Tuesday, July 14, 2015
Well, Goodness Gracious, Father Ignatius
If you don't know that limerick, count yourself blessed. I am certainly not going to enlighten you.
NFIB's Small Business report took a frank dive in June. Except for the credit constraints, which are non-existent in this report, it agrees well with NACM CMI. Unfortunately, that agreement implies a poorish third quarter.
This is still one of the "small" samples - the next large one will show up in next month's report.
Sales expectations are sharply lower, reversing the gains of the last couple of years. Actual earnings and sales experienced a very sharp one month fall, thus lowering expectations.
The pricing pressures and compensation pressures continue - outlook fell from 98.3 last month to 94.1 this month. If confirmed by the larger sample next month, the economy is on thin ice.
Hah, I find myself trying to explain this one away. For about half the negatives, if you throw out last month you get a better signal. How's that? However, as with so many of my attempts to explain why economic reports aren't as bad as they seem, the bottom line is that for several months sales expectations have been sharply lower than they were last year at this time (8 and 7 points lower), so throwing this report out as an anomaly is probably not the wisest thing to do.
I'll carry it as a negative uncertainty.
The last JOLTS reported a significant drop in the hiring rate for professional and business services in May. That wasn't a particularly good sign, because openings are high:
When you see a persistent gap open, generally the economy is worsening. This hires category peaked in October - I still have the peak in this business cycle as last November!! The distance between wave peaks is getting too long!
We are definitely not going to get a whole lot of external help in this tight spot. The global economy is worsening with some determination, and China is the major driver. The only bright spot globally is that the Indian monsoon has been quite good to date - better than predicted.
Singapore reported Q2 advance GDP. I still regard it as an excellent indicator for the Asian economy as a whole, and while it had shown signs of weakness before, it is now contracting. Quarterly GDP is reported at -4.6%, with a continuation of the manufacturing contraction, but this quarter services and even construction decided to jump on the contraction train.
I had been reading reports that Singapore high-end commercial rents were falling with rising vacancies, so I am not surprised.
Chinese auto sales (from Trading Economics) show that the theory that consumer demand is going to keep the economy just clipping along are highly, highly suspect:
Sunday, July 12, 2015
They're Still Meeting (Deal!!!)
FAZ's coverage is hilarious, with pictures of crashed-out journalists on their all-nighter. You don't have to read German - just look at the pictures.
At this point, it's reminding me of Glengarry, Glen Ross.They're reported to be in another pause for private consultations.
The concept of putting the privatization sales assets and funds in a trust fund securing the creditors is reported to be one of the sticking points, the other being the issue of how long the European bailout fund will be expected to carry the obligation to Greece.
With direct write-offs being apparently off the table, a "long-term non-interest-bearing loan" is the apparent solution to Greek financial insolvency. The question is duration, and who or what will pick up the "asset" upon official termination.
When I was a child, my father used to say "That wasn't a theft - that was just a long-term non-interest-bearing loan!"
El Pais, international edition, which has been consistently providing highly detailed coverage which seems to be accurate, is currently reporting that Greece tried to agree last night to a milder version of the real-asset trust fund (Greece state privatization sales), but that the IMF disagreed on the amounts that could likely be gained. I stuck that in Google Translate.
IMF will be negotiating for Greece in its request for a debt write-down (explicit or by the no-interest loan route). IMF's framework requires debt sustainability.
Now - What of Italy?
HUH? What about Italy?
This is really the current burning Euro question. Greece is and has been a foregone conclusion - don't forget the push-down of their private bondholders in 2012. That amounted to somewhere around 100 billion Euros, but in exchange for that, those creditors were promised no further "adjustments". Which of course will be ignored now. They'll get paid in drachmas on a one-to-one exchange. It should spawn a few interesting, but immaterial lawsuits. The only ones left to take the 40% write-down necessary are (snort, snuffle, choke) the other EU governments, who are most certainly not going to want to add to that by extending additional loans while writing down the prior ones. And they are going to get the extant Greek debt added to their debt-loads, but Euro-style, so it probably won't be officially added on for a few years.
