Gold Has Longest Streak of Annual Gains Since 1920

Bloomberg reports Gold Extends Longest Streak Since 1920 on Central-Bank Stimulus.

Gold rose, capping the longest annual gain since at least 1920, on renewed concern that central banks from Europe to China will take steps to spur economic growth and as U.S. leaders near a budget deal.

Gold futures for February delivery gained 1.2 percent to settle at $1,675.80 at 1:41 p.m. on the Comex in New York, while prices for immediate delivery jumped as much as 1.5 percent. Through Dec. 28, the metal had slumped for five straight weeks as the deadline for the so-called fiscal cliff of automatic tax increases and spending cuts due to take effect tomorrow loomed. President Obama said today at a White House event that an agreement was “within sight.”

Record Average

The metal averaged a record $1,670.71 this year in New York even as it slid 6 percent since September, the biggest quarterly drop since 2004. The run of annual gains in the immediate delivery market is the longest since at least 1920. The Standard & Poor’s GSCI gauge of 24 commodities gained 0.3 percent

This year, bullion gained 7 percent on the Comex, where floor trading will be closed tomorrow for New Year’s Day. Platinum futures rallied 9.8 percent this year in New York and palladium gained 7.2 percent as labor unrest in South Africa helped curb supply. Silver increased 8.3 percent.

Amusing Irony

The amusing irony, as noted in Poison Pill and Gold Debate is that someone posting under the name "Uncle Frank" made the following accusation.

"Mish relishes chaos and financial ruin for this country so his gold holdings shoot-up in value. Everyone has an ulterior motive you know."

"Uncle Frank" is devoid of clear thinking because fiscal prudence is the one thing that would be bad for gold.

Repeating what I said earlier ....

Regardless of my personal beliefs regarding gold (that one would be prudent to buy and hold gold), I actually advocate government and Fed policies that are contrary to my recommendations.

My reasons are easily explained:

1. Neither the Fed nor the government gives a damn about what is fiscally prudent.
 
2. Both the Fed and Congress are highly likely to debase currency, causing gold to rise, even if I think that is bad economic and fiscal policy, which of course I do.

Should Congress actually do what I advocate, I think it would not be good for gold.

I recommend governmental actions on the basis of policy merit alone, not based on my stock market positioning. I find it very sad that few others do the same.

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

China Manufacturing PMI Shows Modest Growth; Don't Expect Bounce to Last

The HSBC China Manufacturing PMI™ shows modest growth this month. The index is at 51.5 with growth above 50.

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 51.5 in December, up from 50.5 in November, signalling a modest improvement of operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011.



Input prices at manufacturing plants continued to increase in December, and for the third successive month. The rate of inflation eased slightly from November but remained marked overall. Average tariffs also increased during December, after remaining broadly similar in November. Output charges rose at an accelerated pace that, although modest, was the quickest in 14 months. Anecdotal evidence suggested that tariffs were raised in line with rising market demand and higher input costs.

Purchasing activity rose at a marked rate in December, the fastest since March 2011. Exactly 17% of panellists reported increased input buying. Consequently, stocks of purchases also rose. Even though the pace of stock accumulation was only slight, it was the quickest in two years. Rises in input buying and stocks of purchases were generally associated with higher new order volumes.

Comment

Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“December’s final manufacturing PMI picked up for the fourth consecutive month to a 19-month high, thanks to the faster new business flows and the end of destocking. Such a momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise. This, plus Beijing’s reiteration of keeping pro-growth policy in place into the coming year, should support a modest growth recovery of around 8.6% y-o-y in 2013, despite the ongoing external headwinds.”

Pollyanna Outlook

I beg to differ with Hongbin Qu.

There is no reason to believe property market conditions will stabilize. Nor is there any reason to believe infrastructure construction will run at "full speed" for any significant length of time.

Indeed, should either of those happen, China's already massive rebalancing problem will just get worse.

Realistic Outlook

• July 18, 2012: "China Rebalancing Has Begun"; What are the Global Implications? Michael Pettis on China Rebalancing, Chinese Price Deflation, and Spain Exit from Euro; Target 2 Revisited
 
• August 16, 2012: Pettis on Debt, Currency Wars, Commodity Prices and Capital Flight; China FDI Contracts 8.7% YoY, 8th Drop in 9 Months
 
• December 27, 2012: Michael Pettis on China Reforms, Ponzi Schemes in Wealth Management Programs, Rebalancing Implications

For a more realistic assessment on what is happening in China and why, please visit some of the above links.

This modest bounce in China PMI to a number barely above contraction is nothing to get excited about.

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

Gold, Stock Market Up as Fiscal Cliff Can-Kicking Deal at Hand

S&P 500 futures are up 24 points (1.7%) and gold is up $22 (1.3%) on news McConnell-Biden Said Close to Deal Except for Sequester

The White House and congressional negotiators have agreed to contours of a deal to avert the fiscal cliff including tax cut extensions, with the remaining sticking point being how to handle automatic military and domestic cuts, according to an official familiar with the talks.

Income tax cuts would be extended on families earning up to $450,000, the official said, with rates rising to 39.6 percent on incomes above that.

Rates on estate taxes would rise to 40 percent, on amounts above $5 million. Extensions of business tax breaks would continue through the end of 2013. There would be a permanent fix to the alternative minimum tax threshold.

The Medicare payment rate for doctors would be extended through 2013.

The contours of the possible deal would generate $600 billion toward deficit reduction. The debate over how to postpone automatic federal spending cuts remains. Democrats propose postponing it for a year, while Republicans want to allow cuts to begin taking effect with the new year.

Debate on How to Further Postpone Begins

In simple terms, Congress will achieve zero budget cuts if Democrats get their way. Republicans appear to be quite fine with that as long as military spending is not cut.

Thus, out of a trillion dollar budget deficit, Congress will have addressed a mere $60 billion a year in revenue and something close to $0 in budget cuts, allegedly avoiding a fiscal cliff but in reality creating a far bigger one a few years down the road.

Last year, before the election, Republicans could have gotten $10 in budget cuts for every $1 of additional revenue. Now they have agreed to tax hikes, getting virtually nothing in return.

The only hope for sanity is the House punts this bill a mile high, but don't count on it.

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

Poison Pill and Gold Debate

In Ho Hum - Fiscal Cliff Deal Stalls - Republicans Offer More and More Concessions; Poison Pill Nonsense I stated ...

"The real poison pill is allowing Social Security and Medicare costs to escalate unabated. Does anyone in either party want to admit the truth? ... the best hope still remains that all compromises fail."

The above thought prompted Uncle Frank to respond in a comment "Mish relishes chaos and financial ruin for this country so his gold holdings shoot-up in value. Everyone has an ulterior motive you know."

Ulterior Motives?

Since I get accused of this sort of thing quite frequently, please let me point out a few things:

1. Gold has been sinking, as it should, if Congress is fiscally prudent.
2. Government Should be Prudent
3. Government Won't Be Prudent

Should Congress be fiscally prudent (and the fiscal cliff is not close to being fiscally prudent),  I would change my stance on gold in one second flat.

Nonetheless, should Congress fail to address the Fiscal Cliff, I would expect the exact opposite of what Uncle Frank suggests.

In short, regardless of my personal beliefs regarding gold (that one would be prudent to buy and hold gold), I actually advocate government and Fed policies that are contrary to my recommendations.

My reasons are easily explained:

1. Neither the Fed nor the government gives a damn about what is fiscally prudent. 
2. Both the Fed and Congress are highly likely to debase currency, causing gold to rise, even if I think that is bad economic and fiscal policy, which of course I do.

Thus the accusations of Uncle Frank, and countless others before him are 100% baseless. Should Congress actually do what I advocate, I think it would not be good for gold.

I recommend governmental actions on the basis of policy merit alone, not based on my stock market positioning. I find it very sad that few others do the same.

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

Addendum: In the second to last paragraph, I stated "Should Congress actually do  what I expect ...". The correct word is "advocate" as should be obvious by the preceding discussion. The word was changed. 

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Ho Hum - Fiscal Cliff Deal Stalls - Republicans Offer More and More Concessions; Poison Pill Nonsense

Republicans have offered more concessions including an agreement to hike taxes on those making as little as $400,000 (up from the $250,000 sought by Obama). They also backed down on a proposal to slow the growth of Social Security benefits.

