Initial jobless claims for the past week were 505,000, tied with last week for the lowest since January. This brings the 4-week average down to 514,000, the lowest since November of last year and the 11th consecutive week of declines. 

Clearly, fewer people are losing their jobs.  But, 505,000 is still a large number – one consistent with a net loss of 150,000-200,000 jobs per month. And there are still 5.6 million people with continuing unemployment insurance claims, 1.8 million more than at this time last year.

I see this as reflective of an inexorable but slow decline in layoffs complicated by a lack of new jobs, which will keep unemployment elevated as far as the eye can see. So, yes, the employment market in the United States is improving. But it is improving slowly, leaving many long-time unemployed workers bereft. This is what is called structurally high unemployment – and its happening at a level much higher than even I thought likely.

Here are two nuances in the data flow.

Dichotomy in seasonal and non-seasonal data.

All of the numbers above are seasonally-adjusted data. But, I tend to think they overstate the number of job losses (this particular point puts me somewhat at odds with David Rosenberg).  My reason is simple: we are in the recovery part of the business cycle, which means that any seasonal adjustment bias will tend to elevate the numbers.

For example, when you look at year-on-year numbers, the seasonally adjusted continuing claims data show an average 1.82 million more workers filing claims. But, the non-seasonally adjusted data show 1.56 million.  That’s a pretty sizable difference. This leads me to conclude that the seasonal adjustments may be overstating continuing claims.

Year-on-year data much worse for continuing claims

On the other hand, the initial claims numbers are flat with year-ago levels. While, as I indicated above, continuing claims are greatly elevated. To me, this points to the likelihood that the unemployment rate will rise much higher. Last year, we were seeing 500,000 layoffs as well. Yet non-farm payrolls were declining at a greater rate (380K in October, almost 600K in November and almost 700K in December). I see only two ways this is possible: 1. more people are getting hired today so the net job loss is less; or 2. more likely, non-farm payrolls understate the number of job losses because of losses not tracked in small businesses.

I have not been able to reconcile these two points. I hope to see a trend which explains both points develop in the coming weeks.

Related posts:

• US Jobless claims decline in latest week
• Initial and continuing jobless claims decline
• Jobless claims in second week just over 600K
• Jobless claims fall again due to seasonality
• Jobless claims rise 30,000 from artificially low number

This is a crucial question because Devon Energy, the Oklahoma-based independent oil and natural gas producer has just decided to put billion of dollars in Deep sea Gulf of Mexico assets on the market.

Canada’s National Post reported:

Devon Energy Corp. hopes to raise up to US$7.5-billion from the sale of its Gulf of Mexico and international assets as the company moves to restructure itself as a North American on-shore player.

Devon’s chief executive, Larry Nichols, said the company believes the market is not valuing its Gulf of Mexico and international assets properly. Devon hopes to realize between US$4.5-billion and US$7.5-billion from the sale of assets during 2010.

Reporting on the same issue, the New York Times has indicated that the Chinese may well be interested in these assets.

One company that might be interested in taking the risk would be China National Offshore Oil Corporation, known as Cnooc. It recently agreed to buy a stake in some of Statoil’s Gulf assets, the first time that a Chinese company would take an ownership interest in energy assets in the United States.

Only four years ago, Cnooc’s $18.5 billion bid for American oil company Unocal collapsed under pressure from Congress amid concerns about American oil assets falling under the control of the Chinese government. Since then, the Chinese have been wary of bidding on American energy assets and have concentrated their investments on undeveloped fields at home and in Africa, the Middle East and South America.

The Statoil deal seems to have changed all that. But Devon’s assets could be too much, too soon for Cnooc. It may simply continue to buy small stakes in fields across the region before it is ready to make a major purchase.

The Statoil connection for Cnooc has not made much of a splash up in the mainstream press, but it is significant given the protectionism we witnessed when the Chinese were rebuffed when they outbid Chevron for Unocal, an American company which had largely non-U.S.based energy assets.

Forbes reported on the Cnooc Gulf of Mexico acquisition two weeks ago:

CNOOC Ltd has agreed to buy a minority stake in four prospects in the Gulf of Mexico from Norway’s Statoil, opening crude oil reserves in the U.S. Gulf to China for the first time.

CNOOC will have a 10 percent to 20 percent interest in the four exploration areas, CNOOC spokesman Xiao Zongwei told Reuters.