(It's like the US debt burden. We all pretend that those student loans that are in income-based repayment schemes not even covering the accruing monthly interest are somehow going to be paid back. But no, the taxpayers are probably out 300 billion on those alone. Extend and pretend is a fine public finance art form.)
But now we come to Italy. Trading Economics has a nice stat site, so we'll use that. As you will note, there is a similarity in the Debt-to-GDP curves:
Greece is the lighter line. The major difference is that Greece has somewhat held the line over the last few years (but remember that write-off of debt in 2012!!!) whereas Italy is quietly trudging up the debt mountain.
As of this writing, both real debt-to-GDP ratios are higher than shown, but Italy's is lower in terms of percent of GDP:
One noteworthy aspect of this is that Italy's debt-to-GDP ratio, hereafter referred to as D-G-r (that's government debt to GDP ratio) is substantially higher than Greece's back in 2010 when the creditors took flight. But Italy has Draghi, doing whatever it takes.
At times, whatever it takes has involved creditors paying Germany for the privilege of holding their bonds. One suspects there is a natural limit to that. After a while opening a trading an account and buying Chinese stocks starts to look better, because at least there's a possible upside.
But what about those Greeks, always running budget deficits??
We have a similar, although less intense, problem in Italy. They are not making progress, and as a result of the current exercise in reality-recognition, sooner or later they are going to get some Greek debt added to their D-G-r, as will all the other European countries. Draghi has already pointedly mentioned that it would be utterly illegal for the ECB to take any of the losses.
Is there really any hope that Italy's debt is sustainable?
In evaluating a country's ability to sustain higher taxes, you generally look at savings rates, which, in the absence of high growth, must go down as taxes go up. Personal savings rates are not available for Greece, but I would bet that they have been higher than Italy's:
Italy's savings rate has fallen so low that it suggests that real bank deposits must slowly fall, which would not help the Italian government in flogging its debt. It's doubtful that they can raise taxes at this point without actually lowering receipts.
Then there's balance of trade - we'll look at the current account to GDP ratios:
There Greece was making progress, but clearly not at a level which would allow it to cut its debt.
Italy has done slightly better:
So there is a grain of hope. Just a grain. With debt at more than 130% of GDP, Italy's current account balance would have to stay quite positive to have a hope of stabilizing debt and then reducing it over the longer term.
If a country's external debt is low, then interest rates on the debt are mostly being recycled back into the domestic economy, and the country can sustain a much larger debt-to-GDP ratio.
There, we see some issues. I suspect that the leg up is due to ECB OMT buying, but I just don't seem to be able to find that information from the ECB. Brueghel is publishing some very nice stats on sovereign debt holdings, but they don't show ECB holdings. According to Brueghel's numbers, peak domestic bank holdings were in Q2 2013 at 24.5%, since dropping to about 22%, and non-resident holdings were slowly rising to 37.9% in Q3 2014, the latest data. That has increased since.
ECB probably will redistribute its profits to the member states, so there could be some offset there.
Well, when in doubt, always look at cash flow. The Bank of Italy publishes plenty of statistics here. We want the financial accounts, which I downloaded and read. A grim awakening.
Here is the grim evidence from Table 15 of their financial accounts, published by Bank of Italy. This is the bottom of the table which covers financial assets and liabilities of the central government (which holds the vast majority of the debt):
On the left we find assets. On the right we find liabilities. This covers Q4 2013 to Q4 2014. Italy's liabilities net assets increased by more than 10%. In a year.
This explains why Italy's sovereign stock increased by more than 10%. In a year:
So, in point of fact only the ability to get ECB to monetize debt is holding Italy on the brink of the abyss (as opposed to being at the bottom of the abyss), because Italy's finances are cartwheeling into doom and there is no prospect of escape from the trap. This debt cannot be absorbed internally and taxes cannot be raised sufficiently to stop the very rapid accumulation of debt.
The moment that Mr. Market realizes that Italy could be next, the King Canute moment is reached.
And this, I think, explains what is happening in Brussels right now - there is no telling what would happen if Greece disappeared from the radar. As long as everyone's staring at Greece, no one's asking the real question.
You Say Nein, I Say Oui....
