Mish's Global Economic Trend Analysis

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• Bug In Search of Windshield; Japan's Current Account Surplus Shrinks 63% as Machine Orders Plunge 14.8%
• Italy's Prime Minister Blames Finland and Netherlands for Spike in Yields
• Excellent Anti-Union News From Multiple Places Including US Supreme Court
• Trends in Duration of U.S. Unemployment

Bug In Search of Windshield; Japan's Current Account Surplus Shrinks 63% as Machine Orders Plunge 14.8% Posted: 08 Jul 2012 10:49 PM PDT With every data point, I become more convinced the Global Recession is Upon Us. Here is another data point to add to the list. Bloomberg reports Japan's Current-Account Surplus Shrinks 63% As Machine Orders Drop. Japan's current-account surplus was the smallest in May since at least 1985 and machinery orders fell the most in more than five years, adding to signs a slump in demand is threatening the nation's rebound. The excess in the widest measure of the nation's trade shrank 63 percent from a year earlier to 215.1 billion yen ($2.7 billion), the Ministry of Finance said in Tokyo today. Machinery orders, an indicator of capital spending, fell 14.8 percent in May from the previous month, the Cabinet Office said, the biggest drop since comparable data were made available in 2005. Explanation of Current Account For those unfamiliar with the term Current Account Wikipedia offers this explanation: In economics, the current account is one of the two primary components of the balance of payments, the other being capital account. It is the sum of the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers. The current account balance is one of two major measures of the nature of a country's foreign trade (the other being the net capital outflow). A current account surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period. The balance of trade is the difference between a nation's exports of goods and services and its imports of goods and services, if all financial transfers, investments and other components are ignored. A nation is said to have a trade deficit if it is importing more than it exports. Positive net sales abroad generally contributes to a current account surplus; negative net sales abroad generally contributes to a current account deficit. Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports. This however is not always the case with secluded economies such as that of Australia featuring an income deficit larger than its trade surplus. Why This Is Important Japan's balance of trade is already negative, but the important point is the overall current-account of which trade is a part. If Japan's current-account was negative, Japan would depend on foreign capital to make up the deficit. Will foreigners fund Japan at 0% interest rates? I think not. Bug In Search of Window Japan has debt-to-GDP ratio of 220% and rising. As of July 9, the Yield on 10-year Japanese Bonds is .80%. A mere rise of 2 percentage points would consume all Japanese revenues just to pay interest on the national debt. Moreover, Japan's demographics are such that pension plans are now for the first time last year net sellers of bonds, not net buyers. For details, please see World's Largest Pension Fund Needs to Sell Japanese Bonds; Japan's Demographic Time Bomb Officially Goes Off As John Mauldin commented in his book Endgame, "Japan is like a bug in search of a window." If you have not yet picked up a copy, please do so. It's a good read. Once Japan's current account balance goes negative in a sustained way (and I believe that will indeed happen), the bug will have found the window. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Italy's Prime Minister Blames Finland and Netherlands for Spike in Yields Posted: 08 Jul 2012 09:01 PM PDT Like a drunk blaming a pebble in the road for causing his fall, Italy's Prime Minister Blames Finland and Netherlands for Spike in Yields. Italian Prime Minister Mario Monti denounced unnamed "northern" EU states on Sunday for taking positions that contributed to spikes in borrowing costs for Italy and Spain. In an apparent reference to Finland and The Netherlands, which cast doubt on the conclusions of last month's EU summit hailed as a watershed for the debt crisis, Monti said they undermined the eurozone's "credibility". Finland has said it has no intention of footing the bill to cover the debts of other eurozone countries. "Collective responsibility for other countries' debt, economics and risks; this is not what we should be prepared for," Finance Minister Jutta Urpilainen said in a newspaper interview. For his part Dutch Central Bank president Klaas Knot, a member of the European Central Bank's governing council, took a similar line, saying: "If somebody wants to help southern Europe, then it has to be other governments, not the ECB." Is there any country that recognizes its own responsibility in creating this mess? