Europe….

Expectations for 2014 may need to be tempered against a weak/weakening Eurozone.  Up until today’s flash Markit PMI, European economic fundamentals have weakened considerably since the summer.  But even the positive flash PMI data is nothing to write home about:

From the Markit report:“On the downside, the PMI is signalling a mere 0.2% expansion of GDP in the fourth quarter, suggesting the recovery remains both weak and fragile.  “The upturn is also uneven. Growth is concentrated in manufacturing, where rising exports have helped push growth of the sector to the fastest for two and a half years, while weak domestic demand led to a further slowing in service sector growth.

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As it came to pieces in my hands…

Paul Weller: “I stood as tall as a mountain; I never really thought about the drop; I trod over rocks to get there; Just so I could stand on top; Clumsy and blind I stumbled;…I didn’t stop to think about the consequences; As it came to pieces in my hands.”

The 2008 crisis told us that there was a mismatch between asset values and debt, asset values and future return, and debt and economic growth as well as some rather large structural economic imbalances.

We have tried to delay the eventuality implied by the difference in the hope that the “true” magical economic growth rate should return. Have we built up a bigger monster, and if so, how do we slay the beast?

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As we move from the shock to the core, Euro industrial production data is more than just a number..

Industrial production down by 0.3% in euro area and EU27 – short term data is far less important than the longer term compound declines in industrial production shown in the following chart taken from the Eurostat report.

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Short term declines in output can usually easily be accommodated by an economic framework, but, longer term, sustained declines have much more damaging effects: higher unemployment and its attendant social and funding issues; lower capital investment and reduced investment in human capital; overall infrastructure risks; deflation as returns on capital decline and as increasing amounts of marginal capital are written off (debt attached to such capital needs to be written off, impacting asset values and broad money supply stock); and ultimately increased costs of future growth. once an uptrend is re-established, including that of inflation.

The longer the economic malaise continues the greater will be the impact on productive and financial capacity of the Euro economy and the greater the weight of the current sovereign (and banking system) debt problems. 

All this at precisely the time that the new Fiscal Compact rules come into force.

I think Spain will need to default on some of its debt..

Spain’s economic problems deepen and as its problems deepen so does its ability to support and repay its debts weaken.   I am in particular disturbed by many a loose sanguine comment over the risks of a Spanish default without, apparently, taking the time to explain in context some of the unique characteristics of the Spanish debt problem.

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The Euro Crisis is not over..

….says Roger Bootle in a recent article, and I would have to agree with him.  

Economic growth the foundation on which debt will be repaid and austerity allowed to work its magic is negative in the Eurozone.  Economic conditions, on average, have been brutal over the last year and sovereign debt problems have worsened.  

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Manufacturing woes part 3–Europe

The German Markit/BME manufacturing PMI fell for the fourth month in a row in July, at its fastest pace since April 2009, to its lowest level since June 2009.  

Interestingly July represented the 13 month of falling new business, the longest stretch of declines since the survey began in 1996.

Manufacturing orders, whether you look at the X-12 ARIMA or the BV4.1 data adjustments (shown, given its longer term data profile), is showing a sharp deceleration as of June 2012 (latest data). Continue reading

Don’t worry, here comes the three horsemen of the apocalypse!

Ambrose Evans-Pritchard has neatly summed up some industry think in his latest piece, “Global banks see market rally on Greek exit”. 

But this type of industry thinking is also likely to scare away the retail investor, through rational cognitive dissonance or otherwise. 

Apparently, we are set for a big rally, once Greece leaves the Euro, as Central Banks the world over pump yet more liquidity into the financial system.  This will either be via LTRO Repo type (temporarily exchange your securities for cash) transactions or the better for the banks and sovereigns, QE (buy your duff securities for a price you would not be able to dream of otherwise). 

Here is my very quick, write it as you think it, opinion on this “play”. Continue reading

Denuded Data!

US weekly unemployment claims are trending up with previous figures being consistently revised upwards.  A focus on current trends is meaningless, which is why I have been comparing current unadjusted data with historic data.  I have looked at the last 9 weeks to 7 April, and historic 9 week periods over the same time frame, and found that current trends represent the worse weekly claims outcomes since at least 1997: Continue reading

Links & comments 20 December 2011

The plight of the 1% – some good quotes here with respect to the upper echelon’s ignorance over the likely deteriorating quality of their own pies: upper echelon wealth depends on the health of the pyramid, something which many fail to understand.  In other words, the wealthy have more to lose if the supporting structures collapse.

Eurozone crisis hits US mortgage securities – Euro banks may be selling US asset backed (mortgage backed) paper causing a fall in the pricing of these assets( which incidentally may further influence Fed buying of mortgage based assets).  The dynamics of this activity can better understood by reading a recent paper by Hyun Song Shin, Global Banking Glut and Loan Risk Premium discussed in an earlier post of mine -   Light on the Euro Zone banking crisis.

Can Italy survive the financial storm? An article from Vox that suggests yes by providing a positive spin on recent developments in Europe.  I am not sure that I share these sentiments which depend on falling wage costs, stability in the banking system through the ECB longer term refinancing operations and a belief in the implementation and effectiveness of austerity measures:

“The Italian government is pushing a strong and credible fiscal adjustment through Parliament. “

“The stability of the Italian banking system now seems assured given that the ECB has made three-year funding available “

What has to start yet is to make the Italian economy competitive again by reducing labour costs……Provided the real sector of the economy can be shielded from the worst effects of the financial storm the country should have enough time for the real adjustment to bear its first fruits.”

With regard to wage costs, Germany has indeed benefitted from lower growth in wage costs, but its wage costs are still relatively high (higher than Italy’s) and a larger component of gross wages in Italy are non wage costs, which means non wage costs need to fall, itself implying in part further austerity.  Not only will wage costs and non wage costs need to fall if they are to compete with lower cost Eastern European countries, but productivity and skills will need to rise if they are to compete with the likes of Germany and the US.   It is not so much wage costs, but the wage costs relative to the added value produced by labour in the industries in which they are employed and hence a refocus and restructuring of capital employed which also depends on so many other factors.    This is a very long term outcome, and these are usually characterised by barely perceptible incremental changes along the way.  It may be hard to discern any benefit for some time and certainly not in sufficient time to assuage deflationary risks currently embedded in the economy..

As far as austerity measures, there is no guarantee that the short term impact of such measures will be negligible in economic terms, especially when combined with European, if not global austerity imperatives.   Finally, is the stability of the Italian banking system really assured, as suggested, by the new LTRO measures introduced by the ECB?  

Labour_cost_index_-_recent_trends/ Economic boom barely lifts German labor costs / EU-Comparison of labour costs and non-wage costs /LABOUR DEMAND IN GERMANY: AN ASSESSMENT OF NON-WAGE LABOUR COSTS / Problems of International Labour Cost Comparisons/ http://www.oecd.org/dataoecd/51/53/48723947.pdf / The margins of Labour Cost adjustment./ This Is The Chart That Really Makes The Germans Furious / After the Election: Germany Will Continue to Obstruct Global Economic Rebalancing/ What Explains the German Labor Market Miracle in the Great Recession?*/ Wage setting in Germany – new empirical findings /The economy of Germany: powered by reform