They may as well throw out the white flag at this point. While I do not know if they reach a compromise today, it appears Senate Republicans are willing to do more than they should.

The fact remains this is a pathetic effort by both parties to rein in unsustainable budgets.

Please consider Fiscal deal stalls as clock ticks to deadline

Efforts to prevent the economy from tumbling over a "fiscal cliff" stalled on Sunday as Democrats and Republicans remained at loggerheads over a deal that would prevent taxes for all Americans from rising on New Year's Day.

One hour before they had hoped to present a plan, Democratic and Republican Senate leaders said they were still unable to reach a compromise that would stop the automatic tax hikes and spending cuts that could push the U.S. economy back into recession.

"There are still serious differences between the two sides," said Senate Democratic leader Harry Reid.

Progress still appeared possible after the two sides narrowed their differences on tax increases and Republicans indicated they would withdraw a contentious proposal to slow the growth of Social Security retirement benefits.

The two sides were close to agreeing to raise taxes on households earning around $400,000 or $500,000 a year - higher than Obama's preferred threshold of $250,000 - several senators told reporters.

Republicans aim to pair any tax increase with government spending cuts to benefit programs that are projected to grow ever more expensive as the population ages in coming decades.

But their proposal to slow the growth of Social Security benefits by changing the way they are measured against inflation met fierce resistance from Democrats. Obama included the proposal, known as "chained CPI," in an earlier proposal, but many of his fellow Democrats remain opposed.

'POISON PILL'

"We consider it a poison pill - they know we can't accept it. It is a big step back from where we were on Friday," a Senate Democratic aide said.

Poison Pill Nonsense

The real poison pill is allowing Social Security and Medicare costs to escalate unabated. Does anyone in either party want to admit the truth?

Apparently not, but that is hardly news to anyone with an eighth-grade education in math.

As the bargaining continues, it will be up to the House to reject whatever nonsense the Senate comes up with, because if not in December, the Senate will come up with something in January at the current rate of Republican concessions.

Every compromise to date leaves the US worse off than if the fiscal cliff happens. Thus, the best hope still remains that all compromises fail.

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

Online Education and College Degrees at Far Lower Prices is the Future; Virtual Classrooms to Reach 1 Billion People

I received an interesting email from "James in Arizona" today. James offers this comment on online education.

Greetings from Arizona, Mish,

I ran across this website while exploring various online options for my daughter (in high school, but she’s very computer savvy, so I’m looking for options to expand her interests/basis). It is EdX, an online education group started by Harvard and MIT, but other universities are joining.

Hopefully this online education program will finally put a torpedo in the expense of college.

Have a wonderful New Year, and thanks so much for the effort you put forth on your blog, and educating those like me.

James in Arizona

Virtual Classrooms to Reach 1 Billion People



The above video is a disappointing infomercial, but the courses available are genuine.

Here is a sample of free courses offered in the link above.

• Foundations of Computer graphics
• Circuits and electronics
• Artificial intelligence
• Software as a service
• Quantum Mechanics and Quantum Computation
• Introduction to Solid State Chemistry

The classes are free but unfortunately you do not get credit hours for them. Eventually you will.

The cost of education will come down for the simple reason it has to. The price of college education is not only ridiculous, but unsustainable.

The plunge in education costs will likely not happen soon enough to help James' daughter but it most certainly will help those with much younger kids.

If you do have kids in high school now, please encourage them to sign up for some of those classes to get a head start.

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

Obama Issues Executive Order Granting Pay Raises to Congress, the Vice President, Judges; Any Raise is Too Much; Congress Approval Rating is 18%

Congress has done such a beautiful job handling the fiscal cliff and debt ceiling that president Obama felt it mandatory to issue an Executive Order Giving Biden, Congress Pay Raises

President Barack Obama issued an executive order to end the pay freeze on federal employees, in effect giving some federal workers a raise. One federal worker now to receive a pay increase is Vice President Joe Biden.

According to disclosure forms, Biden made a cool $225,521 last year. After the pay increase, he'll now make $231,900 per year.

Members of Congress, from the House and Senate, also will receive a little bump, as their annual salary will go from $174,000 to 174,900. Leadership in Congress, including the speaker of the House, will likewise get an increase.

Here's the list of new wages, as attached to President Obama's executive order

"A new executive order has been issued providing for a new pay schedule beginning 'on the first day of the first applicable pay period beginning after March 27, 2013,'" reports FedSmith.com. "The pay raise will generally be about 1/2 of 1%."

Congress Approval Rating is 18%

The latest Gallup poll taken December 19, 2012, shows Congress Approval Remains at 18% During Fiscal Cliff Debate

Eighteen percent of Americans approve of the job Congress is doing, as leaders continue to work toward a solution to the looming fiscal cliff. That approval rating is unchanged from last month, but remains low from a historical perspective.



Republicans' approval of Congress fell slightly to 14% from 16% in November, while Democrats' approval increased slightly to 21% from 19%. The resulting seven-point partisan gap in approval of Congress is the largest measured since June 2011, with the exception of the 16-point gap prior to the election in October of this year.

Any Raise is Too Much

I happen to think any raise is too much.

Perhaps Obama thinks 18% approval is a stunningly good achievement following the brilliant Congressional handling of fiscal cliff issues, the smooth handling of healthcare, and the always steady handing of the budget deficit and debt ceiling.

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

Mercy! Isn’t a Late Day Selloff Illegal?

I hope you are as outraged as I am by this late-day stock market action.

S&P 500 Futures 10-Minute Chart



Since when is a late day selloff legal? And for an entire hour with six consecutive red candles!

And in the month of December too! What happened to my Santa Rally? I demand a Congressional inquiry.

Goodness! I was sure such action was illegal. Clearly, it should be illegal, and I thought it was already.

It's no wonder Fiscal Cliff legislation failed. Republicans and Democrats alike forgot to pass circuit-breaker provisions to halt (or better yet prevent) market declines late in the day, as well as this late in the year.

Please call your Senators and Representatives today, demanding their immediate attention on this matter.

After all, everyone knows that jobs and fiscal prudence are irrelevant. It's the stock market that's vital to the economy.

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

European PMI Retail Sales Collapse: Near-Record Drop in Italy Retail Sales; French Retail Sales Drop 9th Consecutive Month; Germany Retail Sales Back in Contraction

Inquiring minds are noting the expected (at least in this corner) collapse in European retail sales as measured by PMI indices in Italy, France, and Germany, the three largest Eurozone economies.

Earlier today I took a look at France. For details, please see France Economic Implosion Underway; French Retail Sales Contract 9th Consecutive Month as Cost Inflation Surges.

This article will look at Germany and Italy, the first and third biggest eurozone economies.

Italy

The Markit Italy Retail PMI® shows Steep downturn in high street spending continues in December.

Key points:

• Near survey-record year-on-year fall in retail sales
• Rate of job losses fastest since July
• Business sentiment weakens to series low

Summary:

Italy’s retail sector remained in a steep downturn in December, with sales dropping sharply according to both monthly and yearly measures. Gross margins decreased amid a further rise in average wholesale prices, while firms cut employment and purchasing activity in line with lower sales. The month also saw business sentiment hit a record low.

December data pointed to another sharp month-on-month drop in Italian retail sales. This was signalled by Italian Retail PMI® registering 36.8, up from November’s seven-month low of 35.5 but slightly below its average over the year as a whole of 37.2. The latest decrease in high street spending was the twenty-second in consecutive months, and attributed by panellists to greater tax burdens, weak consumer sentiment and media scaremongering.

When measured on a year-on-year basis, the decline in retail sales was one of the most marked since data collection began in January 2004. In fact, only in December 2008 and May 2012 have faster annual rates of decline been recorded.

Comment:

Phil Smith, economist at Markit and author of the Italian Retail PMI®, said: “2012 surpassed 2008 as the worst year in the survey’s history, with the PMI showing sharp monthly contractions in high street spending throughout and never once climbing above its pre-2012 historic average. The series measuring year-on-year changes in sales hit a record low back in May and came close to that mark in the latest survey period as consumer spending power was weakened further amid added tax pressure. Firms persistent attempts to boost sales through discounts have proved largely fruitless over the past 12 months, such has been the extent of the downturn in demand among Italy’s households.”

Germany

The Markit Germany Retail PMI® shows Retail PMI hits lowest level for eight months.

