Wednesday, February 29, 2012

Unbelievable Stress of Making "Only" $200,000 After Taxes

People who have nothing to eat, no job, and are about to be tossed out of their homes in foreclosure, really do not know what stress is.

To fully appreciate stress, please consider the sorry "plights" of Andrew Schiff, marketing director for Euro Pacific Capital, Daniel Arbeeny, a Wall Street headhunter, and hedge-fund manager Richard Scheiner.

Bloomberg describes the out-and-out horror stories of all three in Wall Street Bonus Withdrawal Means Trading Aspen for Coupons
Andrew Schiff said the $350,000 he earns, enough to put him in the country’s top 1 percent by income, doesn’t cover his family’s private-school tuition, a Kent, Connecticut, summer rental and the upgrade they would like from their 1,200-square- foot Brooklyn duplex.

“People who don’t have money don’t understand the stress,” said Alan Dlugash, a partner at accounting firm Marks Paneth & Shron LLP in New York who specializes in financial planning for the wealthy. “Could you imagine what it’s like to say I got three kids in private school, I have to think about pulling them out? How do you do that?”

Wall Street’s cash bonus pool fell by 14 percent last year to $19.7 billion, the lowest since 2008, according to projections by New York state Comptroller Thomas DiNapoli.

“It’s a disaster,” said Ilana Weinstein, chief executive officer of New York-based search firm IDW Group LLC. “The entire construct of compensation has changed.”

Wall Street headhunter Daniel Arbeeny said his “income has gone down tremendously.” On a recent Sunday, he drove to Fairway Market in the Red Hook section of Brooklyn to buy discounted salmon for $5.99 a pound.

$17,000 on Dogs

Richard Scheiner, 58, a real-estate investor and hedge-fund manager, said most people on Wall Street don’t save.

Scheiner said he spends about $500 a month to park one of his two Audis in a garage and at least $7,500 a year each for memberships at the Trump National Golf Club in Westchester and a gun club in upstate New York. A labradoodle named Zelda and a rescued bichon frise, Duke, cost $17,000 a year, including food, health care, boarding and a daily dog-walker who charges $17 each per outing, he said.

He described a feeling of “malaise” and a “paralysis that does not allow one to believe that generally things are going to get better,” listing geopolitical hot spots such as Iran and low interest rates that have been “artificially manipulated” by the Federal Reserve.

Poly Prep

The malaise is shared by Schiff, the New York-based marketing director for Euro Pacific Capital, where his brother is CEO. His family rents the lower duplex of a brownstone in Cobble Hill, where his two children share a room. His 10-year- old daughter is a student at $32,000-a-year Poly Prep Country Day School in Brooklyn. His son, 7, will apply in a few years.

“I can’t imagine what I’m going to do,” Schiff said. “I’m crammed into 1,200 square feet. I don’t have a dishwasher. We do all our dishes by hand.”

He wants 1,800 square feet -- “a room for each kid, three bedrooms, maybe four,” he said. “Imagine four bedrooms. You have the luxury of a guest room, how crazy is that?”

Summer Rentals

The family rents a three-bedroom summer house in Connecticut and will go there again this year for one month instead of four. Schiff said he brings home less than $200,000 after taxes, health-insurance and 401(k) contributions.

“I wouldn’t want to whine,” Schiff said. “All I want is the stuff that I always thought, growing up, that successful parents had.”
Imagine the Stress

  • Imagine the stress of renting a three-bedroom summer home for only one month instead of four.
  • Imagine the stress of only making $350,000 pre-tax 
  • Imagine the stress of making a mere $200,000 after tax and IRA contributions, and having to wash dishes by hand
  • Imagine the stress of being able to send your kids to the $32,000-a-year for the Poly Prep Country Day School in Brooklyn

Imagine the stress knowing full well that none of the above is enough, yet not being able to whine about it.

“I wouldn’t want to whine,” Schiff said. “All I want is the stuff that I always thought, growing up, that successful parents had.”

This is more than nauseating, so if you need to excuse yourself to take care of matters, please do so now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Gold Plunges Over $100; Some Blame Bernanke; What Did He Say? Nothing (However, I have 5 Different Interpretations of Nothing)

It was a wild ride in gold today with a top to bottom over $100 as show in the following chart.



Some Blame Bernanke For "Committing to Nothing"

Bloomberg reports Gold Falls in ’Manic’ Plunge as Bernanke Damps Stimulus Bets
Gold futures fell as much as $100 to below $1,700 an ounce on signs that that the Federal Reserve will refrain from offering more monetary stimulus to bolster the U.S. economy.

In testimony before Congress today, Fed Chairman Ben S. Bernanke gave no signal that the central bank will take new steps to boost liquidity.

“People were expecting that the Fed would loosen policies, even if the perception is that the economy is doing well,” James Dailey, who manages $215 million at TEAM Financial Management LLC in Harrisburg, Pennsylvania, said in a telephone interview. “The investor sentiment changed as the Fed committed to nothing. This is the manic nature of the market.”
Bernanke Hints at More QE

In video commentary Fox News says Bernanke Hints at More Quantitative Easing

Hints at More QE? Really? How about this interpretation?

Door is Open, But Not For A While

The Wall Street Journal reports Comex Gold Tumbles On Bernanke Testimony.
"Bernanke's comments to Congress left the door open for more QE," said Steve Scacalossi, a director of precious metals with TD Securities, in a note. "But his statements that employment is recovering at a better than expected rate implies that if QE is coming, it won't be for a while."
QE Increasingly Improbable

The LA Times says Bernanke's testimony in Congress pushes down gold, silver prices
Federal Reserve Chairman Ben S. Bernanke's words carried a great deal of weight in the commodity markets — so much so that they squashed the prices of gold and silver.

Bernanke told Congress that the U.S. economy was probably headed for modest growth this year, adding that the current increase in oil and gas prices probably would reverse before sparking long-term inflation.

The presentation Wednesday signaled to many investors that the Fed's embarking on another round of quantitative easing was an increasingly improbable scenario.

"When Bernanke didn't mention the possibility of another round of monetization, that was enough to take the fizz out of everything," said independent commodities analyst Dennis Gartman. "Before today, gold was looking quite strong, but today it just gave up the ghost."
Overall Dovish Undertones With Markedly Less-Dovish Testimony

Yahoo! Finance reports Euro Tanks, U.S. Dollar Surges on Bernanke Testimony
Federal Reserve Chairman Ben Bernanke was on Capitol Hill today testifying in front of the Committee on Financial Services. Despite overall dovish undertones, the chairman’s testimony was markedly less-dovish than recent Federal Reserve communiqués, boosting the U.S. Dollar across the board.
Bernanke's Actual Testimony

Please consider Semiannual Monetary Policy Report to the Congress, Testimony by Ben Bernanke.

A quick sscan shows Bernanke did not mention the word "quantitative" once. The Only reference to "easing" was in relation to constraints on motor vehicle parts in Japan related to the earthquake.

Bernanke did say growth would be close to or somewhat above second half of last year but "fundamentals that support spending continue to be weak". More specifically the Fed forecasts "2.2 to 2.7 percent, considerably lower than the projections they made last June"

He also said "housing affordability has increased dramatically" but "potential buyers lack the down payment ... others are reluctant to buy a house now because of concerns about their income"

In regards to unemployment, Bernanke said "With output growth in 2012 projected to remain close to its longer-run trend, participants did not anticipate further substantial declines in the unemployment rate over the course of this year. Looking beyond this year, FOMC participants expect the unemployment rate to continue to edge down only slowly toward levels consistent with the Committee's statutory mandate."

That's "markedly less dovish"? Really?

What does that mean for QE?

Nothing. That's what.

People can and did read into Bernanke's testimony what they wanted to hear. Others judged the market reaction, and wrote a corresponding explanation to fit.

One thing's for certain, that was hardly an upbeat assessment of the economy especially in light of the statement that "global financial markets posed significant downside risks".

Here's the deal. If the economy tanks the Fed is likely to do another round of QE. The same holds true for another LTRO by the ECB.

By the way, a couple of the links above came via email from Pater Tenebrarum at the Acting Man Blog, who in turn got them from Lance Lewis. Thanks!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Economy Grew 3.0% Annualized, Faster Than Expected in 4th Quarter; Or Did It?

Reuters reports Economy grew faster than expected in fourth quarter
Gross domestic product expanded at a 3 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said on Wednesday in its second estimate.

The reading, which was up from the 2.8 percent pace the government reported last month and reflected modest upward revisions to almost all components of GDP, added to the recent run of fairly upbeat economic reports.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised to a 2.1 percent rate of increase from 2 percent. At the same time, growth of real disposable income was revised up to a 1.4 percent rate from 0.8 percent.

"Consumers are spending from rising income rather than digging into their savings to spend," said Shulyatyeva.

Business investment in capital goods was lifted to a 2.8 percent pace from 1.7 percent, but still weak compared to the recent trend. Outlays on home building were firmer than previously estimated, while investment on nonresidential structures was modestly weak.

While a rebuilding of inventories added a hefty 1.88 percentage points to GDP in the last quarter, the increase was revised down to $54.3 billion from $56.0 billion.

