Friday, July 20, 2012

Weekend links

1--Evidence of Coming Recession Is Overwhelming, comstock partners

We first noticed the first signs that the economy was beginning to soften about three months ago. Now the evidence of a slowdown has become so overwhelming that it is difficult to avoid the conclusion that we are headed for a recession. We cite the following as evidence.


Retail sales (both total and non-auto) have dropped for three consecutive months. This has happened only five times since 1967—-four times in 2008, and one now. Vehicle sales have tapered off with May and June being the two weakest months of the year. Consumer confidence for both the Conference Board index and the University of Michigan Survey are at their lowest levels of 2012.

On the labor front, June payroll numbers were weak once again and averaged only 75,000 in the second quarter. The latest weekly new claims for unemployment insurance jumped back up to 386,000 and the last two months have been well above the numbers seen earlier in the year.

The ISM manufacturing index for June fell 3.8 points to 49.7, its first sub-50 reading in the economic recovery. The ISM non-manufacturing index for June dropped to its lowest level since January 2010. Most recently the Philadelphia Fed Survey for July was negative (below zero) for the third consecutive month.

The small business confidence index declined in June to its lowest level since October and has now dropped in three of the last four months. Plans for capital spending and new hiring have dropped sharply.

Despite all of the talk about a housing bottom, June existing home sales fell 5.4% to its lowest level since the fall of last year. In addition mortgage applications for home purchases have been range-bound since October.

Core factory orders, while volatile on a month-to-month basis, have declined 2.6% since year-end, and the ISM numbers cited above indicate the weakness is likely to continue.

The Conference Board Index of leading indicators has declined for two of the last three months and is now up only 1.4% over a year earlier, the lowest since November of 2009, when it was climbing from recessionary numbers. The ECRI Weekly Leading Index is indicating a recession is either here now or will begin in the next few months.

The breadth and depth of the slowdown are greater than the growth pauses experienced in mid-2010 and mid-2011, and indicate a strong likelihood of recession ahead. In addition the foreign economies will be a drag as well. A number of European nations are already in recession and others are on the cusp. The debt, deficit and balance sheet problems of the EU’s southern tier are a long way from any solution, and will not remain out of the news for long. China is coming down from a major real estate and credit boom, and is not likely to avoid a hard landing. The Shanghai Composite is in a major downtrend, declining 28% since April 2011. The view that China is immune because of their unique economic system reminds us of what people were saying about Japan in 1989.

The stock market is ignoring these fundamentals as it did in early 2000 and late 2007 in the belief that the Fed can pull another rabbit out its hat. It couldn’t do it in 2000 or 2007 when it had plenty of weapons at its disposal. Now there is little that the Fed can do, although it will try since it will not get any help, as Senator Schumer so aptly pointed out at Bernanke’s Senate testimony. In sum, we believe that the stock market is in store for a huge disappointment

2--China Rebalancing Has Begun"; What are the Global Implications? Michael Pettis on China Rebalancing, Mish

Pettis On China Price Deflation...

China’s official GDP growth rate has fallen sharply – on Friday Beijing announced that GDP growth for the second quarter of 2012 was a lower-than-expected 7.6% year on year, the lowest level since 2009 and well below the 8.1% generated in the first quarter. This implies of course that quarterly growth is substantially below 7.6%.  Industrial production was also much lower than expected, at 9.5% year on year. 

In fact China’s real GDP growth may have been even lower than the official numbers.  This is certainly what electricity consumption numbers, which have been flat, imply, and there have been rumors all year of businesses being advised by local governments to exaggerate their revenue growth numbers in order to provide a better picture of the economy.  Some economists are arguing that flat electricity consumption is consistent with 7.6% GDP growth because of pressure on Chinese businesses to improve energy efficiency, but this is a little hard to believe.  That “pressure” has been there almost as long as I have been in China (over ten years) and it would be startling if only now did it have an impact, especially with such a huge impact occurring so suddenly...

Adding to the slow economic growth, the country may be tipping into deflation.

