Mish's Global Economic Trend Analysis

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• Lies You Can Believe In
• Treasury Yields Near Record Lows Amid "Suspicious" Direct Bidder Demand; Suspicion Easily Explained
• Email Comments From Hussman Regarding Start of Recession and ECRI Track Record
• How To Protect Yourself From Collapse of the Faith-Based Financial System
• Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears?

Lies You Can Believe In Posted: 11 Jul 2012 08:33 PM PDT Congratulations to Spain's prime Minister, Mariano Rajoy, for the lie admission of the day as Spain steps up austerity amid protests The Spanish government unveiled €65bn worth of tax increases and public spending cuts as part of a deal to secure European aid to rescue its banking system as thousands of miners marched on the centre of Madrid to protest against austerity measures. Facing heckles from opposition politicians Mariano Rajoy, prime minister, issued stark warnings about the risk to Spain's future as he announced a rolling back of unemployment benefits, an increase in value added tax would rise from 18 to 21 per cent, and cuts to local government to achieve the savings over two and a half years. As he spoke, thousands of miners marched on the centre of Madrid, joined by other anti-austerity protesters, to bring the city's main avenue to a near standstill, and sparking small skirmishes as police fired rubber bullets at parts of the crowds. By raising VAT, Mr Rajoy was forced to add to a growing list of policy reversals in his time in office, with the prime minister having stood against tax increases made by the previous government when in opposition. "I said I would reduce taxes and I am increasing them ... the circumstances have changed and I have to adapt myself to them," Mr Rajoy said. Lies You Can Believe In Anyone who was thinking clearly knew Rajoy's pledge to not raise taxes was a gigantic lie the moment he spoke the words. However, few were thinking clearly, not that it matters one iota. The unfortunate reality is no other choice would have made a difference either. All the electable fools would have done the same stupid thing: raise taxes, bailout bondholders, and punish taxpayers to stay with the euro. People voted for Rajoy for the same reason people voted for Obama. Both told lies that everyone wanted to believe. There are exceptions like Ron Paul, but essentially that's what politics is primarily all about - feeding people lies they want to believe in - just to get elected. 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.

Treasury Yields Near Record Lows Amid "Suspicious" Direct Bidder Demand; Suspicion Easily Explained Posted: 11 Jul 2012 02:13 PM PDT Curve Watchers Anonymous is investigating the yield curve in the wake of reported "suspicious" bids for treasuries at the latest auction. US Treasury Yield Curve Since 2003 click on chart for sharper image Legend $IRX: 3-Month Discount Rate $FVX: 5-Year Treasury Note $TNX: 10-Year Treasury Note $TYX: 30-Year Bond Chart above shows closing yield for the month except the front month is current. Treasuries Approach Record Low After Note Auction Bloomberg reports Treasuries Approach Record Low After Note Auction Treasury 10-year note yields approached all-time lows after the U.S. sold $21 billion of the securities at a record rate and minutes from the Federal Reserve's last meeting showed some members favor more stimulus. The auction attracted record high demand from a group of investors that include pension funds and insurance companies. The notes drew a yield of 1.459 percent, compared with a forecast of 1.518 percent in a Bloomberg News survey of seven of the Fed's 21 primary dealers. The previous record low auction yield of 1.622 percent was set last month. Demand 'Suspicion' The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.61, the highest since April 2010, compared with 3.06 percent in June and an average of 3.07 for the past 10 sales. Direct bidders were awarded 45.4 percent of the auction, the most for any offering of U.S. government coupon securities on record. The $9.53 billion purchased was $5.16 billion more than at the previous offering on June 13. The previous record for direct demand at a 10-year note sale was 31.7 percent at the August 2011 auction. "We don't know and we won't know" the source of that demand, said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. "Given the sheer size, it's unlikely a dozen people all decided to come in and it just is coincidental. So the shadow of suspicion is cast on a player or two." Since the start of 2012, direct bidders have won an average 21.1 percent of the debt sold at Treasury 10-year auctions. The next highest direct demand has come at 30-year bond sales, with an average award to direct bidders of 14.9 percent. Indirect bidders, an investor class that includes foreign central banks, purchased 40.6 percent of the securities at today's sale, compared with an average of 42.2 percent for the past 10 offerings of 10-year notes. Suspicion Explained For starters, the US is in a recession (see Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears?), so demand for treasuries should rise. However, that's likely not the totality of the explanation. Foreign demand from