"The large boost to GDP growth from stock building in the fourth quarter is unlikely to be repeated in first quarter but the household accounts provide a much more encouraging backdrop for consumer spending," said Peter Newland, a senior economist at Barclays Capital.

Excluding inventories, the economy grew at a 1.1 percent rate, rather than the 0.8 percent initially reported. That was still a sharp step-down from the prior period's 3.2 percent pace.

The report also showed exports were not as strong as previously thought, but imports are also not growing strongly, leaving a smaller trade gap that was less of a drag on growth.

It also showed still moderate inflation pressures, though a

price index for personal spending rose at a 1.2 percent rate instead of 0.7 percent.
GDP Price Indices 

The rise in income is nice but excluding the inventory correction, the rise in GDP was anemic.

Moreover, please note Excel Spreadsheet Table 4.--Price Indexes for Gross Domestic Product and Related Measures: Percent Change From Preceding Period in the BEA's GDP Report.



My friend BC Writes
Does anyone actually believe prices decelerated at a 70% quarterly annualized rate in Q4?

Had the trend rate of the deflator held from Q1-Q3, annualized real GDP for Q4 would be 1.3% instead of 3%, 1.2% yoy, and a slight contraction q-q for real final sales and barely 1% yoy (historically recessionary).

It would not surprise me were the NBER in 3 quarters or more to date a recession as having begun in Q1 '12 after the economy stalled in Q4 '11.

BTW, the Treasury withholding receipts from Jan. to Feb. indicate a contraction in employment, which fits with Gallup's self-reported employment survey.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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World Bank Warns of Economic Crisis in China; Only 3% Growth for Decade Says Michael Pettis

A World Bank report to be released next week warns of an economic crisis in China unless state-run firms are scaled back. The Wall Street Journal discusses the report in New Push for Reform in China
An exclusive preview of an economic report on China, prepared by the World Bank and government insiders considered to have the ear of the nation's leaders, offers a surprising prescription: China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms.

"China 2030," a report set to be released Monday by the bank and a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.

The report warns that China's growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.

It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship.
China's Difficult Transition From an Unsustainable Growth Model

Peak oil, a housing bubble, bad debts and over-reliance on investments with no genuine economic feasibility guarantee China's current boom is not sustainable. China bulls are in for a ride awakening when various bubbles pop.

As for recommendations, the report  proposes a sharp increase in the dividends that state companies pay their owner (the government) in order to boost revenue and pay for new social programs.

Does China need to increase competition, break apart, and privatize the state-owned monopolies?
Or should China simply increase the dividends?

I vote for the former as does Michael Pettis at China Financial Markets.

Via email, Pettis says:
The report is good as far as it goes, but it doesn’t go far enough. Of course increasing SOE dividends to the government for use in social programs will transfer wealth from the state sector to the household sector, but if the total profitability of the SOE sector is less than one-fifth to one-eighth of the direct and indirect subsidies transferred from the household sector, as I have argued many times, then even 100% dividends is not enough to slow the transfer significantly, and remember the transfers have to be reversed, not merely slowed. This proposal falls in the better-than-nothing category, but just.

What we really need are much more dramatic transfers, for example wholesale selling of assets, with the money used either to clean up bad loans or delivered directly to households. According to the article, however, “neither the World Bank nor the DRC proposed privatizing the state-owned firms, figuring that was politically unacceptable.”

This is the problem. The best solution for China, economically, seems to be off limits because it will be politically difficult. In that case the second best solution, a gradual build-up of government debt as growth slows for many years, is the most likely outcome.

And how much will growth slow? The World Bank report apparently doesn’t say, but the consensus has been slowly moving down towards 5-6% annual growth over the next few years.

That’s better than the crazy numbers of 8-9% most analysts were predicting even two years ago (and some still are), but it is still too high. GDP growth rates will slow a lot more than that. I still maintain that average growth in this decade will barely break 3%. It will take, however, at least another two or three years before a number this low falls within the consensus range.

And by the way when it does, metal prices should fall sharply. Copper prices have done reasonably well in the past few months as Chinese buyers have restocked, as we suggested might happen to our clients last fall. With the recent easing we may see more strength in copper over the next month or so, but I have little doubt that within two or three years copper prices are going to be a whole lot lower than they are today. Chinese investment demand simply cannot hold up much longer.
Sad State of Political Acceptability

The report makes feeble recommendations to ensure the proposals are "politically correct". This is a bad practice for three reasons.

  1. You only damage your own credibility
  2. You presume perhaps incorrectly what is politically acceptable
  3. You plant false hope that incorrect solutions will work, when it's clear they will not

It would be far better list the alternatives and the limitations of those alternatives, then provide an honest assessment rather than assume something cannot be done. Unfortunately, telling people what they want and expect to hear is the sad state of political pandering everywhere.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Tuesday, February 28, 2012

Sharpen the Mower: Spain Needs Triple the Budget Cuts and Tax Hikes to Meet EMU Imposed Budget Targets

Conditions in Spain have deteriorated at a rapid pace. As little as a few months ago the Spanish economy was foolishly projected to grow at .7%. Now it expected to contract 1%.

Likewise, Spain's budget deficit was supposed to shrink to 6% in 2011 and 4.4% in 2012. Instead it rose to 8.51 percent in 2011, up from a revised estimate of 8.2% which was up from a revised estimate of 6.5%.

I think you can see a clear pattern here and as a result, the EU Commission Pressures Spain for Explanations.
Spain must explain soon to the European Commission why its 2011 budget deficit was substantially higher than expected and deliver clear future budget plans, the Commission said on Tuesday.

Spain's 2011 budget deficit came to 8.51 percent of GDP, the finance minister said on Monday, up from early estimates of 8.2 percent and far above forecasts from the Commission for something nearer 6.5 percent.

"We need to understand the causes of this significant slippage," Commission spokesman Olivier Bailly told a regular briefing in Brussels.

Spain will have to come up with more than 40 billion euros in savings to meet that target, implying spending cuts that most economists see as impossible given that the economy is already slipping into recession and the jobless rate is the highest in the European Union at 23 percent.

Bailly said Spain also needed to deliver its 2012 budget estimates in the coming weeks, not at the end of March, saying the task in hand was so great it could not be delayed.
Sharpen the Mower

My friend Bran notes that Spain now needs to come up with another 30 billion Euros in budget cuts on top of the 15 billion promised. Moreover, those cuts need to be spread out over 9 months, not 12.

This set of facts prompted the Spanish Gurus Blog to write Sharpen the mower. Spain's deficit exceeds 90 billion euros.
Specifically, Spain's budget deficit is 91.3 billion euros, 8.51% of GDP. So it should not take a wizard to realize the simple mathematical fact that team Rajoy has not yet begun with budget cuts and tax increases, if by 2012 Spain is to meet the 4.4% of GDP deficit target set by creditors.

The measures announced in December were only an appetizer. Instead of sharpening the blades, I think a good lawn mower would be more practical.

The announced cuts and tax increases of last December (income tax, capital gains), are expected to generate about 14,900 million.

To meet the objective of a 4.4% deficit, in 2012 the government deficit should not exceed 46,500 million euros.

To do so requires a nearly 30 billion euros hole to be filled, with the aggravating circumstance that it's now March and those 30 billion euros need to come in the next 9 months.

This figure is double the cuts and tax increases approved last December. So Rajoy has quite imagination if he expects this to happen.
I modified that translation substantially, but I am pretty sure I have it accurate. Spain's unemployment is already 22.9%. What pray tell would another 30 billion in cuts or tax hikes do to that number?

By the way, to go from 15 to 45 is tripling (not doubling) the tax hikes and cuts.

Many structural reforms pertaining to jobs and work rules are quite necessary. The accompanying tax hikes are not and the Spanish economy is poised to implode as a result.

Not to worry, EU commissioner Jean-Claude Juncker promises to "examine the situation with calm and serenity".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Damn the Voters, Full Bailouts (and Existing Policies) Ahead

What's "too complicated" for France is not "too complicated" for Ireland. The Financial Times reports Ireland calls vote on European treaty
Dublin will hold a referendum on the eurozone fiscal treaty, plunging Europe into months of uncertainty and potentially placing a question mark over Ireland’s future membership of the euro.

Enda Kenny, Ireland’s prime minister, said on Tuesday that the government had decided to hold a referendum following advice supplied by the attorney-general that “on balance” the Irish constitution required the treaty to be put to a vote.

He said he would sign the treaty at a European Union summit on Friday and within a matter of weeks the government would organise a referendum commission – an independent body appointed to explain the subject matter of a referendum to the public.

An opinion poll last month found 73 per cent of the public felt a vote should be held on the treaty, which would tighten budget rules for the 17 countries sharing the euro. Some 40 per cent of the 1,000 people questioned in the Sunday Business Post/Red C poll said they would support the treaty, 36 per cent were opposed and 24 per cent were undecided.

The government’s decision to hold a referendum follows a threat by the Sinn Féin party to challenge in the Supreme Court any decision not to give the public a say. Irish officials have privately acknowledged it would be more difficult to win a referendum if the government was seen to have been forced to hold a vote by the Irish courts.