Stubb of Finland appears to be saying that a deal has been reached in this game of Greek ball, but the deal will be to throw it back to the Greek parliament for enabling laws, and it seems as if the "No" camp is trying to enforce something in which the state properties to be sold of are put into some sort of legal trust fund which backstops the European advances.
Italy (and Draghi) are fighting tooth and nail to prevent a Grexit, joined by France and others. It seems as if they have won for the time being.
I have a post on Italy coming up.
If the Greek debt owed to the EU were to be made half non-interest bearing, it's possible that the accounting rules could be fudged so that no country would have to take that long-term, non-interest bearing debt as an obligation, which would greatly help matters.
But really, this is about Italy.
Update. from FAZ live-blogging:
Nett zu beobachten: EU-Kommissionschef Jean-Claude Juncker drückt Alexis Tsipras zur Begrüßung einen Kuss auf die linke Wange, legt ihm den Arm um die Schulter. Ein gutes Zeichen?The German press changes direction like a school of fishes, and they are now swimming in the other direction. The above: "Good to see: EU Chief Commissioner Jean-Claude Juncker greets Alexis Tsipras with a kiss on the left cheek, wraps his arm around Tsipras' shoulders. A good sign?"
Saturday, July 11, 2015
My Guess Is Grexit
You can either see Tsipras as the most brilliant politician ever or the worst. He has, in a just a few short months, created a political consensus for the austerity measures that would be needed if Greece were to return to the drachma, he has unified the country's deeply antagonistic political factions, and he has orchestrated a situation in which there will be an internally plausible story that Greece was forced out which will elicit a patriotic embrace of otherwise unpalatable measures, along with significant expatriate support. The austerity deal was interesting - the corporate tax rate is surprisingly low, and I would expect there's been some quiet background dealing with some very wealthy Greeks.
I don't think there will be support among about seven countries for any significant further loans and write-downs (Germany, The Netherlands, Finland, probably not Malta, Lithuania, Latvia, and Estonia). Probably either Slovenia or Slovakia would not assent. Luxembourg probably wants a Grexit. Luxembourg and Malta are under a German hammer because of their banking systems, and would swap their support for a polite No for German assurances to back off on banking sector reform. There have been three strong "Neins" for several years - Finland, Germany and The Netherlands - but in the EU you need four or five.
Juncker has been talking all along about a humanitarian support package in case of Grexit, and I expect that Tsipras will come home with that, interim support for Greek banks, and something from the IMF to support trading. Maybe the wealthy Greeks will agree to dump some money into a specialized import/export bank, and the IMF will agree to backstop it??
Friday, July 10, 2015
I see perhaps some slight turn in rail, which is impossible to tie down due to calendar effects this year and will have to wait 2-3 weeks for confirmation. So I am not willing to call it yet.
But either May was the low or that's it. We may actually be in a recession. If we are, it should be somewhat mild, but rather enduring.
If you combine the June NACM CMI with the Wholesale report, cursing ensues. June CMI shows financial pressures deepening, not loosening, and we are very close to the point at which the feed-in effect becomes a much stronger negative.
This is what I am looking at:
Collections are worsening, more and more credit is being extended, and now BKs are going south. In June, we were still seeing a diffusion of financial pressures rather than an amendment. So either this is the low or it's a slow grind down. Note that this is the combined.
Again, I am not willing to call it because more credit is being extended to mfrs, with the obvious hope that carrying them through will get everyone through the rough patch. But the accompanying degeneration in collections factors indicates that either it turns swiftly or more credit will be cut in the next couple of months.
There is also a clear diffusion of financial stress into services, which is the factor that affects jobs the most.
This is either a mid-cycle growth recession or a recession, and we will probably know toward the end of August.
The fundamental mechanism of this situation is really higher debt loads for businesses accompanied by lower incomes for consumers after necessities. The drop in oil prices did help consumers, but doesn't come close to redressing the accumulated deficit from health insurance/food pricing alone.
A degree of stiffness in the interactive economic network has developed - companies have a hard time lowering prices because of low excess cash flow, but consumers have a hard time paying prices! In addition, a stronger dollar and poor global growth circumstances don't help at all, so the exits are pretty well blocked and everyone just has to shuffle around in the given space doing what they can.