China certainly plays a part. Wait you say, shouldn't foreign demand be indirect bidding? In the case of China, the answer is no. Reuters reported on May 21, 2012 U.S. lets China bypass Wall Street for Treasury orders China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters. The relationship means the People's Bank of China buys U.S. debt using a different method than any other central bank in the world. The documents viewed by Reuters show the U.S. Treasury Department has given the People's Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011. China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market. The change was not announced publicly or in any message to primary dealers. "Direct bidding is open to a wide range of investors, but as a matter of general policy we do not comment on individual bidders," said Matt Anderson, a Treasury Department spokesman. While there is been no prohibition on foreign government entities bidding directly, the Treasury's accommodation of China is unique. China Trade Surplus Hits 3-Year High Yesterday I wrote China Import Growth Plunges, Trade Surplus Hits 3-Year High; Will US Response Be Protectionism? Is China Headed For a Deflationary Shock? In light of all of the above, I have a few questions: What is China going to do with a record trade surplus? The answer is buy more US treasuries. What are pension plans and corporations going to do if the US is headed into recession?  The answer is buy more US treasuries. What are those concerned about global growth and the situation in Europe (including capital flight) going to do? The answer is buy more US treasuries. I fail to see precisely what is so "suspicious" about these non-revelations. Capital Flight in Spain Check out the Capital Flight in Spain as posted on FT Alphaville. Things Can Get Disorderly FT Alphaville reports ...  The result is not very pretty. Since the middle of last year, this has been a one-way show, with capital leaving Spain apace. Capital inflows have been almost non-existent. Indeed, Yiagos Alexopoulos at Credit Suisse reckons outlflows are currently running at an annualised rate of 50 per cent of GDP. The analyst notes that the clear trend of foreign investors yanking money from Spain has been joined by evidence of domestic investors moving assets abroad. If that accelerates from here, things could get disorderly. Emphasis added. Yes, indeed, things can and will get disorderly in my opinion. 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.

Email Comments From Hussman Regarding Start of Recession and ECRI Track Record Posted: 11 Jul 2012 11:43 AM PDT I received a nice email from John Hussman regarding my post earlier today Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears? John Writes ... Hello Mish I enjoyed your latest piece, as always. In Lakshman's defense, we're clients of ECRI, and he did note pretty clearly to ECRI subscribers that the economy was first "moving toward," then later "squarely in the window of vulnerability" and later "locked on a glide path" to recession. His current view that the economy has now entered a recession really is the first time in this sequence that ECRI has called a recession actually in progress. I suspect that in the interest of clarity in his interviews, Lakshman may not have brought that subtlety out enough. For our part, we've been in the "oncoming" recession camp since about August of last year, which I think was deferred by the round of central bank easings late last year, but which I also view as part of the same broad signal rather than one failed signal and one probably correct one. More recently, my own views on the economy deteriorated from strong concerns in  January (Leading Indicators and the Risk of a Blindside Recession) to the specific expectation that a recession would begin in May or June (Dancing at the Edge of a Cliff). You're right that saying that we're in a recession is different than saying one is oncoming, and my view about actually being "in" a recession came last month (Enter, the Blindside Recession). You also indicated that I turned bullish in 2009. Actually, while our valuation work did indicate that stocks were valued for reasonable 10-year returns in early 2009, I did miss the upturn because I insisted on making our methods robust to Depression-era data (since the market lost two-thirds of its value in the Depression even after becoming "reasonably" valued). I wasn't willing to subject shareholders to potentially vicious drawdowns until I was certain that our methods were robust to that period (something I called our "two data sets problem" at the time). Thus, some of your readers can correctly take issue with the comment that I was bullish in 2009. I think we're well prepared for future cycles as a result, but 2009 was actually a miss for us. Your reports are always appreciated, Mish. Have a great day. John Recession Is Now Camp That makes at least three of us in the "Recession Is Now" camp: Hussman, the ECRI, me. I believe Hussman was first, on June 25, 2012 in Enter, the Blindside Recession, as noted above. History will show whether this view is correct or not. If not, it won't be the first or last time any of us will have been wrong. 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.