The Irish public have twice rejected EU treaties, only to approve them in second referendums. In 2008 the Lisbon treaty was rejected only to be approved in a second referendum held 18 months later.
Logic of Signing a Treaty then Voting on It

In the real world it makes no sense to sign a treaty then vote on it. In the political world it is a way of telling voters their wishes do not matter, that politicians will hold a referendum as many times as it takes to get a treaty signed.

In a massive landslide, Irish voters swept out Ireland's previous prime minister, only to have Enda Kenny come along and do the exact same things as the politician he replaced.

US Budgets and Bailouts

That is exactly what happened in the US 2008 presidential elections as well. Obama carried out the same bailout policies and the same war mongering policies as Bush.

There is plenty of rhetoric for change, just no real change that anyone can see. Both sides want to do something about the budget, neither side does.

Obama wants to close corporate tax loopholes, then just a few days ago proposed a new set of loopholes for manufacturing, just as Santorum and Romney have proposed. The net result would be an increase in the budget deficit.

There are differences between the parties on social issues, but nothing happens there but hot air.

Romney vs. Obama What's the Difference?

Not your grandfather’s Republican Party; President Obama and Mitt Romney are Nearly One and the Same!


Obama Seeks to Prove He is More Like Romney; Obama vs. Romney - What's the Difference?

Germany Bailouts

Voter sentiment in Germany is overwhelmingly against giving more money to Greece. So why did Chancellor Angela Merkel ram through more aid for Greece?

The answer as explained many times is all Merkel cares about is her legacy, and that legacy says no country can leave the eurozone. Merkel does not give a damn about what is good for Greece, or what her own constituents want either.

French Promises

French President Nicolas Sarkozy will not hold a referendum claiming it's "too complicated". In reality, Sarkozy knows the referendum would be about him (See Referendum on a Person or on a Treaty?).

Everywhere you look, it's a case of "Damn the Voters, Full Bailouts (and Existing Policies) Ahead". Politicians have decided, things are "too complicated to change". Expect a cornucopia of promises from politicians, just don't expect any real change.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Referendum on a Person or on a Treaty?

Reader Andrea from Italy, but who now lives in France adds some insight into Sarkozy's "Treaty Too Complicated For A Vote" excuse.

Andrea writes ...
Hi Mish,

I can add some more info.

Sarkozy started his presidential campaign pledging to be the "president of the people" and saying he wants to give to the people the power to decide about some issues: particularly he said he is going to propose a referendum about a couple of issues, immigration laws and unemployement benefits. As you can easily imagine, these are "minor" subjects for a referendum, normally dealt by executive power.

So, it is very contradictory that he does not want a referendum about the European Treaty, even more in the light of the fact that in recent years France held two referendums about Europe: one about Euro introduction and another about approval of the European treaty signed in 2006 (possibly as complicated as this one). Clearly he knows the topic is a referendum on his own policies and he wants to avoid this.

Regards,

Andrea
On second thought, the treaty is too complicated (for his own personal good), not too complicated for the good of France.

President of the people? Is there a president (leader) of the people anywhere? Certainly not Germany, Ireland, Greece, Italy, the United States, Australia, Canada, or anywhere else.

I am tired of the endless brutal lies from politicians everywhere. Unfortunately, such lies on both sides of the Atlantic are going to get much worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Monday, February 27, 2012

Sarkozy Breaks Campaign Pledge, Says Treaty Too Complicated For A Vote

French president Nicolas Sarkozy is campaigning on a pledge to consult people directly on "significant issues". However, despite trailing in polls, Sarkozy refuses to agree to referendum on EU fiscal treaty.
Mr Sarkozy, who is trailing the socialist François Hollande in opinion polls seven weeks before the presidential election, came under pressure to promise a referendum on the pact after he pledged to consult the people directly on significant issues if re-elected.

“No,” he replied when asked on French radio yesterday if he would put the treaty to a public ballot. “If you’re dealing with a treaty with 200 articles, 250 articles, I can’t see how you’d formulate a clear question.”

The French electoral calendar means the treaty cannot be passed by parliament until after the election. Mr Hollande has said he will seek to renegotiate parts of the deal if he wins, a move that has been criticised by Mr Sarkozy and German Chancellor Angela Merkel.

Arnaud Montebourg, a prominent party figure who came third in the presidential primary last autumn and has been campaigning for Mr Hollande, went further than the candidate by predicting the treaty “will never be ratified”.

Mr Montebourg said a left-wing majority in France would never vote for the pact, while there was “not a majority” in favour of it in Ireland, the UK or other European countries. “The ‘Merkozy’ treaty would inflict austerity on all of Europe and plunge us dangerously into recession,” he said.
Too Complicated To Form a Clear Question?

Sarkozy says "I can’t see how you’d formulate a clear question.

Mish Attempt to Formulate Clear Question For Voters

  1. Punch Yes to Approve Treaty
  2. Punch No to Disapprove Treaty

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Capital Flight From Italy, Greece, Portugal Accelerates; Two Trillion Fantasy; Merkel Weaker Every Week; Crude and Geopolitical Risks

Via Email, here is a nice summary of European events from Steen Jakobsen at Saxo Bank in Denmark. Topics include the G20 Summit, Extend-and-Pretend Dogma, Capital Flight , and Geopolitical Risks.

Steen Writes ...
Two Trillion Fantasy

This week-end's G-20 came and went without any real new information. Yes, the policy makers wants us to believe ultimately IMF will have 2 trillion US dollars at its disposal.

No, the US, UK and rest of non-Europe is not really interested before we all get more clarification on how Europe will ring fence the debt crisis.

This is more and more Wall Street vs. Main Street: Underfunded banks buys underfunded government bonds and underfunded governments guarantees underfunded banks.

The real loser being the unemployed - Edward Heath put it more elegantly: Unemployment is of vital importance, particularly to the unemployed.

Meanwhile the real economy and unemployment is exploding higher adding further burdens to already stretched government deficits.

The new EU forecast for GDP growth in 2012 of minus .3% from this past Friday down from plus .05% is great example of how EU and the debt crisis non-solutions continues to lack behind fundamentals. Soon the rising disconnect will hit the politicians games of buying time.

Capital Flight



Merkel Weaker Every Week

Chancellor Merkel is weaker, week after week. She soon will have to rely on SPD votes if she continues down this path. 62 percent polled over weekend are against giving more money to Greece and 2/3 don't believe Greece can be saved according to German newspaper Bild.

Finland will have an interesting vote this week. Follow it closely.

The G20 did not give more credibility to more funds but they sure talked the talk of extend-and-pretend dogma.

Geopolitical Risks

Crude: We are potentially a few weeks from some sort of confrontation unfortunately. IEA report from Iran is due this week. Israel's time window is closing if you believe the media coming out of Israel. Iran's finances are running out of time as well. Iran failed to pay for Indian rice last week.

High energy prices will soon spill-over into gasoline and survey data and will start to impact data and sentiment negatively.

Greece Controlled Default: Greece will have a controlled default and a vacation from Europe.

Portugal CDS Spreads: Portugal is the real issue and containment is almost impossible. CDS spreads suggest the probability of default within five years is about 65 percent.

Nice money printing week,
Steen Jakobsen
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mathematical Case for Brokered Convention; How Ron Paul Can Throw a Big Wrench Into Romney's Campaign

There are 2,286 republican delegates. It takes 1,144 delegates to win the Republication nomination. With four candidates remaining, many are wondering about the likelihood of a brokered convention where no candidate wins in the first round.

Conventional wisdom suggests there will not be a brokered convention. From where I sit, one is increasingly likely.

Following is a table of delegates won so far (totals from Real Clear Politics Delegate Count), plus my projections of all primaries and caucuses through Super-Tuesday on March 6 (based on recent polls).

StatePrimaryCountRomneySantorumGingrichPaul
Total to Date-24399473220
IowaJan 3286700
New HampshireJan 1012*7003
South CarolinaJan 212520230
FloridaJan 3150*50000
NevadaFeb 42814365
MinnesotaFeb 74021714
ColoradoFeb 73691721
MaineFeb 11249307
MichiganFeb 2830*131124
ArizonaFeb 282929000
WashingtonMar 343131758
GeorgiaMar 6761922278
OhioMar 6661927137
TennesseeMar 6581625710
VirginiaMar 64949000
OklahomaMar 643111895
MassachusettsMar 64128823
IdahoMar 63232000
North DakotaMar 628101233
AlaskaMar 627101133
VermontMar 61711411
Super Tuesday EstMar 678235920210472
If Paul Wins IdahoMar 6782327202104104

* States penalized half of their delegates.

Thru Super-Tuesday Scenarios
Romney 359 Others 423 (Romney wins Idaho)
Romney 327 Others 455 (Romney loses Idaho)

Notes

  1. I assigned delegates by expected percentages based on recent polls except in winner-take-all setups. All state delegates were assigned to the above four candidates.
  2. In no instance did I assume Romney would do worse than his most recent polls. In several instances I bumped up Romney's poll percentages substantially.
  3. Points one and two were not done to favor Romney per se, but rather to to give a modest boost to the prevailing idea there would not be a brokered convention.