Key points:

• Moderate reduction in sales since the previous month
• Actual sales fall short initial expectations for December
• Job creation was maintained

Comments:

The seasonally adjusted Germany Retail PMI dropped to 47.6 during December, from 50.2 in November, signalling a moderate month-on-month contraction in like-for-like sales. December’s index reading was below the long-run series average (49.8) and pointed to the sharpest pace of contraction for eight months. Reports from retailers in Germany suggested that strong competition, unfavourable weather conditions and unexpectedly low consumer footfall had all contributed to lower sales.

December sales disappoint compared to targets

German retailers signalled that actual sales at their stores fell short of prior expectations in December, continuing the trend of weaker than expected sales for the ninth month running. Moreover, the degree to which sales failed to reach initial targets was the most marked for any December since that recorded in 2009. Meanwhile, expectations for sales in the month ahead were the weakest since December 2009, with some retailers suggesting that earlier than planned promotional discounting will have a negative influence on like-for-like sales in January.

Margins squeezed again

Operating margins in the German retail sector declined again in December, thereby extending the current period of contraction to 25 months. Anecdotal evidence suggested that lower margins reflected strong competition and a sharp rise in average cost burdens during the month.

Italy Implosion Continues

Note that high street spending is in its twenty-second consecutive month of contraction.

Also note (and laugh at) the blame placed on "media scaremongering".

Germany Back in Contraction

German retail spending is back in contraction and this time I expect it to stay there, while laughing at the blame placed on "unfavourable weather conditions and unexpectedly low consumer footfall".

Signs point to a full-blown eurozone recession that is worsening nearly every month.

Germany cannot possibly be immune from this and indeed I blasted the IMF for proposing just that on January 9, 2012 in Dimwit Comment of the Day: Christine Lagarde, IMF Director says "Europe May Avoid a Recession This Year"

"The idea Germany may avoid a recession is silly enough. The idea Europe may avoid a recession is downright idiotic."

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

Four Strikes Is An Out; Obama Proposes Last Minute "Mini Deal" Essentially Scrapping All Cutbacks, While Adding Milk Lobby Bonus

The one thing I am always afraid of in budget negotiations is that virtually nothing is done, or worse yet, something counterproductive is done.

Obama's latest Fiscal Cliff "Mini-Deal" Proposal is exactly the kind of counterproductive nonsense I am talking about.

Assuming the above Atlantic Wire article is correct ...

1. The deal would delay or replace the vast majority of spending cuts called for in the automatic sequester.
2. The deal would extend unemployment benefits
3. The deal would stop planned cuts to Medicare reimbursements
4. Out of the blue, and probably an attempt to buy farm-state votes, the deal purportedly would include a "milk fix" that allegedly would avoid a dairy market catastrophe created by the failure to renew the farm bill

Four Strikes Is An Out

I am against all four ideas and it's hard to say which one is worse. Certainly we need to scrap all farm subsidies, not put back those that have been scrapped.

Hopefully the House punts this ball a mile high, or better yet, let's hope this does not clear the Senate in the first place.

Purportedly the deal would only be for 60-90 days which would in all likelihood do nothing but allow further watering down of the proposal in yet another can-kicking exercise at that time.

Since the market is not blasting higher on this preposterous idea, it's safe to assume this deal is Dead-on-Arrival in the House, if it were to get there.

As I have said on numerous occasions, the best offer on the table is to let the alleged "fiscal cliff" happen.

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

France Economic Implosion Underway; French Retail Sales Contract 9th Consecutive Month as Cost Inflation Surges

Inquiring minds are noting the expected (at least in this corner) collapse in European retail sales as measured by PMI indices.

The spotlight for this post is France, the second largest Eurozone economy following Germany.

The Markit France Retail PMI® shows French retail sales fall for ninth consecutive month.

Key points:

• Sales fall at sharper pace on both monthly and annual measures
• Purchasing costs rise at strongest rate in ten months
• Stocks of goods for resale decline at faster pace

Summary:

French retailers reported another month-on-month decline in sales during December – the ninth in succession which is a survey record. Sales were also down on an annual basis, and fell well short of retailers’ plans. Gross margins remained under considerable pressure, partly reflecting a strong and accelerated rise in purchasing costs.

The headline Retail PMI® slipped to 46.8 in December, from 48.8 in November. The latest reading was indicative of a solid rate of contraction. Anecdotal evidence suggested that a difficult economic climate and low customer footfall had contributed to the drop in sales.

Actual sales at French retailers once again disappointed relative to previously set plans in December. The degree of undershoot was the greatest since August. Survey respondents are also pessimistic regarding the one-month outlook for sales.

Factors expected by retailers to boost sales over the coming three months include cold weather, new product launches and promotions. Those factors expected to depress sales include a weak economy, depressed consumer confidence and increased taxes.

Latest data indicated that French retailers’ gross margins remained under strong pressure in December. Margins have declined in every month since February 2008.

Wholesale prices faced by French retailers continued to increase in December. The rate of inflation accelerated to the sharpest since February. Panellists reported that suppliers had generally raised prices in order to pass on higher raw material costs.

France Economic Implosion Underway

Retail sales in France fell for the 9th consecutive month, a new record. Deterioration is marked as well as expected.

Because of the sharp rise in inflation, things are even worse than they look at first glance of the PMI numbers.

The horrendous policies from president Francois Hollande and his socialist cronies including ridiculous tax hikes and inane rules on firing workers are going to cause massive heartburn (to put things mildly).

I have to laugh at the comment by Markit that "low customer footfall had contributed to the drop in sales". Nearly as amusing, note that retailers expect "increased sales because of cold weather."

For further reading, please consider economically insane proposal by French president Francois Hollande "Make Layoffs So Expensive For Companies That It's Not Worth It"

Given that any clear-thinking person should quickly realize that if companies cannot fire workers they will be extremely reluctant to hire them in the first place , it should be no surprise to discover French Unemployment Highest in 14 Years (And It's Going to Get Much Worse).

In France, Government spending amounts to 55% of total domestic output. For discussion, please see Hollande's Honeymoon is Over; 54% of Voters Unhappy; Unions Promise "War" in September.

Looking ahead to 2013, I Expect things in France to get worse at an accelerated pace.

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

Japan Manufacturing PMI Downturn Accelerates; Output and New Orders Suffer Sharpest Contractions for 20 Months; Cheaper Yen Cannot Save Japan

The Markit/JMMA Japan Manufacturing PMI™ shows Downturn of manufacturing sector accelerated during December.

Key points:

Output and new orders register sharpest contractions for 20 months
Employment, purchasing and stocks all continue to be cut
Output charges lowered further as input prices remain unchanged



Summary:

Latest data from Markit/JMMA indicated that the performance of the Japanese manufacturing sector continued to deteriorate in December. Output, new orders and employment all fell compared to one month ago while margins remained under pressure as output charges declined amid ongoing price competition.

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) registered a level of 45.0 in December. Down from 46.5, the PMI subsequently posted a 44-month low.

Output continued to decline markedly, with the sharpest contraction again seen in the capital goods producing sector. Total manufacturing production has now fallen for seven months in a row, with the latest reduction the sharpest seen since April 2011.

Falling volumes of incoming new business was the primary factor driving manufacturing output lower in December. As was the case with output, the fall in new order volumes was the steepest since April 2011, although the rate of decline was considerably sharper than seen for production.

New export order volumes also continued to fall in December, with companies reporting that demand from Chinese and European markets remained sluggish. The fall in orders from abroad was the steepest since July, with investment goods producers recording the steepest reduction.

Cheaper Yen Cannot Save Japan

Nearly every day someone sends me an email stating Japan's manufacturing and export machine will pick up with a falling yen.

Will it? Why?

Japan is in an economic war with China over disputed islands so that part of Japan's export business is dead, and will remain dead.

In isolation, a falling Yen will help Japanese exports to Europe. However, Europe is in a severe, as well as worsening recession, so a falling Yen alone will not revive sales.

In the US, car buyers are not as in love with Japanese cars as they once were, and the US has its own share of problems in a weakening if not outright recessionary economy.

Finally, a falling Yen will exacerbate Japan's energy problems as Japan is totally dependent on imports to meet its energy needs. 

Japan wants inflation, but this is a strong case of "be careful of what you ask, because you may get it". Inflation is likely to destroy Japan, the real question is "when".