I am waiting for Singapore Q2 GDP which will be published next week. South American growth is slow, India is hardly busting out of the gates, and the Asian economies are beginning to experience further knock-on difficulties from China's situation.
The oil patch should be past its low, but I am not sure that motor vehicles will hold up.
One factor which I have not seen discussed is that the inevitable effect of the Chinese swirl-down-the-drain exercise must be to raise the yen.
If I were the Fed, I would still raise rates nominally. In this situation, more credit is needed. It is obvious that it must come externally from the B2B account network. Banks sitting on portfolios with low yields are going to push money out the door if they think rates are going up. Because you MUST. In that situation, it's write new loans or die a slow death.
In banking - commercial banking, which I think the Fed hardly remembers any more - there are two hard and fast rules. In a low interest rate environment you manage to minimize total risk. In a high interest rate environment you push money out the door trying to increase your total loan portfolio, and business loans are really favored, because they roll and rates are rapidly adjustable. To some extent Main Street bankers are already doing this - witness the drop to 4.8% in May from 5.3% in January in short-term rates on loans reported in NFIB's survey. You have to keep it going.
It may seem like a paradox, but a couple of nominal interest rate increases this year would actually increase the flow of credit on Main Street, and that's what this economy needs. Specifically, doing that would increase lending to small businesses, and that's where the life is right now.
Tuesday, July 07, 2015
Reality - It's That Thing That Doesn't Go Away Whether You Believe In It Or Not
Tesla (snicker). I don't know what to say but ---- Tesla!!!!
Greece. The Eurozone's all like "Who'd a thunk?? They can't pay their debt??" When the leader of Malta is trotted out to make these statements of shock and outrage you can hear Cypriot strains in the background, played in a German Biergarten. And Greece - if you are not even willing to pretend, don't expect everyone else to keep pretending on your behalf. Folks, you had to have something to sell! If you weren't willing to do the Sheena Strut, you couldn't expect another quarter on the table.
China - Party like it's 1929. Shanghai opened into a bloodbath, and the banks are falling. They'll have to concentrate their firepower on the financials, and they are going to run out of ammo. I am sure the Chinese state will buy in. China doesn't fool around - the central bank will just hand out money to buy stocks or buy them directly. But there is an end to everything, and there will be to this also, because you cannot print money like that and bail those small investors out without perverting the system, and if you bail the large ones and dump the small ones, you have a hell of a social problem. Call it the Barney factor - it doesn't go away. This is straightforward buyer's exhaustion.
What unites these disparate "crises" is what lies behind them.
As for Tesla, anyone who has ever read their financials had to have a moment of supreme enlightenment. Surely. So don't claim you didn't know. This is a company that has no actual revenue stream.
Greece - well, the only thing Greece ever had to sell was the pretense that a country with say, 130% - 140% debt to GDP ratio could actually pull out through an austerity program and pay their debts. If you are Italy, it is essential to maintain that pretense. If you are France, it's very important. If you are Germany, you don't feel the same urgency, and in the end the Germans won and Draghi lost, and the battle now is purely to print enough money to keep those bond yields low. Draghi will indeed do whatever he needs to do, but the problem is the reality is STILL GOING TO BE THERE. Italy is the next Greece, and it's a much larger problem for the EU. The banks hold a huge amount of the bonds, so it will stagger onwards for some time, but sooner or later - Sammy Davis shows up.
China - it is not the stock market crash. It's the stock market crash after the demise of the RE fervor and the slow-down in the basic economy. When profits are doing this and production inputs are doing this and stocks are going sky-high, it was a dead cert that Sammy Davis was singing in the background.
Reality sucks. It always sucks. The only thing that makes reality less painful on average is paying attention to it early, while the problems are still manageable.
PS: The really fun thing to do is to watch the companies being suspended. China even futzes the stock indices, but that still doesn't change reality.
PPS: They are losing the financials and struggling to hold the banks, but they can't succeed. This is historic - make some coffee and stay up and watch trading being shut down. You can't suspend so much of the market and not produce even more selling in the rest of it. The mathematics is inexorable.