Michigan Prediction

30 Delegates
Percent: Romney-40% Santorum-35% Gingrich-8% Paul-12%
Delegates: Romney-13 Santorum-11 Gingrich-2 Paul-4
Real Clear Politics Michigan Primary Poll

Arizona Prediction
29 Delegates
Arizona is "Winner Take All"
Romney wins all 29 Delegates
Real Clear Politics Arizona Primary Poll

Washington Prediction
43 Delegates
Percent: Romney-30% Santorum-38% Gingrich-12% Paul-17%
Delegates: Romney-13 Santorum-17 Gingrich-5 Paul-8
Real Clear Politics Washington Caucus Poll

Georgia Prediction
76 Delegates
Percent: Romney-24% Santorum-26% Gingrich-33% Paul-10%
Delegates: Romney-19 Santorum-22 Gingrich-27 Paul-8
Real Clear Politics Super Tuesday Poll (Georgia, Ohio,  Oklahoma, Massachusetts, Vermont)

Ohio Prediction
66 Delegates
Percent: Romney-26% Santorum-38% Gingrich-19% Paul-10%
Delegates: Romney-19 Santorum-27 Gingrich-13 Paul-7

Tennessee Prediction
58 Delegates
Percent: Romney-26% Santorum-40% Gingrich-12% Paul-16%
Delegates: Romney-16 Santorum-25 Gingrich-7 Paul-10
Vanderbilt University Tennessee Primary Survey

Virginia Prediction
49 Delegates
Romney wins all 49 Virginia delegates.
Virginia has a proportional allocation with a twist. Should any candidate take 50% in a district, the candidate will all votes in the district. In a display of complete ineptitude, Santorum and Gingrich failed to collect and turn in enough signatures on time and are not on the ballot. Romney is currently polling about 53% and Paul 23%, but Paul can only win delegates if he outright wins a district.

Oklahoma Prediction
43 Delegates
Percent: Romney-23% Santorum-42% Gingrich-20% Paul-9%
Delegates: Romney-11 Santorum-18 Gingrich-9 Paul-5

Massachusetts Prediction
41 Delegates
Percent: Romney-64% Santorum-16% Gingrich-6% Paul-8%
Delegates: Romney-28 Santorum-8 Gingrich-2 Paul-3

Idaho Prediction
32 Delegates
Romney wins all 32 Idaho delegates
January Straw Poll Results Romney-34% Santorum-10% Gingrich-12% Paul-43%
February Straw Poll Results Romney-45.4% Paul 42.7%

A third straw poll will be held March 1-3 and my answer may change based on the results of that poll.

Ron Paul or Mitt Romney will likely take all of the delegates based on the explanation below. Whether or not Paul or Romney takes all the votes depends entirely on whether or not Gingrich or Santorum can win any counties which at this time looks doubtful.
Idaho Caucus Explanation:
Voters will go to locations for their county and use ballots or tokens to support a candidate on Tuesday, March 6th. There are five candidates for Idaho voters to choose from and they will keep voting until a winner is selected.

In each round the candidate with the fewest votes or anyone with less than 15% is out of the race. The voting ends at the county level when there is a final vote for two candidates or one has more than 50% of the vote for that county.

The delegates assigned for that county will then represent the winning candidate. Counties will report their winner to the state office in Boise. If one candidate has more than 50% of the vote for all of Idaho, they get all 32 delegates. Otherwise, the candidates split delegates they won in each county
I cannot find any recent polls for North Dakota, Alaska, or Vermont. Romney should do extremely well in Vermont and fair at best in North Dakota and Alaska.

North Dakota Prediction
28 Delegates
Percent: Romney-35% Santorum-40% Gingrich-10% Paul-10%
Delegates: Romney-10 Santorum-12 Gingrich-3 Paul-3

Alaska Prediction
27 Delegates
Percent: Romney-35% Santorum-40% Gingrich-10% Paul-10%
Delegates: Romney-10 Santorum-11 Gingrich-3 Paul-3

Vermont Prediction
17 Delegates
Percent: Romney-64% Santorum-16% Gingrich-6% Paul-8%
Delegates: Romney-11 Santorum-4 Gingrich-1 Paul-1

How Ron Paul Can Throw a Big Wrench Into Romney's Campaign

I purposely bumped up Romney's percentages to see if a brokered convention would still be possible. I also awarded Romney all 32 delegates in Idaho even though that race is a statistical dead-heat with Ron Paul.

If Ron Paul wins Idaho, and the rest of my numbers above are close, the odds of a brokered convention are well above 50 percent in my estimation. There may be a brokered convention anyway, provided Santorum, Paul, and Gingrich stay in to the end.

Fuzzy Math

The New York Times discusses The G.O.P.’s Fuzzy Delegate Math.
There are 2,286 delegates to the Republican National Convention, of which 1,144 are required to clinch a majority. The Web site TheGreenPapers.com, which has extensive information on delegate-selection procedures in each state, divides them into two broad categories, what it calls “hard” and “soft.” Hard delegates are formally bound to a candidate on at least the first ballot at the convention, while soft delegates are not.

Although this is a useful conceptual framework, it probably simplifies things too much. Instead, Republican delegates exist along something of a spectrum between bound and unbound, pledged and unpledged, hard and soft.

Contributing to the confusion is that there are a series of three interrelated ideas about delegates which are often treated as interchangeable, even though they are not:


  • Bound vs. Unbound Delegates. Is the delegate officially bound to a particular candidate on at least the first ballot at the convention?
  •  
  • Pledged vs. Unpledged Delegates. Whether or not she is formally bound to a candidate, will the delegate’s candidate preference be known in advance of the convention and reported upon by the news media?
  •  .
  • Elected vs. Selected Delegates. Was the delegate selected through some relatively direct means, such as based on the popular vote in the state’s primary? Or through some indirect means, like through the series of conventions that often take place in caucus states, and which may not correspond to the popular vote there?



  • Category of Delegates

    Legal Challenges on the Way

    I did not take any of the bound, unbound, super-delegate counts into consideration. However, I was rather generous to Romney in other ways.

    Moreover, there are legal challenges pending in Arizona and Florida. Winner-Take-All primaries are a violation of Republican National  Committee rules if held before April 1. As it stands, Romney 50 Florida delegates and 29 Arizona delegates that could dramatically change the totals.

    Should Romney loses those challenges and also lose Idaho, a brokered convention would be all but certain.

    If Wishes Were Fishes

    If wishes (mine) were fishes, then Ron Paul would win the nomination outright. A more realistic wish is for a brokered convention because Romney, Santorum, and Gingrich are all likely to lose to Obama.

    I believe Paul would defeat Obama although polls don't currently support that idea.

    Republicans Need to Face the Facts

    Of the four candidates, only Ron Paul balances the budget, only Ron Paul wants to stop the war-mongering, only Ron Paul does not alienate the majority of women, only Ron Paul can ignite a fire in independents, and independents (not the radical right), are the key to this election.

    Republicans are not going to vote for Obama so appealing to the far right makes little sense in terms of an overall strategy. Moreover, independents are likely horrified by the war-mongering and misguided statements on religious and social issues of all the candidates but Paul.

    If Republicans lose this election, it will be because they all outdid each other in foolish attempts to appeal to the far right on issues where a huge majority of the population of the US is in the middle.

    Mike "Mish" Shedlock
    http://globaleconomicanalysis.blogspot.com
    Click Here To Scroll Thru My Recent Post List

    Sunday, February 26, 2012

    German Interior Minister Says EU "Should Create Incentives for Exit That Greece Cannot Turn Down"; Greece Delays Swap Until March 8

    It is possible if not likely we have to suffer through at least 11 more Groundhog days as Greece sets March 8 deadline for investors in bond swap.
    Greece has set a March 8 deadline for investors to participate in its unprecedented bond swap aimed at sharply reducing its debt burden, according to a document outlining the offer.

    Greece formally launched the bond swap offer to private holders of its bonds on Friday, setting in motion the largest-ever sovereign debt restructuring in the hope of getting its finances back on track.

    In the document, Greece said the March 8 deadline could be extended if needed. Athens in the past has said it wants to conclude the transaction by March 12.
    Interior Minister Says Greece Should Exit Eurozone

    In yet another break in Merkel's ranks, German interior minister Hans-Peter Friedrich says Greece should exit eurozone.
    With German Chancellor Angela Merkel facing a parliamentary vote Monday on a second Greek bailout, her interior minister, Hans-Peter Friedrich came out over the weekend in favour of Greece leaving the eurozone.

    Friedrich told the news magazine Der Spiegel, “I do not mean that Greece should be kicked out of” the 17-nation eurozone, but he said the bloc should “create incentives for an exit that they cannot turn down.”

    Merkel is opposed to Greece leaving the eurozone, and agreed in January with French President Nicolas Sarkozy that Greece should be kept in the monetary union, as long as its government imposes strict budgetary reforms. She expects the Bundestag to approve the second bailout package in a vote Monday.