3-- American Pie in the Sky, Nouriel Roubini, Commentary, Project Syndicate

 While the risk of a disorderly crisis in the eurozone is well recognized, a more sanguine view of the United States has prevailed. For the last three years, the consensus has been that the US economy was on the verge of a robust and self-sustaining recovery that would restore above-potential growth. That turned out to be wrong, as a painful process of balance-sheet deleveraging – reflecting excessive private-sector debt, and then its carryover to the public sector – implies that the recovery will remain, at best, below-trend for many years to come.

Even this year, the consensus got it wrong, expecting a recovery to above-trend annual GDP growth – faster than 3%. But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%. And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013.

The reality is the opposite: for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013 – close to stall speed.
After explaining the reasons, Roubini concludes:


Policy responses will have very limited effect in stemming the US economy’s deceleration toward stall speed: even with only a mild fiscal drag on growth, the US dollar is likely to strengthen as the eurozone crisis weakens the euro and as global risk aversion returns. The US Federal Reserve will carry out more quantitative easing this year, but it will be ineffective: long-term interest rates are already very low, and lowering them further would not boost spending. Indeed, the credit channel is frozen and velocity has collapsed, with banks hoarding increases in base money in the form of excess reserves. Moreover, the dollar is unlikely to weaken as other countries also carry out quantitative easing.

Similarly, the gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010. Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability.

A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction. And if the US (still the world’s largest economy) starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia.

4--Economy Remains Soft In Output And Housing, NY Times

Data on home sales and factory production released on Thursday indicate a weakening United States economy.

Americans bought fewer homes in June than in May, manufacturing in the Federal Reserve’s Philadelphia region contracted for a third consecutive month, and the number of Americans seeking unemployment benefits rose last week.


The National Association of Realtors said on Thursday that sales of previously occupied homes fell 5.4 percent from May to June to a seasonally adjusted annual rate of 4.37 million homes — the fewest since October.

Compared with a year ago, sales are up 4.5 percent. But the annual sales pace is well below the six million that economists consider healthy.

“It is only one month, and the rest of the housing indicators have all continued to show improvement,” said Jennifer Lee, a senior economist at BMO Capital Markets. “Let’s hope this June decline is a blip.”

The few pieces of good economic news lately have been confined mainly to housing. On Wednesday, for example, the government said builders broke ground last month on the most homes in nearly four years.


Manufacturing in the Philadelphia region contracted for the third consecutive month in July, a sign of further feebleness in the economy. But some analysts say the report mostly reflects a regional slowdown.

The Federal Reserve Bank of Philadelphia says its index of regional manufacturing activity rose to minus 12.9, up from minus 16.6 in June. Any reading below zero indicates a contraction.

Some parts of the report improved. New orders and shipments rose, though both remained negative. An index measuring employment dropped sharply from 1.8 to minus 8.4.

The Philadelphia Fed’s reading “suggests the factory sector is still in recessionary territory,” Paul Ashworth, chief United States economist for Capital Economics, said in a note to clients. “But the downturn doesn’t appear to be quite as bad” as this survey suggested.

The number of Americans seeking unemployment benefits rose 34,000 last week. Normally, that would signal an increase in layoffs. But the figure was skewed higher by seasonal factors that made it hard to tell whether the job market might be worsening.

The government tries to adjust its unemployment benefits data to reflect temporary summertime layoffs in the auto industry. But this year, many automakers skipped those shutdowns to keep up with demand. That led to fewer layoffs, which the Labor Department did not anticipate.

Once those statistical distortions fade, Joshua Shapiro, chief United States economist at MFR, wrote in a note to clients, “We suspect that the data will point to a soggy labor market.”

Also, a gauge of future economic activity in the United States fell in June.

Measures of the overall economy, though, suggest the recovery may be in danger of stalling. The Conference Board’s index of leading economic indicators slipped in June. The index fell 0.3 percent after a 0.4 percent increase in May. It had dropped 0.1 percent in April, its first decline in seven months.

The leading indicators index “is pointing to no strengthening over the next few months, as the economy continues to sail through strong headwinds domestically and internationally,” said Ken Goldstein, an economist with the Conference Board.