For more on Japan, please see

• December 16: Spotlight on Japan: Return of 'Abenomics', More Militarism, Tougher China Line; Outlook for Yen and Nikkei
 
• December 19: Kyle Bass on the End of the Debt Supercycle and a Coming Massive Devaluation of the Yen; Most Difficult Time to Invest; The Belief Bubble
 
• December 23: Yen Declines Following Shinzo Abe's Threat to Change Japanese Law; An Idle Threat?
 
• December 26: Mad, Mad World; Japan Prime Minister Unveils "Crisis Beating" Cabinet With Pledge to Increase Spending; Yen Sinks to Two-Year Low

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

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Lock Congress Up Until They Deal?

Stocks staged a late day rally because the Senate is prepared to kick the can down the road, avoiding any chance of fiscal sanity this year or next.

Whether or not the House will go along is another matter, but unfortunately Speaker Boehner calls House back to Washington on Sunday

The House of Representatives will reconvene on Sunday evening, just less than 30 hours before the United States reaches the fiscal cliff.

House Speaker John Boehner, R-Ohio, notified lawmakers that the House would come to order at 6:30 p.m. ET on Sunday in hopes of averting the end-of-year combination of tax hikes and spending cuts that constitute the fiscal cliff.

The lawmaker on Thursday's call told NBC News that any Senate plan Boehner puts on the House floor (of which there is no guarantee) would only receive as few as 40 Republican votes, making Democratic help necessary.

"If the Senate will not approve these bills and send them to the president to be signed into law in their current form, they must be amended and returned to the House," Boehner told Republicans Thursday, according to a source on the call. "Once this has occurred, the House will then consider whether to accept the bills as amended, or to send them back to the Senate with additional amendments. The House will take this action on whatever the Senate can pass -- but the Senate must act."

Flagpole Rally S&P 500 Futures



The moment I saw that second green candle and volume spike on the S&P 500 futures I knew a deal was in the works even though I could not find any news for a half hour.

Magic Number is 60

MarketWatch reports Senate Republicans open to new cliff deal

Senate Republican Leader Mitch McConnell said late Thursday that Senate Republicans are open to any White House proposal to avert the fiscal cliff.

Reid urged the House to pass a Senate bill extending Bush-era tax cuts for those earning $250,000 a year or less. The Nevada Democrat said the House is being operated under “a dictatorship of the speaker.”

A spokesman for House Speaker John Boehner said in response: “Senator Reid should talk less and legislate more.”

Even in the Democratic-controlled Senate, Obama’s preferred bill faces an obstacle: Sixty senators are required to break a filibuster, and Democrats control 53 seats.

Easy Escape for Senate Republicans

The magic number may be 60, but I do not expect any filibusters in the Senate.

The easy escape route is to pass the buck. In this case the Senate is likely to pass anything, hoping to avoid the blame, while placing a burden on the House to do something fiscally responsible.

Let's hope the House rejects whatever watered-down proposal that comes out of the Senate.

Lock Congress Up Until They Deal?

MarketWatch Columnist Rex Nutting says On fiscal cliff: Don’t negotiate, let’s legislate.

The United States doesn’t have a fiscal problem. Or an economic problem. It has a political problem. The workings of the government are so gummed up that we’re in danger of falling into a recession that’s completely avoidable.

I think it’s high time we locked the members of Congress in a room and told them that we’ll let them out when they reach a deal.

Economic Folly of Recession Avoidance

The idea the US does not have a fiscal problem or an economic problem is of course total nonsense.

That said, I am of course totally sympathetic towards the idea the US also has a political problem. Indeed, I am even willing to say the political problem is largely responsible for the economic and fiscal problems.

Where Nutting crosses the line into economic folly is the idea Congress needs to avoid a recession. Quite frankly, that is a nut case proposal, and no solution at all.

The US is in this mess because every step of the way, the Fed and Congress acted to avoid recessions. Greenspan in particular fueled a housing bubble holding interest rates too low too long to "help" the economy out of a dot-com bubble bust largely of the Fed's making.

Now, Nutting wants to lock Congress in a room until they come up with a deal to avoid a recession.

Instead, I propose fiscal sanity. I propose we lock Congress in a room until they come up with a proposal that will balance the budget within five years.

Either Nutting is wrong or I am. And here's a hint, if I'm wrong about anything, it's that five years is too long.

Nutting proposed nothing more than another can-kicking exercise that will never end. I suggest it's time for an honest economic discussion on what the country can or cannot afford.

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

Social Trap in Spain: Mortgage Nightmare; Why Spain (or Germany) is Guaranteed to Leave Euro

Looking for a synopsis of the problems facing Spain? A summary of bullet points I gathered from the Spiegel article Evictions Become Focus of Spanish Crisis shows just how hopeless the situation is.

• There were a record number of evictions in 2012, foreclosures are expected to increase in 2013.
• Some 400,000 eviction proceedings have been opened in Spain since 2007, with roughly half of the families involved having already lost residential properties due to foreclosures. That means Spain is only half-way through the crisis.
• There are now 1.7 million Spanish households in which not a single family member still earns a salary.
• 4 million people have lost their jobs since 2007
• 27 percent of the population lives below poverty level
• Evictions now affects pensioners, who have used their own homes as collateral to take out loans for their sons and daughters
• A joint study by UNICEF, Oxfam and Doctors Without Borders concluded that the country will need over 20 years to regain the standard of living it attained in the prosperous, pre-crisis years.
• In the Catalonia region, unemployment is 26 percent
• Youth unemployment is over 50%

Social Trap

Spanish Prime Minister Mariano Rajoy has issued a moratorium on foreclosures for "extreme hardship" cases. The definition of "extreme hardship" is "families with two children and an annual income of less than €19,000, more than half of which has to be used for mortgage payments." Single parents with children under the age of three also qualify.

Notice that the hardship rule still requires over half of income to go to mortgage payments. Meanwhile interest accrues indefinitely.

There is no way for these families to ever pay back debts accumulated at or near the height of the bubble.

If there are evictions people are thrown out on the street. If there are no evictions, then there is no way for banks to sell the properties to someone who is able to afford mortgage payments.

Euro Trap

In mid-December, Spain received nearly €40 billion ($53 billion) from the European Stability Mechanism (ESM) to restructure its ailing banks. Yet every day Spanish banks acquire more properties not marked-to-market.

Moreover, moratoriums delay the process as interest accrues.

The longer Spain tries to stay on the euro, the deeper Spain goes into debt to the rest of the EU. This is what happened to Greece, and the result was the rise of "Golden Dawn" a neo-Nazi group.

Constitutional Crisis

There are no sign of Nazism in Spain. However, Pro-Referendum Parties Won 87 of 135 Seats in Catalonia and a constitutional crisis is brewing as Catalans wish to secede from the rest of Spain.

Every day, bad debts mount at Spanish banks.

Catch 22 of Sorts

On December 19, I reported Loan Default Rate Hits 11.23% in Spain, a New Record; Construction Defaults Hit 26.4%; Credit Plunges 5%

Can anyone tell me how Spain can possibly exit their trap that does not involve Germany pouring vastly more money into Spain?

The only way I can come up with is default with Spain leaving the Euro.

Sooner Spain Leaves the Euro the Better for Everyone

Note that the ECB, IMF, and the rest of Europe (including Spain), threw money at Greece, turning a relatively small problem into a much bigger one. As Greece has shown, the sooner a country leaves the Euro, the better off everyone will be.

So when does Spain, or Germany come to its senses? Either one will do.

In the meantime, politicians will kick the can for as long as they can, making the situation messier and messier along the way.

Pick Your Poison

The bottom line is Germany will pony up (and by pony up I mean "give" not lend) massive amounts of money to Spain, or Spain will have no choice but hard default.

1. Ultimately, a charismatic politician in Spain will blame Germany, blame the euro, and pledge to default. That politician will be elected.
 
2. Alternatively, a charismatic politician in Germany will get tired of making handouts to the club-med states and promise to put Germany back on the Deutschmark. That politician will be elected.

This is a clear case of pick your poison, and Germany will take a hit one way or another. Timing is the only uncertainty

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

Michael Pettis on China Reforms, Ponzi Schemes in Wealth Management Programs, Rebalancing Implications

Here are portions of a email from Michael Pettis at China Financial Markets on the unsustainable nature of China's growth, Ponzi schemes in wealth management programs, and the implications of China's rebalancing efforts. By permission ...