    Friedrich, of the CSU, the Bavarian sister party to Merkel’s Christian Democrats, is the first member of the federal government to have spoken out suggesting a radical change of course in euro crisis policy.

    “Outside European monetary union, Greece’s chances of regenerating itself and becoming competitive are definitely better than if it remained inside the eurozone,” Friedrich told Der Spiegel.

    Meanwhile, at a meeting of G20 finance ministers and central bankers in Mexico City, German Finance Minister Wolfgang Schäuble said it made “no economic sense” to be “endlessly” pumping money into eurozone rescue funds.
    It should have been obvious Germany wanted Greece out of the Eurozone no later than January 27 when Merkel demanded Greece to Cede Sovereignty to Eurozone "Budget Commissioner".

    Merkel's Official Denial "I will have no part in forcing Greece out of the euro" Should have made it all the more clear on February 7.

    At the same time Schäuble started "Salami Tactics" on German participation (see above link). On February 23, came the Pact With the Devil Over Gold.

    Then on February 23 Troika Demands 38 New Changes in Greek Tax, Spending and Wage Policies in Next 6 Days.

    Finally, at long last, the German Interior Minister came flat out and stated what previously Finance Minister Wolfgang Schäuble only hinted at, and Merkel herself "officially denied". As I have said many times, Merkel's denial is not plausible. She just not does to be on record as the person causing any country to exit the Eurozone.

    Merkel is to be pitied for one of two reasons.

    1. She is so amazingly dense that she cannot see that Greece needs to leave the Eurozone
    2.  
    3. She is so concerned about her legacy that she does not have the honesty and decency to say what she knows is true, and she is willing to further destroy Greece in the process.

    I vote for door number 2.

    Mike "Mish" Shedlock
    http://globaleconomicanalysis.blogspot.com
    Click Here To Scroll Thru My Recent Post List

    Saturday, February 25, 2012

    Bill to Destroy California Businesses Introduced in Senate; Bill Mandates Employers with 5 or More Employees to Create "Personal Defined Benefit Plan" Managed by CALPers

    The gall, arrogance, and stupidity of public union pandering has reached new heights. A senate bill sponsored by written by Sen. Kevin de León, D-Los Angeles seeks to force businesses with five or more employees to create personal defined benefit plans, managed by CALPers.

    The Sacramento Bee reports California Democrats push pension plan for nongovernment workers
    Senate Bill 1234, written by Sen. Kevin de León, D-Los Angeles, would require businesses with five or more employees to enroll them in a new "Personal Pension" defined benefit program or to offer an alternative employer-sponsored plan.

    The new system's investments would be professionally managed by CalPERS or another contracted organization. Employees would contribute about 3 percent of their wages through a payroll deduction, although they could opt out of the plan.

    The fund would assume much lower investment returns than the 7.75 percent that the California Public Employees' Retirement System says its investments will generate, de León said.

    Steinberg rejected suggestions that Democrats are pushing de León's bill to fend off pressure to enact substantial public pension changes.

    "Absolutely not. We're not running away from it," Steinberg said, calling de León's bill the private sector "bookend" to public pension reform measures he expects lawmakers will send to Brown before the current session ends.
    Pure Insanity

    There is no polite way to put this so I won't. Sen. Kevin de León is clearly a certifiable nutcase.

    Stoctkon and Vallejo California are both bankrupt over insane promises made to public union employees. So is Detroit Michigan, Central Falls Rhode Island, Providence Rhode Island, and Harrisburg Pennsylvania.

    Numerous other cities will eventually be forced to seek bankruptcy. Los Angeles and Oakland are at the top of the list.

    Numerous airlines and GM went bankrupt over defined benefit pension plans.

    De León's bill would bankrupt countless small businesses trapped in its wake.

    Things That Would Happen If Passed

    1. Immediate large-scale firings by small businesses. No small business owner in his right mind would have over four employees. 
    2. Any business that could, would leave the state. 
    3. Many businesses that do stay would be destined to go bankrupt.
    4. California would end up like Detroit or Greece

    States on the Right Path

    The road to reform is 180 degrees opposite. Governor Scott Walker in Wisconsin, Governor John Kasich in Ohio, and Governor Mitch Daniels are on the right path.

    Five Point Road to Reform

    1. End collective bargaining of public unions
    2. Scrap Davis-Bacon and all prevailing wage laws
    3. Scale back existing pension benefit promises via bankruptcy if necessary
    4. Eliminate defined benefit pension plans
    5. Institute national right-to-work laws

    Corruption of America

    The gall, arrogance, and stupidity of Senate bill 1234 sponsored by Sen. Kevin de León, D-Los Angeles, is absolutely stunning.

    Here are a few particularly relevant paragraphs from my post Fatally Flawed Approaches to the Budget Deficit and Taxes; Debt Will Swell Under 3 of 4 Republican Hopefuls' Tax Plans 
    Porter Stansberry wrote a tremendous article on The Corruption of America and how public unions are at the center of it.

    Golden State on road to Greece, by way of Detroit

    Stansberry touched on Detroit in his article and so did the Orange County Register in an editorial Golden State on road to Greece, by way of Detroit

    The Chicago Tribune reported Chicago teachers asking for 30% raises over next 2 years.

    Is that insane or is that insane? The only way to stop such insanity is by ending collective bargaining of public unions, scrapping Davis Bacon and all prevailing wage laws, and instituting national right to work laws.

    Legal Bribery

    As long as public unions, corporations, and lobbyists can bribe legislators with campaign contributions, then bills are going to be written by public unions, corporations, and lobbyists.
    Tax reform alone cannot and will not work. In addition to a balance budget amendment, something must be done to rein in the power of public unions and corporate lobbyists at the center of this mess.

    Ending collective bargaining rights of public unions and passing right-to-work legislation would be a wonderful first step.

    Addendum:

    I missed the words "Employers could make voluntary contributions into the fund." Sorry, but I still don't buy it. This would be the first step towards mandated involuntary contributions. Moreover, maintenance of the plan would cause headaches, and giving money over to CALpers to manage is inane.

    If people want to enter such programs on their own, let them. Mandating businesses offer such plans is another ridiculous burden on all businesses, especially small businesses. Nothing at all stops private companies from offering such plans.

    Who is going to guarantee these benefits anyway, and who will be at risk when the plans fail to meet the goals? The answer today may be one thing, the answer down the road is sure to be taxpayers and businesses.

    Mike "Mish" Shedlock
    http://globaleconomicanalysis.blogspot.com
    Click Here To Scroll Thru My Recent Post List

    160 German Tax Collectors Volunteer to "Help" Greece

    Goodness gracious, how gracious! The German business weekly WirtschaftsWoche reported Saturday that Germany offers to send tax men to Greece
    The German government is prepared to send 160 financial experts to Greece to help the country overhaul its tax collection, the business weekly WirtschaftsWoche reported Saturday.

    Hans Bernhard Beus, deputy finance minister, told the magazine that the tax officials are ready to jump in to help the ailing country. They would need to at least speak English, but about a dozen of the volunteers speak Greek, he said.

    A large number of the volunteers would come from western German state of North Rhine-Westphalia, where state Finance Minister Norbert Walter-Borjans of the centre-left Social Democrats (SPD) told WirtschaftsWoche: “Greece is facing the problems that former East Germany faced in 1990.”

    The central German state of Hesse is also prepared to send in volunteers, the state’s Finance Minister Thomas Schäfer of the conservative Christian Democrats (CDU) said.

    “In helping Greece, we should also entertain the idea of bringing in retired tax collectors, because considerable practical experience could be used here,” he told WirtschaftsWoche.

    In January, the Greek government released a 170-page list of 4,000 tax evaders, who owe the state approximately €15 billion. The Greek government under Prime Minister Lucas Papademos has announced that it will be seriously pursuing tax evaders.
    Is this tax collection help or the beginning of colonization?

    Mike "Mish" Shedlock
    http://globaleconomicanalysis.blogspot.com
    Click Here To Scroll Thru My Recent Post List

    Friday, February 24, 2012

    Stockton California, Population 292,000, Takes Steps Toward Bankruptcy, City Manager Says

    Bondholders of Stockton, California debt are about to be punished as City Manager Takes Steps Toward Bankruptcy.
    Stockton, California, may take the first steps toward becoming the most populous U.S. city to file for bankruptcy next week because of burdensome employee costs, excessive debt and bookkeeping errors that misrepresented accounts, city officials said today.

    The Stockton City Council will meet Feb. 28 to consider a type of mediation that allows creditors to participate, the first move toward a Chapter 9 bankruptcy filing under a new state law. The council will also weigh suspending some payments on long-term debt of about $702 million, according to a 2010 financial statement.

    “Somebody has to suffer and in this case the city manager has decided it should be the bondholders who suffer,” Marc Levinson of the Sacramento-based law firm Orrick, Herrington & Sutcliffe LLP, which represents the city, said at a news briefing at Stockton’s City Hall today.

    Stockton, a farming center about 80 miles (130 kilometers) east of San Francisco, has fought to avert bankruptcy by shrinking its payroll, including a quarter of the roughly 425- member police force. At 292,000, the city has more than twice as many residents as Vallejo, California, which became a national symbol for distressed municipal finance in 2008 when it sought protection from creditors.