How To Protect Yourself From Collapse of the Faith-Based Financial System Posted: 11 Jul 2012 08:56 AM PDT With the LIBOR manipulation scandal and the collapse of commodity brokers MF Global and PFG Best, what is the average investor to do? Lauren Lyster discusses the answer in a Capital Account interview with Simon Mikhailovich, co-manager of Ediesis Capital. The topic is "Death of Price Signals and the Birth of a Faith-Based Financial System" Link if video does not play: Birth of a Faith-Based Financial System The entire interview is worth a complete play. The key portion starts right around the 21:30 mark in which Mikhailovich explains .... The financial system is so interconnected and so highly correlated, different asset classes that deemed to be uncorrelated or low-correlated, have become highly-correlated and are essentially all sitting in one systemic basket. The way to address the problem is to look for baskets that are not in the financial system. You have to look for physical assets, hard assets, that are not financial instruments, not only the assets themselves are not in the financial system, but the way you own them is not related to the financial system. In other words, direct physical ownership of non-financial assets. ... The main one is gold. Physical gold is the answer because gold is the most liquid, most ubiquitous material, with a worldwide market. It should owned physically outside the financial system and hopefully with geographic diversification so you can assess liquidity during tough times. We have started a fund to enable people to do just that. Hold Physical Gold Outside the Financial System To escape the "faith-based initiative" physical gold is the answer. Mikhailovich proposes one way. Taking physical possession is another, Goldmoney is a third. I believe a portion of one's assets belongs in physical gold. What portion depends on many things, including comfort level of holding gold and ability to not panic in strong corrections. As noted in previous posts: For the sake of full disclosure, my physical precious metals holdings are now entirely at GoldMoney and I have an affiliate relationship with them. If anyone wants information about GoldMoney or investing in physical gold and silver in general, please Email Mish 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.

Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears? Posted: 11 Jul 2012 12:50 AM PDT There is a big difference between making a claim the economy is in recession from a claim the economy is headed for one. Case for a Global Recession I think the entire global economy is in recession and said so on July 6, 2012 in Plunging New Orders Suggest Global Recession Has Arrived However, we need to define the term "recession" Contrary to popular myth, recession does not mean two consecutive quarters of economic contraction. Rather, two consecutive quarters of economic contraction is a sufficient, but not necessary condition. In the US, the NBER is the official designator of recession start and end points. Many recessions have started with GDP still growing. The "Conditions for Global Recession" are even looser. "The International Monetary Fund (IMF) considers a global recession as a period where gross domestic product (GDP) growth is at 3% or less. In addition to that, the IMF looks at declines in real per-capita world GDP along with several global macroeconomic factors before confirming a global recession." Given current conditions are what one would expect from outright stagnation (if not worse), I am confident a global recession has begun. What About a US Recession? On June 21, I gave 12 Reasons US Recession Has Arrived (Or Will Shortly). Tipping the Balance to Now (Not Shortly) The Third Consecutive Weak Payroll Report  The pending Global Collapse In Auto Sales  Plunge in China Import Growth (For discussion see China Import Growth Plunges, Trade Surplus Hits 3-Year High; Will US Response Be Protectionism? Is China Headed For a Deflationary Shock?) That is enough for me. And I am not the only one to feel that way. ECRI's Achuthan: "I Think We're in a Recession Already" Link if video does not play: ECRI's Achuthan Says U.S. Economy Is in Recession Partial Transcript of Video Achuthan on whether he can reaffirm his recession call from last year: "Yeah…I think a lot of people forget what our call was. What we said back in December was that the most likely start date for the recession would be in Q1 and if not then, by the middle of 2012. I'm here to reaffirm that. I think we're in a recession. I think we're in a recession already. As I said back there, it is very rare that you know you're going into recession when you're going into recession. It often takes some big hit on top of the head. In the last recession, it took Lehman to wake people