Note: If you don't grasp what I was referring to above, look at the component companies. Trading has been suspended (I believe the companies apply for this) in many, and the rest stop trading when they limit out at -10%. So in the end, if you need to pull money for any reason, you are limited to selling 10 or 20% of the companies in the index, which is a terrible situation to create. It's a recipe for a total crash, as investors have to sell profitable companies at reasonable valuations to get cash. This is almost a total shutdown of the market with hours to go.
Any theories that the Chinese regulators and government are somehow really super-cool clever have to founder on this terrible, terrible mistake. Instead, they are crazy amateurs. They should not have let this happen.
Saturday, July 04, 2015
Celebrating the Fourth By Baking Cakes
So this morning I donated to the latest hapless victims of a government gone insane. This lady got her business shut down and now is being fined $135,000 for refusing to bake a wedding cake for a lesbian couple.
Me - depending on the exact circs, I'd probably bake the cake. But I certainly don't agree with trying to force other persons to bake the cake.
So let the fireworks begin.
Thursday, July 02, 2015
The Jobs Schizophrenia Continues; It Must Be Close to a Breaking Point
Total U.S. carload traffic for the first six months of 2015 was 6,930,568 carloads, down 3.8 percent or 271,831 carloads, while intermodal containers and trailers were 6,605,029 units, up 2.3 percent or 149,442 containers and trailers when compared to the same period in 2014. For the first six months of 2015, total rail traffic volume in the United States was 13,535,597 carloads and intermodal units, down 0.9 percent or 122,389 carloads and intermodal units from the same point last year.Total June traffic was down more than 2% YoY. In one place they say -2.3%, in another -2.8%. We don't have June trucking figures; they should be better because they are biased toward intermodal. So no disaster, but the divergence from last year's pattern is pretty strong.
Turning now to the unemployment report, Establishment says we added more than 200K jobs; Household responds with jeering and farting noises and says we lost over 50K jobs.We wish these two would just grow up and start working together.
When numbers get this out of joint, I usually turn to Table A-8. Table A-8 says that, since February and on an SA basis, we have gained about 160K government jobs and lost about 210K private sector jobs, but added self-employed. The net non-ag wage-and-salary is virtually unchanged at +10K, with the balance being made up of private household workers.
Table A-8 agrees well with rail.
There must be some things off about the Establishment survey, because it's telling us there hasn't been much life in construction, which just can't be true. Construction and housing reports show strong activity, and those agree with fuel supplied figures from EIA.
Table A-8 also agrees that construction is good, because it shows we've added over 250K self-employed since February, which you would see when construction was strong. And gas, self-employed, construction surveys, and auto sales all agree that construction is strong. The net A-8 non-ag gain for all categories of employment since February is about 310K, which does make sense.
The official unemployment rate this month is 5.3%, which is sourced to the "exodus" - the total labor force fell sharply, because those not in the labor force rose by over 600K. This may be partly due to the end of the school year, although seasonal adjustments are supposed to deal with that. But as we collectively age, retirements are going to pick up, so perhaps that's the reason for this blip.
But regardless, net unemployment is reaching lower bounds.
The establishment report is initially poorly able to pick up some types of structural changes in the US economy. It can both lag upturns and lag downturns, although in revisions sometimes occurring years later it becomes much more accurate. CES generally compensates pretty well for the unavoidable flux with the birth-death adjustments.
The Establishment survey is quite reliable for wage and hour trends, and this month it was pretty static. Therefore my conclusion is that the Establishment survey is over-reporting a bit; wage trends are probably accurate but partly due to retirements and replacements with lower-level employees; a year or two from now Establishment will be revised to report lower trends for employment this spring. Also, never discount the importing-cheaper-workers trend.
NACM CMI is showing more trouble in B2B credit. The June numbers were not good month-over-month and YoY. Thus we will see some issues this summer. In particular, the BK numbers are rapidly degenerating. That is quite surprising because 2008 naturally caused a lot of BKs, and structurally they are now disfavored. So if they are happening, they are happening from acute stress, and the unfavorable indicators show very signficant financial stress.
As long as construction and motor vehicle sales hold out, you won't get the correlations needed to form a recession. MV production plans for the summer quarter are still very strong.
When MV production plans slack off, that's the time to worry.