Taxpayers Subsidizing Big Mac Buyers?

Posted: 03 Feb 2014 01:17 AM PST

A friend of mine who wishes to remain anonymous claims the following:

Walmart employees (as a group) are often the biggest recipients of federal and state aid within each state.
McDonalds employees are up there as well.

Specifically, my friend asks "Why are Taxpayers Subsidizing Big Mac buyers?"

His proposed solution is to raise the minimum wage to the poverty level, about $23,550 for a family of four.

My friend claims the employer, not the taxpayer will pick up the tab.

Seen and Unseen

My otherwise bright friend is not bright enough to examine the seen and the unseen costs and benefits of his proposal.

It's a given that those who are employed by McDonalds and WalMart will be better off, provided they retain their jobs.

That's a pretty big "provided". But it's far worse than that. Here are 10 things I came up with (and it only took a few minutes to do so). I am sure my list is incomplete.

There are no proposals to reduce food stamps or any other government subsidies if minimum wages rise. Money allocated on food stamps and other subsidies will still be spent unless Democrats agree to cuts.
Prices at WalMart and McDonalds will rise
The higher the wages, the more pressure there will be on businesses to reduce the overall number of employees by other methods, including hardware and software robots
The higher the overall costs (of which wages are a huge component), the fewer the number of store that will be built
When corporations don't open stores they otherwise would have, construction jobs are lost, shipping jobs are lost, merchandising jobs are lost, corporate income taxes do not rise as they would have, and property tax collection does not rise as it would have.
Marginal stores will be shut.
Employees at those marginal stores will be laid off .
Shut stores pay no corporate income taxes or property taxes.
Vacant stores are a form of blight. They reduce property tax collection and lower rent prices.
Marginal store closings and refusal to open new marginal stores will most likely happen in the very neighborhoods most desperately in need of jobs and services.

Moreover, for all the bashing of WalMart, please note that it pays one of the highest corporate tax rates in the country.

Other Problems With Minimum Wage Laws

Minimum wages impair the liberty of workers and employers to freely enter into voluntary contracts. They are extremely unfair to unskilled and low-skilled workers, many of whom will either lose their jobs or no longer find any.

Young entrants into the labor force won't even have a chance to improve their lot by gaining job experience because they won't be allowed to offer their labor for less than the minimum wage, even if they want to. Instead they will become dependent on handouts.

Issue of Fairness

The government cannot wave its hand and order nature around. Economic laws will remain valid regardless of legislation and regulations. And that means that all those whose labor is simply too expensive at the new minimum wage will be priced out of the market, typically the lowest skilled and poorest workers. It matters not if anyone thinks that is 'fair'. It is simply what is going to happen.

Please consider points number five, nine, and ten one more time:

When corporations don't open stores they otherwise would have, construction jobs are lost, shipping jobs are lost, merchandising jobs are lost, corporate income taxes do not rise as they would have, and property tax collection does not rise as it would have.

Vacant stores are a form of blight. They reduce property tax collection and lower rent prices.

Marginal store closings and refusal to open new marginal stores will most likely happen in the very neighborhoods most desperately in need of jobs and services.

The above points should be so obvious, my friend should be embarrassed with his simplistic "hike the minimum wage" solution.

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

Economy News

3.2.14

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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