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Excellent Anti-Union News From Multiple Places Including US Supreme Court Posted: 08 Jul 2012 04:09 PM PDT At long last unions are on the run and losing battles in multiple places at once. Let's take a look at some dates and headlines. June 7, 2012 LA Times: 2 big cities OK cuts to worker pension costs Landslide victories on ballot measures to cut pension costs in two major California cities emboldened reform advocates, who said they expect a flurry of copycat initiatives and increased support for Gov. Jerry Brown's long-stalled push to curb the state's obligations to its employees. In San Jose, nearly 70% of voters Tuesday approved a plan that gives workers the choice between increasing their pension contribution to 13% of their pay, currently 5% to 11%, or switching to a lower-cost plan with reduced benefits. It also steeply cuts benefits for new hires and tightens rules for disability retirements. In San Diego, where pension cuts already have been implemented, voters opted to eliminate pensions for new workers. By a 66% to 34% margin, voters Tuesday endorsed Proposition B, which provides newly hired city employees with a 401(k) program, but preserves traditional pensions for new police officers. The San Diego measure also calls for a five-year freeze on "pensionable" pay levels and removes elected leaders' ability to improve retirement packages without a popular vote. Leaders in both cities say voters were echoing a point that reform advocates have made for years. June 7, 2012 Washington Times: Labor unions feel pain of pension reform votes in San Diego, San Jose "San Diego's victory isn't just a win for San Diego taxpayers. It marks the beginning of the pension reform movement for our country," declared Lani Lutar, president and CEO of the San Diego County Taxpayers Association. "Tuesday the voters sent a very clear message to elected officials: Put the taxpayers first. Use our money prudently, and stop giving away benefits we can't afford." Pension reform advocates call it a crushing defeat, a rising trend, and just the beginning. According to the California Foundation for Fiscal Responsibility, with the victories on Tuesday 18 of 20 pension reform measures have now passed in California since 2010. They have won with an average of two-thirds of the vote, even in more liberal cities like San Francisco. July 6, 2012 Mercury News: State will not override local pension votes, Senate leader Darrell Steinberg says "I would not favor doing anything that would affect the voter-approved initiatives," the Senate president pro tem told reporters Thursday, a day before the Legislature breaks for its summer recess. A spokesman for the Sacramento Democrat had said earlier that his boss "respects the will of the voters. ... It is presumed that any local initiative passed this year will be grandfathered-in to the eventual pension-reform legislation." July 5, 2012 Union Watch - Steve Greenhut: US Supreme Court Slaps Down California SEIU Union Dues Collection Scheme In Knox v. Service Employees International Union Local 1000, by a 7-2 vote, the high court slapped down the local – California's largest state-employee union – for deducting money from employees' paychecks and using it to fight against California campaign initiatives – without giving its covered nonmembers a chance to opt out of these political campaign contributions. July 3, 2012 Town Hall - Gina Loudon: Labor Unions Suffer Defeat on Taxpayer Revolt While the unions treat lawmakers in Sacramento, and most of the large cities like LA, San Francisco and Oakland like their concubines, having their way with them anytime they want, voters in the hinterlands, led by San Diego are not so compliant. In fact, voters in little El Cajon (pop. barely 100,000) showed big time el cajones by also becoming a charter city. A charter city differs from a general law city in that many of the day to day law making gets pulled from Sacramento to the local city council. Those laws include labor union laws. To date, voters in fully 122 California cities have voted to give Sacramento the bird. The City of Vista passed their charter in 2007 on the prediction that taxpayers could save million of dollars on planned construction of two fire houses and other projects as charter cities could avoid being forced to pay Sacramento government-mandated wages or so-called "prevailing wages" on these projects. The measure passed by an overwhelming margin, but what did the unions do? Right. They sued. Today they lost. In