As analysts wrack their minds over specific debt problems in China and how they are to be resolved, I think we must remember to look not at specific debt issues but rather at the way the overall system operates.

I have argued many times in the past six years that the Chinese growth model has reached the point (perhaps well over a decade ago) where growth was almost necessarily driven by an unsustainable increase in debt. This meant, I suggested, that while it might be hard to predict where the next debt problem would crop up, it was very easy to predict that debt problems would continue to crop in one sector of the economy after another.

We need to remember this as we consider financial risks in China. One of the big stories this month of course was the failure of the Zhongding Wealth Investment Centre, the borrower against a Wealth Management Program (WMP) issued at a Shanghai branch of Huaxia Bank.

According to an article in the South China Morning Post, [Huaxia scandal spotlights China's Ponzi crisis] "dozens of depositors lost their multimillion-yuan investments in a "wealth management product" (WMP) sold at a Shanghai branch of Huaxia Bank. The sorry saga was a rude reminder that Ponzi schemes thrive on the mainland, where millions of residents still believe that banks are the safest havens for their lifelong savings."

The reason this particular story is important is not because the transaction is large enough to make much of a difference, but rather in what it tells us about risks in the financial system. The first point is that we have no idea what is really going on in this already large and rapidly growing part of the Chinese financial system, but whatever we can see looks pretty ugly.

In my October 29 newsletter I referred to a recent article that discussed this problem, an opinion piece by Xiao Gang, the Bank of China’s CEO, in China Daily. In this piece he describes the shadow banking system and the role of wealth management products:

It is difficult to measure the precise amount and value of WMPs. Fitch Ratings says that WMPs account for roughly 16 percent of all commercial bank deposits, while KPMG reports that trust companies will soon overtake insurance to become the second-largest sector in the Chinese financial industry. According to a report by CN Benefit, a Chinese wealth-management consultancy, sales of WMPs soared 43 percent in the first half of 2012 to 12.14 trillion yuan ($1.9 trillion).

There are more than 20,000 WMPs in circulation, a dramatic increase from only a few hundred just five years ago. Given that the number is so big and hard to manage, China's shadow banking sector has become a potential source of systemic financial risk over the next few years.

Particularly worrisome is the quality and transparency of WMPs. Many assets underlying the products are dependent on some empty real estate property or long-term infrastructure, and are sometimes even linked to high-risk projects, which may find it impossible to generate sufficient cash flow to meet repayment obligations.

I went on to say in my newsletter:

There are three big questions with WMPs, as analysts are increasingly recognizing, each of which Xiao discusses, perhaps a little more politically than I do, in his piece. First, we don’t know the size of the market. Second, we have no idea of whether or not the assets backing these products are money good – in fact the bankers themselves who sell WMPs are almost never able to explain what asset is behind the WMP. Third, we have no idea of the transmission mechanism between potential problems in WMPs and the banking system.

The key point we must remember is that whatever Beijing does about WMPs, this will not resolve the underlying debt problem. Growth in China is currently dependent on an unsustainable increase in debt. If one avenue for this growth in debt is cut off, we will simply see the debt rise somewhere else. Economic growth in China requires rapid growth in investment. This growth in investment is increasingly misallocated on projects that will not generate the increases in real productivity needed to cover the cost of capital. Since these investments are funded at least in part by debt, debt must rise in one part of the system or another as long as GDP growth rates exceed 4-5%.

In China, in other words, high growth is no longer compatible with a strengthening balance sheet. If China is growing at a rate that approaches or exceeds this level, it is probably a safe bet that debt is rising faster than debt servicing capacity.

The good news is that the current leadership seems very clear about the need to implement reforms, and also understands that this is going to be politically a difficult process.

As an article in the People’s Daily put it: No easy path in sight for China's economic future

"Reform is exciting, but it is also full of difficulties and challenges. Xi said in Guangdong that China must squarely face difficulties and challenges, strive for the best results and firmly seize the initiative. This deserves consideration by the entire Party and society."

These expected, and exciting, “difficulties and challenges” are, I suspect, the things we should be most concerned about in our attempts to understand the pace of reform. The history of developing countries suggests that most countries fail in the reform and adjustment process precisely because the sectors of the economy that have benefitted from the distortions are powerful enough to block any attempt to eliminate those distortions.

Certainly not everyone in China is confident that Beijing will be able to force through the reforms that are widely accepted as necessary without a serious fight. There were two interesting and related articles in this week’s South China Morning Post that may indicate the degree of worry.

The first article tells you much of what you need to know in the title (“China's rich and skilled leave in record numbers”). It goes on to say:

More than 150,000 Chinese became permanent citizens in major immigrant countries including the United States, Canada, Australia and New Zealand last year, topping the world’s list of overseas migration in absolute numbers, a recent report revealed. The Centre for China and Globalisation (CCD) and Beijing Institute of Technology (BIT) School of Law jointly released their findings in the Chinese International Talents Annual Blue Book's International Migration Report (2012) on Monday, according to media reports.

…Another report by Hurun Research Institute and Bank of China in 2011 found that 14 per cent of China’s high-net-worth individuals had either emigrated or were in the process of doing so. In addition, 46 per cent were considering permanently moving overseas through various immigrant investor programmes with real estate, foreign currency deposits and stocks being the primary areas of investment.

US Citizenship and Immigration Services (USCIS) declared that 41 per cent of total EB-5 Immigration Investor Programme applicants were Chinese while the Australian Department of Immigration and Citizenship reported that 61.5 per cent of applicants for the Business Skilled Migration Programme were Chinese.

We have known for a while that Chinese with the means to do so are increasingly opting to move abroad. There are many reason for this, of course, but China is still growing much faster than the rest of the world, even if some of us don’t fully accept the official numbers, and so for people to look for opportunities abroad suggests at the very least that either some of these people seriously doubt the sustainability of China’s current growth and expect it to come crashing down, or that they are worried about political uncertainty and the possibility of difficulty ahead. Or both.

The second article, China 'top source' of world's tainted money, also by the South China Morning Post, involves data from a completely different source and for completely different purposes, but it may broadly be telling the same story. The article is based on a very interesting study conducted by Global Financial Integrity on illicit capital flows around the world. The article summarizes their study as:

Some 150 developing countries, led by China, have been the source of flows of tainted money totalling US$5.9 trillion over 10 years through 2010, Global Financial Integrity, a research and advocacy group in Washington, DC, said.

Flows of illicit money from tax evasion, crime and corruption in the developing world have roared back to pre-financial crisis levels, topping nearly US$859 billion in 2010, near the all-time high of US$871 billion in 2008, it said. In 2009, following the global financial crisis, the figure dropped to US$776 billion.

China tops the list of developing countries sending illicit money abroad, either to offshore havens or to financial institutions in developed countries, GFI said in a study. In 2010, illicit money out of China totalled US$420 billion, the report said, and exceeded US$2.7 trillion for the decade ending in 2010 - nearly half that period’s total for all developing countries

For comparison’s sake, Malaysia came second, with over $64 billion in 2010 and $285 billion for the decade. Mexico was in 2010, with over $51 billion in illicit flows, and $476 billion for the decade. The study acknowledges that it does not include cash transactions, so actual illicit flows are probably higher, maybe even significantly higher.

The full ranking of 71 countries shows, among other things, that illicit capital flows from China are roughly equal to the sum of illicit capital flows from the next fifty countries. I haven’t been able to adjust the numbers for GDP size (larger economies should on average have larger illicit outflows), but when you consider that the next fifty countries include Mexico, Malaysia, Russia, India, Indonesia, Poland, Brazil, Turkey, Argentina, Hungary and forty others, I think it is pretty safe to say that China’s ranking as number 1 is not just a function of its being the largest developing economy in the world.

As a share of GDP, in other words, Chinese illicit outflows seem easily to exceed the average for all developing countries. Mexico’s GDP, for example, is roughly one-seventh the size of China’s, and yet for all its drug money, its illicit flows were only one-eight those of China. This means that the Chinese business and political elite export illicitly a larger share of the Chinese economy than the combination of the Mexican business and political elite and their drug cartels.