    Stockton’s council will be asked to reduce the current budget by $15 million because of newly uncovered accounting errors and fiscal mismanagement that have left the city almost broke, City Manager Bob Deis told reporters. To keep the city solvent through the end of the fiscal year June 30, the City Council will be asked to default on $2 million of debt payments owned to bond holders.

    “Our employees and the citizens of Stockton who receive city services have borne the entire brunt of our restructuring efforts so far and now it’s time for others to do the same,” Deis said in a report to the council. “We can’t ‘grow our way’ out of the problem and no amount of forward looking financial planning will properly fix it.”

    Deis said the city is facing a $20 million deficit in the next fiscal year. Expanded retiree health insurance commitments in the 1990s have left the city with a looming $450 million unfunded liability.

    “Next year, we expect to pay more for retiree health insurance than for our current employees,” Deis said, likening the promises to a “Ponzi scheme.”

    A state law backed by unions and passed last year in response to Vallejo’s bankruptcy requires cities to work with a “neutral evaluator” for at least 60 days before seeking bankruptcy court protection. The process is similar to mediation and gives creditors a right to participate. It can be bypassed if the city declares a fiscal emergency, according to the law.

    Entering the 60-day mediation process could cause a “run on the general fund” by vendors, bankruptcy attorney Lee R. Bogdanoff of Klee, Tuchin, Bogdanoff & Stern LLP, the firm that filed the biggest municipal U.S. bankruptcy on behalf of Jefferson County, Alabama, said today in a telephone interview.
    Once again we see fraud and untenable union benefits at the heart of the problem. The bondholders should suffer, and so should the unions. Those contracts should be wiped out in bankruptcy.

    I commend the actions of the city manager to not tax its citizens to death to meet ridiculous, probably fraudulent, union benefits that should never have been granted.

    Chapter 9 bankruptcy was established to deal with these situations. Unions better get used to it, because more actions like this are coming.

    Mike "Mish" Shedlock
    http://globaleconomicanalysis.blogspot.com
    Click Here To Scroll Thru My Recent Post List

    ECRI Sticks with Recession Call on CNBC; More than a Bit of an Exaggeration by Achuthan to Make His Call?

    ECRI's Lakshman Achuthan sticks with his recession call. This time his call is based on coincident indicators as the following video shows.



    CNBC has an interesting feature where you can click on any snip of generated text and it will take you to that spot in the interview. However, do it a couple times and it hangs.

    Here is the link to a complete transcript if interested: ECRI Sticks With Recession Call

    More than a Bit of an Exaggeration by Achuthan

    At one point Achuthan says "I want to be first on this. On the right-hand side of the chart, that's a 21-month low. It has not -- you haven't had a decline like that in the past 50 years without a recession following in short order, okay?"

    Well - Not OK.



    Annotations in Red by Mish.

    The above chart, clipped straight from the CNBC video, was obviously prepared in advance (I have no problem with that). However,  Achuthan's claim based on that chart is clearly preposterous.

    I count three instances between 1990 and 2000 where ECRI coincident indicators flagged a recession by the methodology Achuthan cited.

    I have numerous other problems historically with ECRI claims, including their alleged "perfect" track record. Please see A Look at ECRI's Recession Predicting Track Record for details.

    This time, I happen to think Achuthan has very valid points. However, once again, Achuthan has a hard time articulating them in a purely factual manner in spite of the fact he is clearly bright and articulate.

    Mike "Mish" Shedlock
    http://globaleconomicanalysis.blogspot.com
    Click Here To Scroll Thru My Recent Post List

    How Low Will We Go?: Long Term Perspectives on a Flailing Economy

    How Low Will We Go?: Long Term Perspectives on a Flailing Economy
    By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College SD

    11:30 am, Friday, 24 February 2012, CJ Callaway’s Event Center (69th and Minnesota)