5--Russia Accuses West of Inciting Syrian Rebels, antiwar.com


Western officials point to ongoing violence as a Security Council vote on Syria is postponed until Thursday

6--Venezuela: A Threat to Washington?, Eva Golinger, global research

From the first time Hugo Chavez was elected President of Venezuela in 1998, Washington and its allies have been trying to undermine his government. When Chavez was just a presidential candidate, the US State Department denied his visa to participate in television interviews in Miami. Later, when he won the presidential elections, Ambassador John Maisto called him personally to congratulate him and offer him a visa. The following months were filled with attempts to “buy” the newly elected President of Venezuela. Businessmen, politicians and heads of state from Washington and Spain pressured him to submit to their agendas. “Come with us”, urged Spanish Prime Minister Jose Maria Aznar, trying to seduce him with offers of wealth and luxury in turn for obeying orders.


When Chavez refused to be bought, he was ousted in a coup d’etat April 11, 2002, funded and planned by Washington. When the coup failed and Chavez’s supporters rescued their democracy and president in less than 48 hours, attempts to destabilize his government continued. “We must make it difficult for him to govern”, said former US State Department chief Lawrence Eagleberger.

Soon, Venezuela was overrun with economic sabotage, oil industry strikes, chaos in the streets and a brutal media war that distorted the reality of the country on a national and international level. A plan to assassinate Chavez with Colombian paramilitaries in May 2004 was impeded by state security forces. Months later, the US-backed opposition tried to revoke his mandate in a recall referendum, but again, the people saved him in a 60-40 landslide victory.

The more popular Chavez became, the more millions of dollars flowed from US agencies to anti-Chavez groups to destabilize, descredit, delegitimize, overthrow, assassinate or remove him from power by any means possible. In December 2006, Chavez was reelected president with 64% of the vote. His approval rating grew in Venezuela and throughout Latin America. New governments in Argentina, Brazil, Bolivia, Ecuador, Honduras, Nicaragua, Uruguay and several Caribbean nations joined regional initiatives of integration, cooperation, sovereignty and unity, encouraged by Caracas. Washington began to lose its influence and control over its former “backyard”. ...

Obama increased funding to anti-Chavez groups this year. More than $20 million in US taxpayer dollars have been channelled from US agencies to help fund the opposition’s campaign in Venezuela.


Is Venezuela a threat to Washington? In Venezuela, the only “terrorists” are the groups trying to destabilize the country, the majority with political and financial support from the US. The drug traffickers are in Colombia, where the production and transit of drugs has increased during the US invasion disguised as Plan Colombia. Relations with Iran, Cuba, China, Russia and the rest of the world are normal bilateral – and multilateral – ties between countries. There are no bombs, no attack plans, no sinister secrets.

No, Venezuela is not that kind of threat to Washington.

Poverty has been reduced by more than 50% since Chavez came to power in 1998. The inclusionary policies of his government have created a society with mass participation in economic, political and social decisions. His social programs – called missions – have guaranteed free medical care and education, from basic to advanced levels, and provided basic food items at affordable costs, along with tools to create and maintain cooperatives, small and medium businesses, community organizations and communes. Venezuelan culture has been rescued and treasured, recovering national pride and identity, and creating a sentiment of dignity instead of inferiority. Communication media have proliferated during the last decade, assuring spaces for the expression of all.

The oil industry, nationalized in 1976 but operating as a private company, has been recuperated for the benefit of the country, and not for multinationals and the elite. Over 60% of the annual budget is dedicated to social programs in the country, with the principal focus on eradicating poverty.

7--Existing homes sales fizzle, The Big Picture  (see chart)

The Housing Recovery is awesome — until you actually look at the sales data.


Then, not so much.

The NAR notes that “Distressed homes – foreclosures and short sales sold at deep discounts – accounted for 25 percent of June sales (13 percent were foreclosures and 12 percent were short sales), unchanged from May but down from 30 percent in June 2011.”

Hence, a huge drop in distressed sales pressuring prices (which would have caused even more distressed sales) is an artificial benefit of the voluntary foreclosure abatements — which have now ended.

The present RRE situation can be best described as massive Fed stimulus + government induced foreclosure abatements = some stabilization.

Anything beyond that statement falls between wishful thinking and a guess. . .

8--Practical advice for today’s prospective homebuyers, OC Housing News

The last crash took more than a decade to work through—and this market could take an especially long time because the huge accumulation of empty, foreclosed houses will hold down prices for all properties.