One of the most interesting paragraphs in the study, for me, concerned trade invoicing:

Trade misinvoicing is the preferred method of transferring illicit capital from all regions except the MENA region where it accounts for only 37 percent of total outflows for the decade ending 2010 (Chart 6). In declining order of dominance, the share of trade misinvoicing in total outflows by region is Asia (94.0 percent), Western Hemisphere (84.0 percent), Africa (65.0 percent), and developing Europe (53.0 percent). Large current account surpluses of countries in the MENA region driven by crude oil exports entail larger outflows through the balance of payments. In the case of Europe, the relatively large unrecorded outflows from the Russia’s balance of payments dominate regional outflows.

This creates, for me, a real and very obvious problem with understanding China’s trade figures. According to the study, illicit money out of China totaled US $420 billion in 2010. The study also claims that in Asia nearly all of the illicit money flows (94%) occur through mis-invoiced trade, which suggests, of course, that the trade numbers can be seriously distorted. If capital is being secretly taken out of the country through trade, exports are likely to be under-reported, imports are likely to be over-reported, and the real trade surplus is almost certainly larger than the reported trade surplus.

How much does this illicit capital flow impact China’s real trade account? Here is a January 2011 Xinhua article on China’s 2010 trade account:

China's foreign trade last year jumped 34.7percent year on year to more than 2.97 trillion U.S. dollars while its trade surplus fell 6.4 percent to 183.1 billion U.S. dollars, the General Administration of Customs (GAC) said Monday.

The country's exports grew 31.3 percent year on year last year to 1.58 trillion U.S. dollars while imports surged 38.7 percent to 1.39 trillion U.S. dollars, said the GAC. "China's foreign trade is, in general, heading towards a balanced structure," said the GAC in a statement on its website. The trade surplus accounted for 6.2 percent of all foreign trade last year, down from 8.9 percent in 2009 and 11.6 percent in 2008.

It is clear that these illicit capital flow numbers are pretty significant in relation to the trade numbers. China’s trade surplus in 2010 was reported to be $183 billion, but GFI claims that Chinese illicit capital flows (I assume that most if not all represents outflows, or even net outflows) for the year were $420 billion, most of which may have been recorded as higher exports or lower imports.

Even if these numbers are way off, they still suggest that China’s real trade surplus may have been substantially higher than reported, with much if not most of the money parked offshore for safekeeping. Among other things these numbers also suggest that the sluggish import growth of the past year, which smart people like Andy Xie insist are among the many numbers that are not compatible with the high official growth rates claimed by the government, may be even lower than reported.

Obviously I am not the first person to complain about the opacity of Chinese economic data and the difficulties we often have in reconciling one set of numbers with another, but I think it is important to note that while opacity may not be a terrible problem during the optimistic up-cycle (in fact hazy data give us more leeway to daydream pleasant things), it can suddenly become a huge problem during the pessimistic down-cycle, when they don’t even constrain our nightmares. What is worse, an increase in opacity, which we are clearly seeing in the financial system, is usually a herald of bad tidings. When the economy starts to get bad, often the first impulse for many is to massage or hide the data.

I don’t think this is the end of this story. The market hasn’t yet priced in the amount of rebalancing China has yet to go through, and so it has also not priced in either the full reduction in hard commodity demand or the extent of rebalancing on China’s export competitiveness. I expect a lot more of the same story in 2013 and 2014.

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

Michael Pettis is one of six speakers an an economic conference I am hosting on April 5, 2013, in Sonoma, California. I consider Pettis as one of the world's leading experts on China and on global trade issues.

Click on the image below for conference details.

"Wine Country" Economic Conference Hosted By Mish
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US Hits Debt Ceiling Limit on December 31; Geithner Unveils Treasury Plan to Buy More Time

On December 31 the US will once again hit the debt limit and Treasury Secretary Tim Geithner is working on an emergency plan to deal with the situation.

Here's the kicker. If the Fiscal Cliff hits (which it likely will), the increased tax revenue and spending cuts would automatically buy the Treasury some time.

Please consider Geithner's plan to buy time under debt ceiling.

The Treasury on Wednesday announced the first of a series of measures that should push back the day when the government will exceed its legal borrowing authority as imposed by Congress by around two months.

Without any action, Treasury said the government is set to reach its $16.4 trillion debt ceiling on December 31.

To cut government spending and delay bumping up against the debt ceiling, the Treasury will suspend issuance of state and local government series securities -- known as "slugs" -- beginning on December 28.

Investments in a government employee pension fund will also be suspended, along with some other measures, although Treasury did not give dates for when these other measures will begin.

"These extraordinary measures ... can create approximately $200 billion in headroom under the debt limit," Treasury Secretary Timothy Geithner wrote in a letter to congressional leaders.

Normally, these measures would buy the Treasury about two months time before hitting the debt ceiling, Geithner said in the letter. But a series of planned tax hikes and spending cuts due to take effect in early January could give Treasury further time if they take effect as scheduled, he said.

True Fiscal Cliff

The true Fiscal Cliff is years down the road and will be similar to the crisis about to hit Japan in 2013 or 2014. The way to address the problem is to balance the budget, exactly the opposite of what Obama and nearly everyone in Congress other than Ron Paul and Rand Paul want to do.

The term "Fiscal Cliff" as currently used is simply preposterous. The ultimate irony is the alleged "Fiscal Cliff" happens to be the most fiscally responsible plan currently under discussion.

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

Mad, Mad World; Japan Prime Minister Unveils "Crisis Beating" Cabinet With Pledge to Increase Spending; Yen Sinks to Two-Year Low

The Keynesian and Monetarist clowns in Japan are going all out in Japan with pledges to ignore debt caps and implement "bold monetary policy".

Please consider Japan signals rise in borrowing.

Japan’s new finance minister has signalled that the government will borrow to boost the struggling economy, as Prime Minister Shinzo Abe unveiled a “crisis beating” cabinet on Wednesday.

At a press conference following his appointment as finance chief, Taro Aso announced he would issue bonds and lift a cap on new debt for the 2012 fiscal year.

“We will not stick to the debt cap of Y44tn ($514bn) [for the year through to March],” Mr Aso said. The debt limitation was introduced by the previous Democratic party administration, which was defeated in a landslide by Mr Abe’s Liberal Democratic party two weeks ago.

Mr Abe on Wednesday unveiled a cabinet of close allies and policy experts to push his agenda of economic recovery, just hours after being formally appointed as the country’s seventh prime minister in six years.

He has vowed to create a “crisis beating government” to tackle the deflation that has dogged Japan for more than a decade and also the strong yen. Mr Abe said he had instructed his cabinet to do their utmost to achieve economic recovery and reconstruction after last year’s devestating earthquake, and to ensure national security.

“I will direct the energies of my entire cabinet towards implementing bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment, and aim to achieve results with these three pillars,” Mr Abe said.

He has pledged to reflate the economy through fiscal stimulus and monetary easing. He has also called on the Bank of Japan to carry out “unlimited” easing and warned that the central bank risks losing its independence – through legislative changes – if it does not introduce a 2 per cent inflation target.

Nature and Origin of Japan's Crisis

Japan's crisis is not deflation as the economic illiterates suggest. Rather, Japan's problem is a debt-to-GDP ratio of 230%, caused by economic illiterates attempting to defeat deflation.

Mad, Mad World

It's a mad, mad world with monetarist fools in complete control of the Fed, the Bank of England, and the ECB.

If prime minister Shinzo Abe gets his way (and I suggest he will), Japan will lead the way with fiscal lunacy and the Bank of Japan will follow suit with massive monetary recklessness.

The Yen is at a two-year low in response to these events, and a currency crisis is now baked in the cake. Exact timing is all that's left in doubt.

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

"Wine Country" Economic Conference Hosted By Mish
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Good News for Consumers: Holiday Sales Barely Rise; Worst Shopping Season Since 2008

I am always suspicious of early holiday season reports of glowing sales around Thanksgiving and especially Black Friday. Then, right after Christmas I always wonder if retailers lowball estimates so they can beat-the-street on same-store-sales reports.

That said, because of the souring economy I am not surprised by reports of Lackluster Holiday Sales.

The 2012 holiday season may have been the worst for retailers since the financial crisis, with sales growth far below expectations, forcing many to offer massive post-Christmas discounts in hopes of shedding excess inventory.

While chains like Wal-Mart Stores Inc and Gap Inc are thought to have done well, analysts expect much less from the likes of Barnes & Noble Inc and J. C. Penney Co.

The latest sign of trouble came from MasterCard Advisors Spending Pulse, which reported holiday-related sales rose 0.7 percent from October 28 through December 24, compared with a 2 percent increase last year.