the matter of the State Building and Construction Trades Council of California ("Big Labor") v. The City of Vista ("Little Taxpayers"), the California Supreme Court ruled today in favor of the taxpayers. Taxpayers in every charter city in California now have the ability to squeeze out from under the oppressive Sacramento mandated "prevailing wages" under which a plumber in San Francisco makes over $100 per hour in total compensation. The taxpayers in Vista will be able to have their fire houses and have millions left over to build more parks or other amenities. The alternative would have been millions of dollars to prop up insolvent union pensions. That is the real issue here. With their losing streak running from Wisconsin to San Jose to San Diego, big labor should realize that the peasants are revolting. The animals on Orwell's Animal Farm have seen that the pigs are their now masters, and they have met the new boss, who looks the same as the old boss. Their fate runs through Vista. So as the ink dries on the Vista decision, and more cities undoubtedly are contemplating enacting charters of their own, Sacramento lawmakers would be well-advised to make themselves scarce when big labor comes demanding more favors. Before Sacramento lawmakers try to do the unions' bidding and pass special laws to harm charter cities, they may take a vista at the cajones of the voters that are in full rebellion. July 6, 2012 Town Hall - John Ransom: Teachers' Union Expelled from School District The Douglas County School District, a suburban community south of Denver, Colorado, has decided to part ways with their teachers' union in the absence of progress on a new contract which expired June 30th, 2012. "The Board of Education finds and declares that the Collective Bargaining Agreements between the District and the Unions," said the district on July 3rd in its formal resolution dissolving the bonds between the union and the district, "which had been effective from July 1, 2011 through and including June 30, 2012, are now expired and of no legal effect whatsoever." The dissolution between the district and the union is unprecedented and sources close to the union tell me that unions are pensively watching, worried that other districts around Colorado and the country could take the same action as Douglas County has. We can only hope. Progress!! This my friends is what's called progress. As Ransom suggests, we hope to see a lot more of it. I have every expectation we will. Indeed, I would like someone to take the entire issue of collective bargaining of public unions as well as prevailing wage laws to the US Supreme Court. It is time to end the insane grip public unions have on US taxpayers. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Trends in Duration of U.S. Unemployment Posted: 08 Jul 2012 10:50 AM PDT Duration of Unemployment by Percentage: 5 Weeks and Under, 15 Weeks and Over, 27 Weeks and Over click on chart for sharper image Quick Figures In June of 1983, the percentage of those unemployed 27 weeks or longer peaked at 26%. That is the only month prior to April of 2009 above the 25% mark. Starting April of 2009, every month has been above the 25% mark. Starting July of 2009, every month has been above the 30% mark. Starting December of 2009, every month has been above the 40% mark. Grim Picture The trends paint a grim picture. With each recession the duration of unemployment has increased. Note that prior to 1990, shortly after recessions ended, the percentage of people unemployed 15 weeks and over, and 27 weeks and over dropped quickly. The last three recessions did not follow that pattern and the recession starting in 2007 is unprecedented in obvious ways. I believe a major reason the 27 weeks and over percentage is dropping now is people have exhausted all their benefits and have claimed disability or gone on "forced retirement" to collect social security benefits. Since the global economy has stalled (see Plunging New Orders Suggest Global Recession Has Arrived) and the US is headed for recession if not in recession (see 12 Reasons US Recession Has Arrived Or Will Shortly) there is not much realistic hope of these numbers showing drastic improvement except by more forced retirements or rising disability claims. For more on disability claims, please see ... 2.2 Million Go On Disability Since Mid-2010; Fraud Explains Falling Unemployment Rate; Will Higher Disability Taxes Fix the Problem?   TrimTabs on Debt and Disability Claims: How Much Debt Does it Take to Generate $1 in GDP? Disability Fraud vs. Expiring Unemployment Benefits Revisited   Bernanke Puzzled Over Jobs, Cites Okun's Law; Six Things Bernanke is Clueless About  Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.