    Nine days ago, at the Augustana Academy for Seniors, I delivered a speech called “Little Business on the Prairie: Exploring How Entrepreneurs Keep South Dakota’s Economy Vibrant.” That speech, which like this one is posted on my personal blog called finance history and policy dot blogspot dot com, that’s finance history and policy dot blogspot dot com, was about South Dakota’s economy and was much more upbeat than today’s pessimistic talk, which is about the national economic outlook. I fear that the national economy will remain in a funk – a period of no to slow growth – for a decade or more, perhaps, like Lenore, for evermore. That’s from Edgar Allan Poe’s poem “The Raven,” by the way. To invoke Poe once more, this time his place of death, I fear the entire U.S. economy will soon resemble that of Baltimore in the HBO Series The Wire – very po’ indeed. Seriously, barring a major natural catastrophe or war, the odds of America degenerating into third world-like poverty is slim but without major political reforms I think our economy is likely to slip into the same superpower retirement community inhabited by Persia, Rome, the Mongols, the Mayans, Holland, England, Japan, and so many other has beens.
    The United States is the third most populous nation in the world behind China and India and has almost a 100 million more people than number four Indonesia, so it is going to remain an important player on the world stage for a long time to come. But if it continues down its current path it will not long remain the most important one, economically, politically, or militarily.
    South Dakota may benefit from these changes, at least in relative terms, due to its entrepreneurial culture and pro-business economic climate. As you may know, famed economist Arthur Laffer and the American Legislative Exchange Council recently ranked South Dakota second, behind Utah, in overall economic outlook. South Dakota ranked first, of all U.S. states and Canadian provinces, in the Fraser Institute’s economic freedom index and the state has for seven years in a row ranked number one in the Small Business and Entrepreneurship Council’s small business survival index, well ahead of runners up Nevada and Texas. But no state can soar too far above the others without attracting enough people and capital to bring it back into orbit around the national economy. In other words, if the overall U.S. economy stagnates, so too will that of each of the states, at least eventually. The American Dream will die first but what consolation will that be when South Dakota’s Reverie follows it gently into that good night? That’s not Poe, by the way, and enough with the po-etry for today.
    One particularly troubling sign that the state and national economies are stagnating is the recent rise in what was traditionally called sharp business practices. It’s not as apparent here in Sioux Falls as elsewhere but even our burgeoning little metropolis has its share of shysters. Several kiosks in the mall, the big one, have been selling shoddy quote unquote No Way products because there is no way the vendors will refund your money and no way the products should have been sold in the first place. And at least one major local car dealer is getting a reputation for overcharging for repairs. Well, overcharging even more than it used to. What is troubling is that those and other businesses engaging in sharp practices must not envision a more prosperous future on the horizon. They are trying to get as much as they can today even though they must know that if they persist in scamming their customers they will not be around tomorrow. As a business strategy that only makes sense if they are on the verge of bankruptcy or believe that the economy is.
    Please keep in mind that I am not predicting that national economic stagnation must occur. There is nothing inevitable about it that I can see. Rather, America’s, and hence ultimately South Dakota’s, economic future hinges on its policies, which are ultimately a function of its politics. If numerous people argue persuasively that the economy will remain in a funk they may change public sentiments and politicians’ agendas enough to drive implementation of reforms that will break the funk and hence the nation’s relative economic slide. If that comes to pass, historians, decades hence, will chide and deride the pessimists not realizing that their vocal lamentations indirectly saved the nation’s economy, just as the wails of George Washington and Alexander Hamilton in the 1780s initiated the reforms that launched America on its modern growth trajectory a decade later.
    I’d like nothing better than to regale you with a three hour lecture explaining how Hamilton et al turned an unstable, bankrupt, economic backwater into a major nation in a single lifetime. But if you are really that interested you could pick up my One Nation Under Debt, which is really reasonably priced on Amazon right now. Suffice it to say here that the U.S. implemented constitutions at the national and state levels that protected people’s lives, liberties, and properties without dipping very deeply into their pockets or intruding much into their day-to-day lives. Confidence in government led directly to the financial and corporation revolutions that made possible the agricultural, transportation, and industrial revolutions that transformed the continent into the most productive in history to date.
    Reforms are necessary again today because current policies are clearly not working. The economy is showing few signs of growth in the short term, faces a major conundrum in the intermediate term, and the most important long term driver of growth, confidence in government, has disintegrated in recent years. If the economy does soar anytime soon, be on the lookout for yet another speculative bubble at the heart of it and signs of the financial cataclysm that must inevitably follow. Please allow me to explain the reasoning behind those claims in some detail.
    Nobody can predict short run movements in the economy consistently and with precision but consensus economic forecasts are often quite accurate and go well beyond stock prices, which you may have noticed have been up recently. Just like they were in 1929 and 1999. The VIX, a stock market volatility index, is just a quarter of the level it was during the crisis of 2008, in fact at almost exactly the same level it was before the financial manure hit the fan that year. So it is difficult for me to rest easy simply because the VIX is low, or because the stock market is up.
    Certainly watch the VIX and the equities markets -- the Dow, the S&P, and the Russell 2000 -- but don’t be a lemming. There are numerous other, more important economic indicators out there. In our 2011 book, The Wall Street Journal Guide to the 50 Economic Indicators That Really Matter, Simon Constable and I show that even lay investors can peer a few months into the future with some confidence by carefully studying the clues that the economy is constantly creating about its current condition and direction. Most of those clues or indicators are still showing signs of weakness and even the economy’s few bright spots could be, perversely enough, signs of its shaky condition. To call a turn in the economy, many forecasters like to see the so-called three Ps: pronounced, persistent, and pervasive movements in the data. Pronounced means large, persistent means a trend, not a random bounce, and pervasive means not limited to just a few indicators. Right now, the economy has zero Ps.
    Let’s overview the short-term outlook in more detail:
    1.    GDP growth in 2011 was positive but still anemic. That means each person on average produced a little bit more than they did in 2010 but not by much. Some forecasts for 2012 are more optimistic but others are pessimistic and hardly anyone expects breakout growth. The headline for the Philadelphia Fed’s most recent survey of professional forecasters is quote Forecasters Predict Lower Growth and Higher Unemployment in 2012 and 2013. unquote
    2.    Unemployment has decreased of late, job growth is up, and new jobless claims are down. Unemployment, however, is still above 8 percent nationally and is likely to remain higher than optimal throughout the rest of the year. That means continued weak demand for consumer durables, more mortgage defaults, and continued stress on government budgets.
    3.    The Federal Open Market Committee’s promise to keep the Federal funds rate, its overnight interbank interest rate target, at almost zero for the foreseeable future suggests that the Federal Reserve and many investors remain pessimistic about the economy’s growth prospects this year. It also means that fears of future inflation and asset bubbles loom large.
    4.    The Federal Reserve’s January Beige book, its summary of current economic conditions, pointed to modest improvements in manufacturing and retail but also noted continued problems in financial services and real estate.
    5.    Consumer confidence grew steadily last Fall but has recently weakened again. Consumer spending was sluggish in December despite early claims to the contrary. Investor confidence also declined recently, mostly due to uncertainty about Europe. Small business confidence indicators are up, but only slightly. Business inventories are slowly building but remain lean.
    6.    Consumer credit recently jumped $20 billion, way above the consensus forecast. Some of the news here is good – about $5 and a half billion went to new car sales, which are showing a little life, probably because people like me are finding it too expensive to keep our old clunkers running. But the rest of the news is bad – people are running up their credit card balances again. That means that many of the little glimmers of hope we have seen recently may be the result of people running deeper into debt prior to bankruptcy. Our bankruptcy laws give people big incentives to do that now, you know.
    7.    Nonfarm productivity is at its lowest levels since 2008.
    8.    At just over 4 percent, Mortgage Rates are still a major bargoooon but Mortgage Applications are down over 3 percent. Existing Home Sales are up but only because Home Prices continue to erode. Nationwide, in January alone the median price fell 4.6 percent and the average price fell 4 percent. There are a few signs, like the recent improvement in the National Association of Home Builders’ housing market index, that a bottom nears. Inventories of Homes for Sale are down to 6.1 months, its lowest level since the crisis. Until housing prices actually regain some lost ground, however, more foreclosures and economically damaging lawsuits are in the offing.
    9.    Manufacturing is pretty strong, but largely because of last year’s earthquake in Japan and the weakness of the dollar, which has boosted exports for the third year in a row. If the dollar continues its recent uptick, manufacturing will probably hit the skids again.
    10.           The Non-Manufacturing index surged in January but it did the same thing a year ago before declining yet again.
    11.           Construction is finally showing signs of life but it is coming off extremely low levels of activity.
    12.           Gasoline demand is at its lowest levels since the financial crisis and of late demand for natural gas has been lower than expected, even adjusting for the mild winter.
    13.           The Philadelphia Fed’s Aruoba-Diebold-Scotti Business Conditions Index is slightly above zero but flatter than a prairie meadow.
    14.           The coverage of retail sales has been kind of humorous. When the weather is bad, analysts claim that sales are down because people stayed home. When the weather is good, the same analysts say that sales are down because people don’t need to buy winter clothes, emergency supplies, and so forth. How about sales are down because people don’t have much money and their credit cards are all maxed out? In any event, December’s numbers have been revised downward and January’s numbers were weaker than expected.
    15.           Last but not least, zombies still stalk the land. No, I’m not referring to the human flesh craving monsters that roam AMC every Sunday night at 8 Central, I’m talking about banks that are economically dead, that are technically bankrupt -- due in part to an ever growing inventory of foreclosed homes of dubious value -- but that remain on regulatory life support. Such banks, we learned during the S&L Crisis, will often take big risks to try to get their balance sheets back into the black. A few will succeed but most will not, further straining the financial system and the government’s elaborate but strained bailout net.
    Zombie banks also cloud the horizon in the intermediate term because their existence increases what economists call asymmetric information. Banks don’t know which of their brethren they can trust and borrowers don’t know if they were turned down for a loan because they are a bad credit risk or because their bank is brain dead. Zombie banks can be overly litigious too. Instead of rationally settling debts caused by the continued gloom in the housing sector, they sue, and sue, and sue so some executive can book a quote unquote profit when a judgment is obtained. That’s a great boon for banks’ lawyers but destroys the credit of Americans with good incomes who pay their bills but who can’t get above water on their mortgages or who had to relocate because of a new job, a growing family, or the deterioration of their neighborhood due to all of the crackhead-infested, boarded-up houses that have not so mysteriously appeared in it over the past few years.
    As the housing crisis grinds into yet another year, such frivolous lawsuits are growing in number and overall economic drag but policymakers are reluctant to address the problem in a significant way. A few weeks ago, for example, the government settled with five big banks accused of abusive foreclosure practices for a mere $25 billion. Homeowners helped by the legislation will receive around $2,000 each sometime in the next three years. A writer Forbes, not exactly a leftwing business periodical, called that sum a quote unquote spit in the bucket. The editors at equally radical Bloomberg agreed that quote the settlement amount is a pittance. Unquote A hundred, hundred fifty years ago any bank that systematically presented fake evidence to courts would have been liquidated, their directors sued into poverty, and their executives jailed.
    Intermediate term growth prospects are also clouded by the possibility of inflation. If the economy ever heats up, the Fed will have to raise interest rates aggressively to stop the general price level from rising rapidly or another asset bubble from forming and that may stop the economy in its tracks. If the Fed doesn’t boost rates fast enough, the economy could suffer from a bout of stagflation, or high inflation, high unemployment, and low growth, similar to the 1970s. A decade ago, when confidence in the Fed’s ability to fine tune the economy was at its apex, the seriousness of the Fed’s conundrum would have been downplayed. Today, few would estimate the probability that the Fed can engineer a robust, low inflation expansion at much above one in three. That’s a big reason why gold is way up. The price of gold is off its highs but the precious yellow stuff is still up over 25 percent on the year and over 150 percent over five years ago. Investors buy gold when they fear inflation, perceive high levels of policy uncertainty, and/or foresee a period of civil unrest.