The estimates are still preliminary and focus on sales, not profits. A handful of retailers will post sales data next week, but most, including heavyweights like Wal-Mart, will not report results at the register until they release financial results in mid-February.

Analysts and industry groups already expected sales to grow at a slower pace than in 2011 and 2010. The National Retail Federation predicted 4.l percent sales growth, versus a 5.6 percent increase a year earlier.

But growth of less than 1 percent is weaker than even some of the most pessimistic forecasts.

INVENTORY CRUSH

One concern for retailers is that weak sales will mean an excess of inventory that will force some to slash prices.

Among other brands, Barnes & Noble offered 50 percent discounts in stores via email promotions on Wednesday, while Ann Inc had half-off at its Loft stores, and Bloomingdale's promoted discounts of up to 75 percent in some cases.

"Retailers are no longer chasing sales, they are chasing inventory management. That means the discounts that they would have liked to be at 50-60 (percent) off have climbed to 75 to even 80 (percent) off," said Marshall Cohen, chief industry analyst at The NPD Group.

Erica Ayala, 31, a mother of four who lives in New York's Harlem neighborhood, waited until the day after Christmas to shop for that very reason, saving more than $150 on kids' clothes alone at Gap's Old Navy chain.

"You can't go wrong with that," she said.

Live Well Within Your Means

You can never go wrong by living well within your means.

And with the unemployment rate massively understating the true state of affairs, "within your means" is a lot lower than the predicted 4.1% growth right after Thanksgiving.

Indeed, I suspect sales growth would have been negative if everyone shopped in a common-sense manner, ignoring the Fiscal Cliff Jackasses who wanted everyone to spend more and blamed Congress for the poor holiday sales.

My comment on Saturday still stands...

As far as I am concerned, people spending less for Christmas is a side "benefit" of the fiscal cliff. The Government needs to tighten its budget and consumers do as well.

Consumers cutting back spending is a good thing. In the next set of retail reports, we will get a better idea how much consumers really cut back.

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

Merry Christmas from Mish and Darlene Love

Darlene Love - Christmas (Baby Please Come Home) - Live on David Letterman - 2012



Link if video does not play: Darlene Love on Letterman 2012

I have watched Darlene Love nearly every year at Christmas for what seems like 20 years (a quick check shows I was off by a single year). This is Love's 19th consecutive appearance.

Love sings the exact same song every year. I missed Love's live performance this year, but a very close friend "Liz" emailed a link to the video shown above.

There are changes every year in Love's performance on Letterman. The highlight for me is a sax solo in the middle of the song. Typically a sax player bursts out behind a paper wall, but this year the sax player is in a glass bubble.

I love the saxophone and keyboards over guitars and drums.

Darlene Love was lead singer for the Crystals in a roundabout way as explained on Wikipedia.

The Crystals number 1 hit was "He's a Rebel" (click on link to see an excellent video and hear an excellent sax performance!).

He's a Rebel, written by Gene Pitney, was supposed to be released as a Darlene Love single but was instead released under the Crystals name although Love was not technically in the group.

I heard Darlene Love explain this on Letterman one year. From memory, Love's version goes like this: Phil Spector (the producer for the Crystals, Ronettes, etc.) promised Love that He's a Rebel as well as follow-up singles would be released under her name, but Spector reneged on that promise and instead released all of Love's hits under the Crystals name.

In 1964 the "British Invasion" began (Beatles, Herman's Hermits, Rolling Stones, Dave Clark Five, etc.). The "British Invasion" coupled with the "Surf Sound" (Beach Boys), and the "Motown Sound" (Supremes, Temptations, etc.), marked the end of the line for the traditional girl groups from the early 60's. Darlene Love never got the recognition she deserved.  

Here is a link to additional performances of Darlene Love on Letterman.

Merry Christmas Everyone
Mish

What Millions Want For Christmas: A Job

If you have a job be thankful. Be especially thankful if you have a job you really like. Stories like the one following show what many people want for Christmas is a job, perhaps any job.

Bloomberg reports Delta Air Gets 22,000 Applications for 300 Attendant Jobs

Delta Air Lines Inc. (DAL), the world’s second-largest carrier, received 22,000 applications for about 300 flight attendant jobs in the first week after posting the positions outside the company.

The applications arrived at a rate of two per minute, Chief Executive Officer Richard Anderson told workers in a weekly recorded message. Applicants will be interviewed in January and those hired will begin flying in June, for the peak travel season.

“We’re hunting for foreign-language speakers as we continue to expand to all points around the globe,” Anderson said. “We are experiencing a phenomenal response to the job posting.”

Delta’s applicant rush reflects the demand for jobs amid a 7.9 percent U.S. unemployment rate and the interest in an industry where flight privileges are a prized employee benefit. The Atlanta-based carrier received 100,000 applications for 1,000 jobs when it last hired flight attendants in October 2010.

While Anderson put the number of positions in the latest round of hiring at about 300, Betsy Talton, a spokeswoman, said it could reach 400. As many as 30 percent will speak languages including Japanese, Hindi, Mandarin and Portuguese, she said.

Sobering Stats

The latest jobs reports shows there are over 12 million people unemployed, the average duration of unemployment is over 40 weeks, and over 40% of the unemployed have been unemployed for over 27 weeks.

Another 8 million people want full-time jobs but only have a part-time job. And finally, unemployment stats do not capture millions more who are so discouraged they stopped looking for jobs.

Best wishes to everyone who wants a job but does not have one. Hoping 2013 brings you a much happier year.

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

Yen Declines Following Shinzo Abe's Threat to Change Japanese Law; An Idle Threat?

A very serious question that investors face today regards whether Japan is or isn't serious about politicians taking over Japan's central bank.

Personally, I think the politicians are serious, as well as "seriously wrong".

If you think that I am wrong, please consider Yen Declines After Abe Says He May Change BOJ Law.

The yen declined versus its peers after incoming Japanese prime minister Shinzo Abe said he will consider changing the law on the central bank unless it boosts its inflation target to 2 percent next month.

Abe said on Japan’s Fuji Television yesterday that he will consider revising the law governing the Bank of Japan if it fails to increase its inflation target from 1 percent at its January meeting. He is poised to become prime minister after his Liberal Democratic Party’s coalition secured a majority in elections on Dec. 16.

Abe has called on the BOJ to pursue “unlimited easing” to help end deflation and revive growth. BOJ Governor Masaaki Shirakawa and his board last week refrained from doubling the central bank’s 1 percent inflation target, while expanding its asset-purchase program by 10 trillion yen ($118 billion) to 76 trillion yen.

Idle Threat?

I see no indication whatsoever this is an idle threat. The counter-argument in the form of a question is "what good did a 1% inflation target by the Bank of Japan do?"

The real question pertains not to the target but actual actions. After all, policy could be 20% instead of 2% but unless either the government or the central bank backs up the pronouncement with actions, talk is meaningless.

I happen to think Shinzo Abe is nuts enough on this go around, to do what he didn't do the first time he was prime minister.

Moreover, my general belief is that statements by politicians regarding what they will or will not do are likely to be most accurate at times their policies will do the most damage.

In this case, Shinzo Abe's threat, if carried out, would destroy Japan.

I take that threat very seriously.

You are free to disagree, but first consider ...

• Bank of Japan Holdings of Japanese Government Bonds Exceeds 100 Trillion Yen for First Time
 
• Kyle Bass on the End of the Debt Supercycle and a Coming Massive Devaluation of the Yen; Most Difficult Time to Invest; The Belief Bubble
  

Bear in mind that nothing moves in a straight line. The Yen has declined significantly, and a snapback rally may (or may not), happen at any time. Longer term, I see no reason to change my forecast of a declining Yen.

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

Bank of Japan Holdings of Japanese Government Bonds Exceeds 100 Trillion Yen for First Time

Bloomberg reports BOJ Holdings of JGBs Exceed 100 Trillion Yen for First Time

The Bank of Japan holdings of the government’s bonds exceeded 100 trillion yen ($1.2 trillion) for the first time, raising the risk that yields will jump on perceptions that it is financing public spending.

The central bank held 104.9 trillion yen of the debt at the end of September, 11.1 percent of all government bonds, a quarterly central bank report showed today in Tokyo. The BOJ said it was the highest on record. Bond holdings by foreign investors rose to a record 9.1 percent.