up and the recession before, it took 9/11." Those are exactly the kinds of things that irritate me about the ECRI. The fact of the matter is Achuthan was calling for a recession in September, not December, and not June. For details, please see my September 30, 2011 post ECRI Calls Recession Based on "Contagion in Forward Indicators"; Just How Timely is the Call? Tom Keen: "Single Sentence, why recession now" ECRI's Lakshman Achuthan: "Contagion in Forward-Looking Indicators" That link clearly shows I thought a recession was imminent as well. Those are the facts. It is silly to try and hide them. Yet, in December (after economic data firmed), Achuthan moved the date forward to June, wanting another 6 months to be proven correct. My question in September "Just How Timely is the Call?" was a good one. The ECRI has been both very early and very late. Far from the perfect track record they claim. That my friends is the nature of making predictions. No one is perfect, not me, not Achuthan, not anyone, and it is very foolish to pretend otherwise. Actually, I have no problem at all with Achuthan moving the date forward. Conditions change. My problem, is revisionist history that makes it appear as if a recession call in September was a recession call for June (made in December). All this nonsense goes away the moment Achuthan admits the ECRI does not have a perfect track record. That said, I think Achuthan is now correct. However, I thought so in September. So be it. I was wrong. The solution when you were wrong is easy, simply say you were wrong. The Other Extreme "Recession is Not Imminent" Please consider the other extreme, Recession is Not Imminent by Dwaine van Vuuren. Among the bearish voices I most respect is John Hussman, whose work I read regularly. He is thorough and quantitatively rigorous. Whenever I am convinced there will be no recession, I temper my enthusiasm by re-reading his articles to make sure I maintain a balanced view. One day he will be right and I will be wrong, but at least I won't be blindsided. But the data don't show catastrophe. Looking at the Leading SuperIndex, we are a bit worse off than last summer and the summer before that. We just put in a leading SuperIndex peak on April 13 (10 days after the SP-500 peak) that is lower than the prior two peaks. This slowdown, if not checked in time, may well be the one that pushes us into recession. But even that worst-case scenario is still three to four months away, according to the SuperIndex recession-path projections in our regular weekly report. Emphasis in italics added. I disagree. The global data is an outright catastrophe. Moreover, the jobs reports in the US and the US ISM manufacturing numbers are  a catastrophe as well. I am amused by van Vuuren's statement "at least I won't be blindsided". I suggest he already is. "We Have Reached the Point that Delineates an Expansion from a New Recession" John Hussman asks What if the Fed Throws a QE3 and Nobody Comes? With regard to the economy, I noted two weeks ago that the leading evidence pointed to a further weakening in employment, with an abrupt dropoff in industrial production and new orders. Mike Shedlock reviews the litany of awful figures we've seen since then, focusing on the new orders component of global purchasing managers indices: U.S. manufacturing new orders and export orders plunging from expansion to contraction, Eurozone new export orders plunging (only orders from Greece fell at a faster rate than those of Germany), and an accelerating decline in new orders in both China and Japan. Recall that the NBER often looks for "a well-defined peak or trough in real sales or industrial production" to help determine the specific peak or trough date of an expansion or recession. From that standpoint, the sharp and abrupt decline we're seeing in new orders is a short-leading precursor of output. As the chart below of global output suggests, I continue to believe that we have reached the point that delineates an expansion from a new recession. On the employment front, Friday's disappointing report of 80,000 jobs created in June may be looked on longingly within a few months, as we continue to expect the employment figures to turn negative shortly. That said, it remains important to focus on the joint action of numerous data points, rather than choosing a single figure as an acid test. I noted last week in Enter, the Blindside Recession, GDP and employment figures are subject to substantial revision. Lakshman Achuthan at ECRI has observed the first real-time negative GDP print is often seen two quarters after a recession starts. Earlier data is often subsequently revised negative. As for the June employment figures, the internals provided by the household survey were more dismal than the headline number. The net