    Civil unrest is not an impossibility because long term growth prospects are extremely weak. Anybody remember the 1960s? I don’t because I wasn’t born until the tail end but I heard the family stories about grandma Wright sitting on the front porch with a loaded side by side while rioters looted and burned stores just a few blocks away. And of course I’ve studied the history. A few more years of economic despair for our young adults and another round of bank bailouts, especially one widely perceived to have been caused by European fiscal profligacy, and it could be 1967-68 all over again. Hell hath no fury like someone with high expectations scorned. And while large scale rioting might help the manufacturers of riot gear, tear gas, billy clubs, and so forth, it is not good for the economy. The 1960s riots contributed mightily to the quote unquote malaise of the 1970s, which was just Jimmy Carter’s hokey term for the economy’s astonishingly low rate of productivity growth in that dreadful decade.
    Economic growth is not about, and never has been about, jobs per se. Good jobs are a result of economic growth, not a cause of it. Economic growth is about efficiency, about producing the same quantity and quality of goods from less input: fewer hours worked, less energy wasted, fewer raw materials consumed. That means that prosperity is ultimately built on driving people into new lines of work and capital into new industries. The first factory operatives and miners were farmers made obsolete by improved agricultural techniques and tools, the agricultural revolution unleashed by the national and state constitutions and Hamilton’s financial reforms that I mentioned earlier. Likewise, today’s modern service economy is built upon the brains of the sons and daughters of factory workers, people no longer needed to build stuff due to sundry innovations in production techniques from Ford’s assembly line to robotics to just-in-time inventory systems.
    So, again, what matters for long term growth is efficiency, doing more with less. Businesses and industries become more efficient only when people have incentives to work harder and smarter. The incentives are the main thing, not the particular technologies that they spawned. Americans invented, improved, or commercialized cotton gins, steamships, telegraphs, light bulbs, automobiles, mainframe computers, personal computers, the Internet, and literally millions of lesser inventions and innovations because they believed that they would be fairly rewarded for doing so. Americans were no smarter than other peoples – we’re just a genetic hodge podge and cultural stew of them anyway – but since the ratification of the Constitution we’ve been among the best compensated for enhancing efficiency.
    Incentives to work harder and smarter, the long range drivers of the American economic miracle, are, however, deteriorating along with the Constitution. We seem determined to teach our children that the way ahead is to cultivate cozy relationships with government officials, create shoddy but clever products, foist them off on unsuspecting dupes, reap millions, and then take refuge in government bailouts and incompetence.
    Many Americans now believe that they live in a very sophisticated kleptocracy. More obvious, more brutal kleptocracies, like Saddam’s Iraq, Fidel’s Cuba, Kim’s North Korea, Mao’s China, or Muammar’s Libya, to name just a few, remained extremely poor because nobody had any incentive to work harder or smarter for fear that they would lose their property or even their lives. Despite the passage late last year of the National Defense Authorization Act, legislation that allows the military to detain U.S. citizens on American soil indefinitely and without trial, most Americans are not yet worried about government-issued jack boots kicking in their doors late at night so they continue to go to work and school. But increasing numbers of them do perceive that income inequality is rising and civil liberties are weakening. They sense that the rich and politically powerful are more equal than the rest, so real wages are likely to flat line even as taxes increase. Life is still pretty good – as a conservative think tank recently pointed out, most Americans own things like TVs and refrigerators. But many people sense that conditions are not likely to improve no matter what actions they, as individuals, undertake, a fear effectively exploited in a recent TV commercial where a grandfather wonders aloud if his grandson will ever be able to own a big house like his. One of our hoariest and most useful myths, that of Horatio Alger and the self-made person, has passed into history and with it the innovations that would have reinvigorated our moribund economy.
    A weak economy does not bode well for Obama’s re-election this Fall, which will sadden the Democrats in the room – both of you – and encourage the Republicans. But more and more Americans seem to be coming to the view that the nation’s economic trajectory does not rest on which party controls the White House, Congress, or even the entire government. Both major parties and the federal bureaucracy appear to be in Washington to help themselves, not to promote a vision of the greater good, however defined. That is why Congress’s approval rating is now 10 percent, lower than pornography, lower than polygamy, and even, I suspect, lower than polygamist pornography. The sense that politicians and government bureaucrats are in it for themselves is also why not one, not two, but three apostate political factions, the Tea Party, Ron Paul, and Occupy Wall Street, flourish.
    Members of each of those factions know that the status quo is rife with serious problems but for ideological reasons focus their wrath too narrowly. Tea Party folks are riveted on government budgets. Taxes, deficits, and government expenditures are certainly important issues – some of you may know that I called for the creation of the Tea Party, albeit with a less stupid name, in a Los Angeles Times op ed way back in March 2008 – but as the movement evolved, entirely without my involvement I should add, it became partisan and ideological. Budget reform has proven intractable because members of both parties, as well as government employees of course, have incentives to borrow and spend. Instead of becoming the independent party opposed to both existing parties that I called for, the Tea Party allowed itself to be co-opted by the Republicans.
    Members of the Occupy movement -- which by the way I can’t be blamed for in any way, shape, or form -- fixate on the influence of the rich, the now infamous one percent, on government policies. The uber-wealthy do seem to have undue influence, and gained still more in recent years thanks to the proliferation of SuperPACs and SCOTUS’s seriously flawed Citizens United decision. Seriously, I mean seriously flawed. As in laughable were it not so tragic. Unfortunately, the Occupiers are also too partisan, blaming rich Republicans for the power they wield instead of blaming a system that gives the wealthy members of both parties, and even of other countries, too much of a say in American electoral politics.
    Ron Paul is nominally a Republican but he is not going to win the Republican primary. His numbers in the polls and primaries held to date, however, have been remarkable, about twice what he polled four years ago. More than 1 in 10 American voters throughout the country believe the federal government has taken its wars, monetary policies, and civil liberties restrictions too far. But like the Tea Party, Paul and his disciples place too much blame on the government per se and not enough on manipulation of the government by powerful special interest groups. Paul insists on auditing the Federal Reserve directly, for example, rather than auditing its owners and clients, the commercial banks that it has, unsurprisingly, been bailing out the last three plus years.
    The differences between these three groups are deep and heartfelt. Occupiers love to bash Paul and vice versa. Ditto Tea Partiers and Occupiers. And of course most Tea Partiers blanche at Paul’s stand on defense, the so-called wars on drugs and terror, and a number of social issues. There is a chance, however, that the three groups could coalesce under a single, neo-progressive banner. A century ago, Progressives, a motley crew of Republicans, Democrats, and Populists ranging from Theodore Roosevelt to William Jennings Bryan, sought to purify all levels of government by fighting corruption and inefficiency with a variety of reforms, the most important and lasting of which were electoral. It was the Progressives who revitalized American democracy by pushing the secret ballot, initiative, referendum, recall, direct primaries, direct election of U.S. Senators, and women’s suffrage. Progressives, believe it or not, were major players in South Dakota’s political scene a century ago and could become so again.
    The neo-progressive movement that I have in mind would not espouse specific economic policies – it would immediately splinter if it did -- but would instead work to reinvigorate American democracy beginning, perhaps, with campaign finance reform. Citizens United must be overturned, Super PACs obliterated, and the power of political party machines over candidate selection reduced if not eliminated. Initiative, referendum, and recall need to be extended to the federal government in intelligent -- which is to say more Dakotan than Californian -- ways. And if that doesn’t work to restore the public’s confidence in their national government, more radical reforms – like random selection of legislators -- must be contemplated, debated, and tested.
    But what if such reforms lead to the implementation of the wrong economic policies, ones that injure long-term growth prospects? Frankly, I do not think that is possible. First, it may very well be the case that economic policies are not “right” or “wrong” per se but rather that any policy widely perceived as legitimate will turn out to be growth-inducing because it will establish known rules that will be widely followed. Rationing and price controls, for example, largely worked during World War II but flopped in 1971 because the public saw the wartime measures as necessary but easily saw through Tricky Dick Nixon’s New Economic Plan. If this view is correct, the problem with Obamacare, Social Security, the recent bailouts, and the like is not their intrinsic characteristics but the fact that many Americans see them as illegitimately enacted and continued, as de facto unconstitutional whether the Supreme Court rules it so or not.
    Second, it seems unlikely that a well-functioning democracy – something the neo-progressives could help the nation to re-create -- replete with diverse economic interests would allow one group to exploit another to any significant degree, much as Madison argued in Federalist Number 10. If that is the case, a quote unquote wrong policy would quickly be corrected. If a policy benefitted no one, repeal would be easy. If it benefitted a minority interest, the expropriated majority would soon overturn it. Policies that injured the overall economy but benefitted a majority would be rare but difficult to dislodge if not checked by the Senate or a presidential veto before their implementation. Overall, though, there is little to fear from quote unquote wrong policies. What we need to worry about is what we now have in spades, illegitimate and unconstitutional policies that benefit small special interest groups at the expense of taxpayers and hence overall economic health.
    A neo-progressive small d democratic movement might also be able to coalesce around corporate governance reform. Stockholders have long since lost control of the corporations they nominally own to executives, which to a first order approximation is why executives get paid so much. In my book Corporation Nation: Rise and Demise of the American Economic Juggernaut, forthcoming from the University of Pennsylvania Press late this year or early next, I describe several reform proposals that would return control to stockholders and hence make corporations less likely to take on excessive but executive bonus enhancing risks. Occupiers could see those reforms as “regulations,” and hence good, while followers of Paul and the Tea Party could see them as property rights protections, and hence something they should support. A side benefit of corporate governance reform is that returning control to stockholders would also likely limit corporate politicking, just as it did in the nineteenth century. Corporations will still lobby for special perks for themselves but won’t find it cost effective to back candidates for ideological reasons.
    Finally, a neo-progressive movement might reduce America’s economic malaise by directly reforming its emerging kleptocracy. The disparate parts of the movement could be brought together simply by recognizing that both governments and corporations can and do steal from the American people. Governments steal from taxpayers whenever they allow inefficiencies like Amtrak or the Post Office to persist and whenever they allow markets to become or stay uncompetitive, views already held by some Tea Party and Paul followers. Corporations steal from consumers whenever they engage in uncompetitive practices or obtain special favors such as bailouts, views already held by Occupiers and some of Paul’s followers. Unlike members of the current factions, neo-progressives would recognize that they cannot hope to reform the government or big businesses but rather that both must be brought to heel through the concerted efforts of everyone who recognizes the damage that kleptocracy can, has, and will continue to inflict on the economy by diminishing Americans’ incentives to work hard and smart.
    So there you have it. Leading economic indicators show few signs that the U.S. economy will pick up soon, intermediate-term growth prospects are clouded by the specters of asset bubbles, zombie banks, and runaway inflation, and long-term growth prospects remain dim due to levels of political and business corruption unseen since the Progressive era a century ago. If Paulites, Tea Partiers, and Occupiers can concentrate on common ground, however, they could implement reforms that would restore Americans’ faith in their government and give them reasons to work hard and smart once again. Without the restoration of such incentives, the U.S. economy will continue to stagnate, eventually dragging down even the vibrant economy of the Northern Plains. The nation will probably remain comfortably affluent but will slip relative to Brazil, China, India, and other large up and comers and inequalities of income and influence will grow, how far nobody knows. Beyond that, I dare not speculate.