The BOJ yesterday expanded its asset purchase program for the fifth time this year, with half of the 10 trillion-yen increase to be spent on JGBs. Incoming Prime Minister Shinzo Abe wants more central-bank action to defeat deflation and has pledged fiscal stimulus to stoke growth, even as he’s constrained by the world’s largest public debt.

If QE worked and fiscal stimulus worked, Japan would not have debt-to-GDP ratio of 230%. Japan's national debt now exceeds a quadrillion yen!

A quadrillion is a number with 15 zeros. 1,000,000,000,000,000. Can that ever be paid back? How?

US has been running budget deficits exceeding $1 trillion for four straight years. What the heck is that other than Keynesian stimulus?

It has failed. But economists like Paul Krugman want more of it (please see Mish on Capital Account: "Time for Krugman to Leave Ivory Tower for Real World").

Krugman will claim deficit spending prevented disaster. It did no such thing. All it did is pile up the debt that cannot possibly be paid back.

The average 7th grader likely understands that he cannot spend more money than he has for years on end. The average economist does not.

For more on Japan, please consider Kyle Bass on the End of the Debt Supercycle and a Coming Massive Devaluation of the Yen; Most Difficult Time to Invest; The Belief Bubble

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

Boogeymen and Fake Reforms

Earlier today I received an email from Jonathan Ingram at the Illinois Policy Institute that I wish to share. The email is regarding the sorry state of Illinois Pensions.

Dear Mish

Illinois has a long history of fake reforms – legislative proposals that promise to solve the great policy challenges of the day when passed, but never actually accomplish these goals and often make problems worse.

In the mid-1990s, Illinois lawmakers were facing a serious problem: the unfunded liability of the state’s five public pension systems had reached $20 billion.

As a way to combat this growing problem, the state created a repayment schedule, often called the “pension ramp.”

The pension ramp, which was passed by the Republican-controlled General Assembly and signed into law by former Republican Gov. Jim Edgar, promised to reach 90% funding levels by 2045.

According to the repayment schedule, the five systems should be nearly 57% funded today. Instead, the systems are just 39% funded and the state’s pension debt has grown to $95 billion.



What happened?

You’ll often hear that the pension debt was caused by the state “skipping pension payments.” What you won’t hear is that taxpayers have actually paid $8 billion more than the original ramp projected.

How can the five pension systems be just 39% funded?

The systems simply weren’t able to get the kinds of returns they promised and the underlying actuarial assumptions didn’t reflect reality.

These are problems with the underlying structure of Illinois’ pension plans. The defined-benefit structure guarantees that a large share of the actual costs will be hidden and largely unknown until the systems come back to taxpayers asking for more money to make up for poor returns and mistaken assumptions.

This creates massive uncertainty for future budgets. For example, the state’s fiscal year 2014 pension contribution was originally projected to be $3.7 billion. The actual contribution for fiscal year 2014 will be $6.8 billion. That’s nearly twice what was predicted.

That’s why we need a government retirement system that is reliable for workers, but still affordable for taxpayers.

We must freeze all of the defined benefits workers have already earned and move to a defined-contribution plan for all future work, similar to the 401(k) plans available in the private sector and the 401(a) plans already offered to many state university workers.

Illinois has the worst-funded pension system in the nation. The only way to move toward those solutions is to get politicians out of the retirement business altogether and give employees real control over their retirement savings.

Jonathan Ingram
Director of Health Policy and Pension Reform

While Illinois burns, Moody’s threatens next downgrade

Ingram is of course preaching to the choir, and I don't object one bit. It's important for Illinois citizens to be informed about the pathetic state of Illinois finances.

Please consider another look at the sorry state of affairs in Illinois, by Ted Dabrowski at the Illinois Policy Institute: While Illinois burns, Moody’s threatens next downgrade.

It’s no secret that Illinois has the worst-funded state pension systems in the nation. That’s an accepted fact by those on both sides of the aisle. Unfortunately, that fact hasn’t motivated any action from the state’s politicians.

Now recent news point to even deeper troubles for the state. Moody’s Investor Services has threatened to punish Illinois again with another credit downgrade by revising the state’s outlook to "negative" from "stable". The agency already gave Illinois the nation’s worst credit rating, an A2, in January 2012 – and things look to get worse.



What’s ironic is that as the situation worsened during the past year, Springfield’s lack of action became increasingly more obvious. Moody’s called out this fact, saying: “The state repeatedly failed to act on pension reform – during the regular session that ended May 31, during a one-day special session convened by the governor on Aug. 17, and again during the state's ‘veto sessions’ in November and December.”

A growing problem

A recent release by the Illinois Policy Institute shows the true extent of the crisis in Illinois. Politicians often talk about Illinois’ official funding shortfall, now equal to $96 billion. But when the state’s liabilities are measured under new accounting and transparency rules proposed by Moody’s, Illinois’ pension shortfall exceeds $209 billion.

The state also has $54 billion in unfunded liabilities for retiree health insurance and $15 billion in pension bonds that Gov. Pat Quinn and his immediate predecessor, former Gov. Rod Blagojevich, issued to avoid pension reform.

That debt now totals more than $275 billion — or $58,000 in debt for each and every household in Illinois.

Only 24% Funded

It’s becoming clear that the state’s pension systems are running out of time. Under new rules proposed by both Moody’s and the Governmental Accounting Standards Board, the five state pension systems have reached dangerously low levels of funding. Under Moody’s rules, the state’s overall funding levels are now just 24 percent. The Teachers’ Retirement System, or TRS, for downstate and suburban teachers is only 24-percent funded and among the worst-funded systems in the nation. One major stock market correction and that fund will be effectively insolvent.

Those findings only confirm what Dick Ingram, head of the TRS, said in February: Without reforms, TRS may be insolvent by 2029.

TRS Insolvency on the Way

Dick Ingram, head of the TRS (not to be confused with Jonathan Ingram at the Illinois Policy Institute) is an optimist.

Without reforms, TRS is highly likely to be insolvent far sooner than 2029. In fact, I think TRS is insolvent now.

Pension plan assumptions regarding expected rates-of-return are preposterous, most likely because they have to be. All it will take to wipe the entire plan out is another big decline in asset prices, and that is something I am confident is coming (time unknown).

If you wish to be better informed about the sorry state of affairs in Illinois and nationally, please sign up for Jonathan Ingram's Health Policy and Pension Newsletter email list

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

Fiscal Cliff Jackasses Complain Shoppers Are Spooked

It was bound to happen. Analysts are bitching the fiscal cliff is holding back retail spending.

Please consider "Fiscal cliff" spooks shoppers in last lap of holiday race.

Fears about imminent tax hikes and cuts in government spending are taking a toll on U.S. shoppers and could deprive retailers of a strong finish to the 2012 holiday shopping season.

The acrimonious debate in Washington over how to avoid the so-called "fiscal cliff" has cast a pall over shopper sentiment as consumers head to malls on the last Saturday before Christmas - typically one of the busiest shopping days of the year.

About 17 percent of the 1,514 Americans who participated in a Reuters/Ipsos poll conducted December 17-20 said the impending "fiscal cliff" was making them spend less this season.

"We just try to stay on a budget. We're not going crazy," said Tom Chowinski, a market researcher at Nielsen, who was shopping with his wife for their four adult children on Saturday morning at a Wal-Mart store in Westbury, New York.

HO-HUM CHRISTMAS

"What could have been a merry Christmas is going to turn to a ho-hum Christmas, and we can thank our, you know, politicians for getting in the middle of it all," NPD analyst Marshal Cohen said. "This great unknown puts a big damper on the consumer feeling confident to go out and spend more."

More than 60 percent of U.S. consumers have already finished more than three-quarters of their holiday shopping, according to a Reuters/Ipsos poll released on Thursday. This means retailers will have to offer deeper discounts to force Americans to open their wallets in the last lap of the holiday race.

Ho-Hum This

As far as I am concerned, people spending less for Christmas is a side "benefit" of the fiscal cliff. The Government needs to tighten its budget and consumers do as well.

For those who do go on a last minute spending spree, who doesn't want lower prices (other than retailers and NPD analyst Marshal Cohen)?

Tough times will return (not that they ever left in the first place for millions of Americans), and the  last thing people need to do is overspend on junk that will be thrown out in a month or items dear Aunt Suzie will donate to the Salvation Army.

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