When adjusted for inflation, the Case-Shiller index didn’t return to its 1989 peak until 2000. Some markets, such as New York and Los Angeles, didn’t hit new highs until 2002. This time may be even worse because the bubble was much, much bigger. Some locations may not recover their inflation-adjusted peak in our lifetimes.

9--The return of auto subprime lending, ft.com

The subprime auto lending market is exhibiting some characteristics last seen during the early- to mid-1990s, when overheated competition led to poor underwriting and drove unexpectedly high losses that put many smaller lenders out of business.


Then, as now, investor capital flowed into the sector, lured by the profit potential from the ability to charge high loan rates while enjoying low funding costs. When the lending boom in the 1990s eventually went bust, the number of lenders contracted drastically, and subprime auto ABS investors suffered losses.

If today’s subprime auto lending market were to deteriorate as it did back then, investors could suffer comparable or greater losses, especially in the absence of monoline guarantors or other controlling parties available to minimize or absorb their losses.

Over the last two years, the sector’s profit potential has lured private equity investment into subprime auto lenders, many of which are relatively small, specialty finance companies that exhibit speculative characteristics and relatively high medium-term default probabilities. As a result, the subprime autoloan ABS market in the US is booming, with 2012 issuance on pace to exceed the robust issuance of 2011...

The credit quality of pools securitized in 2011 and 2012 indicate that credit has loosened since 2010. Recent data from Experian show that the average APR on loans for used autos decreased to its lowest level since 2008, to 8.61% from 8.71% between the fourth quarters of 2010 and 2011, even as the average borrower credit score also decreased, to 670 from 679

10--Stop the pointless demonization of Putin, Reuters

Russian democratization began in Soviet Russia, under Mikhail Gorbachev, in 1989-91. “De-democratization,” as it is often called, began not under Putin but under Yeltsin, in the period from 1993 to 1996, when the first Russian president used armed force to destroy a popularly elected parliament; enacted a super-presidential constitution; “privatized” the former Soviet state’s richest assets on behalf of a small group of rapacious insiders; turned the national media over to that emerging financial oligarchy; launched a murderous war in the breakaway province of Chechnya; and rigged his own re-election. (On February 20, outgoing president Dmitri Medvedev shocked a small group of visitors by finally admitting that Yeltsin had not actually won that election against the Communist leader Gennadi Zyuganov.) Putin may have only moderated those fateful policies, but he certainly did not initiate them.

11--Putin’s Censored Press Conference, global research (from the archive)

Putin: “AN ARMS RACE IS UNFOLDING. Was it we who withdrew from the ABM Treaty? We must react to what our partners do. We already told them two years ago, “don’t do this, you don’t need to do this. What are you doing? YOU ARE DESTROYING THE SYSTEM OF INTERNATIONAL SECURITY. You must understand that you are forcing us to take retaliatory steps.” …we warned them. No, they did not listen to us. Then we heard about them developing low-yield nuclear weapons and they are continuing to develop these weapons.” We told them that “it would be better to look for other ways to fight terrorism than create low-yield nuclear weapons and lower the threshold for using nuclear weapons, and thereby put humankind on the brink of nuclear catastrophe. But they don’t listen to us. They are not looking for compromise. Their entire point of view can be summed-up in one sentence: ‘Whoever is not with us is against us.’”


Putin asks, “So what should we do?” The present predicament has brought us “the brink of disaster”.

Putin: “Some people have the illusion that you can do everything just as you want, regardless of the interests of other people. Of course it is for precisely this reason that the international situation gets worse and eventually results in an arms race as you pointed out. But we are not the instigators. We do not want it. Why would we want to divert resources to this? And we are not jeopardizing our relations with anyone. But we must respond.

Name even one step that we have taken or one action of ours designed to worsen the situation. There are none. We are not interested in that. We are interested in having a good atmosphere, environment and energy dialogue around Russia”.

12--Economic downturn in China worse than official data, WSWS

13--Implications of the Summer Drought, pragmatic capitalism

14--Dean Baker, CEPR (quote)

The real argument between left and right has little to do with government intervention in the market. The real issue is whether the goal is to steer the economy in a direction that will allow the benefits of growth to be broadly shared or whether to structure the economy in a way that directs income upward.


























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