source of job growth was the 16-19 year-old cohort (even after seasonal adjustment that corrects for normal summer hiring). Employment among workers over 20 years of age actually fell, with a 136,000 plunge in the 25-54 year-old cohort offset by gains in the number of workers over the age of 55. Among those counted as employed, 277,000 workers shifted to the classification "Part-time for economic reasons: slack work or business conditions." Permabears? Hussman has been labeled a "permabear". So have I. So has Dave Rosenberg. So have many others. It only seems that way. The reality is Hussman, I, and Rosenberg were bullish at the March 2009 bottom. However, the market shot up so far, so fast, that valuations became quickly stretched. I cannot speak for the others, but I surely underestimated the effect of global coordinated liquidity move by central bankers virtually everywhere (US, EU, UK, China, Australia, Canada, etc.). The result was we had a 10-year stock market rally in three years. Those patting themselves on the back for their "no recession" call were correct only because of  a massive coordinated liquidity pump by central bankers worldwide. Unless the "no recession" callers specifically counted on that, then they were lucky with their forecast. What about now? What if the Fed Throws a QE3 and Nobody Comes? What if stock market valuations reach typical bear market valuations? What if a recession is really at hand? I do not believe the Fed is in control. Such ideas are a myth. If the Fed could prevent recession we would never have them. Yet we do, don't we? The fact of the matter is Fed tail-chasing policies combined with fractional reserve lending and moral-hazard bailouts have amplified the crest and trough  of every boom and bust. Deep Problems Hussman comments ... Our economic problems run far deeper than what can be healed by more reckless bubble-blowing by the Federal Reserve. At the center of global economic turmoil is a mountain of bad debt that was extended on easy terms by weakly regulated lenders with a government safety net. Global leaders have done all they can to protect the lenders at the expense of the public – to make good on the bond contracts of mismanaged financial institutions by breaking the social contracts with their own citizens. The limit of this unprincipled madness is being reached. The way out is to restructure bad debt instead of rescuing it. Particularly in Europe, this will require numerous financial institutions to go into receivership, where stock will be wiped out, unsecured bonds will experience losses, senior bondholders will get a haircut on the value of their obligations, and loan balances will be written down. Bank depositors, meanwhile, will not lose a dime, except in countries where the sovereign is also at risk of default. Even there, depositors will probably not lose any more than they would if they held sovereign debt directly. In the U.S., the pressing need continues to be mortgage restructuring, and an emerging recession is likely to bring that issue back to the forefront, as roughly one-third of U.S. mortgages exceed the value of the home itself Recognizing the Limits of Madness I agree. The key statement is "The limit of this unprincipled madness is being reached." The problem is not only recognizing the limits of "unprincipled madness" but also recognizing the market's willingness to play along. It always lasts longer than one thinks possible. At the end of the line, every possible person is sucked into belief current conditions can go on forever. We saw that in the 2000 dot-com bubble, the housing bubble, the commercial real estate bubble that followed the housing bubble, and we see it now in the "Fed is omnipotent belief bubble". The only reason we have escaped recession so far is the amazing effort central bankers and global governments have put forth to avoid what needs to be done. Congratulations to those who recognized this condition in advance. However, no credit can be given to those with the misguided belief such policies and efforts will last perpetually. The end of the line always comes. No Decoupling There was no decoupling in 2008 and there will be no reverse decoupling now. For further discussion please see Will the US Economy Continue to Decouple From the Rest of the World? Recession Has Begun In this case, the data speaks for itself. We are at the end of the line. The recession is not coming, it is not down the road, it is not likely, it is not at even at-hand. Rather, the recession has begun. Fiscal stimulus from Congress is not coming and no amount of QE is going to stop it. Addendum: Please see followup discussion from John Hussman Email Comments From Hussman Regarding Start of Recession and ECRI Track Record 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.