But, the Devon assets are far more substantial. Moreover, Cnooc comes in after the fact as a minority investor in the Statoil projects. With the Devon sale, Cnooc would be a principal actor and that leaves the door ajar for economic nationalism.

Related posts:

• China wants all of Repsol’s Latin American oil assets
• Should we expect a protectionist China?
• Is China avoiding using US dollars?
• China to diversify out of U.S. dollars
• China company performance

An article in the National Post suggests General Motors may look to divert some of its bailout money to Europe in the wake of a chill in German government support for subsidies. Talk of using taxpayer money to benefit workers in other countries is sure to raise ire, especially in the United States where the unemployment rate has hit double-digit levels.

When General Motors was forced into receivership this past Spring, it received tens of billions in bailout money from the U.S. and Canadian governments in order to protect jobs in the auto sector.

For his part, Stephen Harper, Canada’s Prime Minister said the aid was regrettable but necessary.

The Vancouver Sun reported at the time:

Canada had no choice but to support the restructuring of auto giant General Motors Corp. with about $10 billion in taxpayer aid or face devastating economic consequences, Canadian government and union leaders said Monday.

Hundreds of thousands of jobs would have been lost and communities across southern Ontario would otherwise have been devastated, Prime Minister Stephen Harper and Ontario Premier Dalton McGuinty said at a news conference Monday, hours after the 100-year-old company sought protection from bankruptcy in the U.S.

"We could either participate in reshaping these companies for the future or stand idly by as they restructured out of Canada," Harper said in Toronto.

"The decision announced today is regrettable but necessary."

The federal and Ontario governments’ contribution to the restructuring is set at $9.5 billion US, according to a joint statement Monday from the prime minister and U.S. President Barack Obama.

For that, Canadian taxpayers will hold a 12-per-cent equity stake and will also appoint one independent director to the company’s board.

The U.S. government sunk even more into General Motors – $50 billion. All of this money and the ‘cash for clunkers’ program have allowed General Motors to return to life. However, many issues remain, the most consequential of which is GM Europe. 

Since late May, it has appeared that a consortium headed by Magna International was set to take over GM Europe on the condition of 4.5 billion in state aid from Germany. As early as August, stories surfaced in which GM was considering raising capital in order to keep Opel. GM never wanted to sell Opel and Vauxhall, but it was forced to do so by circumstance.

However, when GM abruptly backed out of the Magna deal early in November it enraged the German government, who are now not likely to offer any aid. At the time I said:

Will Obama now come up with the funds?  If this minister gets his way, there don’t seem to be a whole lot of solutions here.

Well, here is one solution via the National Post (note the part I have highlighted in bold):

General Motors Co. may use some of the money it won from Canadian and U.S. taxpayers in the spring to fix its Opel unit in Europe in the months ahead as it works out a new financing plan for the money-losing business.

Detroit-based GM plans to fund Opel’s turnaround using a mix of sources after deciding to keep the business itself instead of selling a majority stake to Magna International Inc. and Russia’s Sberbank. That could include tapping funds pledged by the federal and Ontario governments, said Chris Preuss, GM’s vice-president of global communications.

"We’re going to be needing to participate directly in the financing" of Opel, Mr. Preuss said in an interview yesterday. "The taxpayers of both Canada and the U.S. have a stake in this. But what was agreed upon was that we have to be able to run a global business."

Translation: GM has every right to use its bailout money as it sees fit.

GM continues to misjudge the political situation. They handled the decision to back out of the deal with Magna very poorly. We are now likely to see increasing signs of economic nationalism at play.

But, just as the backing out created huge waves in Germany, this latest salvo from GM is likely to enrage Canadians and Americans as they see their tax dollars at work to protect the jobs of Europeans. GM may think using Canadian and American bailout funds for GM Europe is a good ‘technical’ solution. But, it is a very poor choice politically and they will pay the price.

Related posts:

• Germany gives GM a stiff arm on state aid
• Germans reject Chinese offer for Opel
• GM considers keeping Opel, raising capital
• German Press: Fiat to sign a deal with Opel, not Chrysler
• GM board decides to keep European Opel unit

On the eve of U.S. President Barack Obama’s visit to China, a major Chinese official has criticized U.S. monetary policy in unusually harsh language. Liu Mingkang, China Banking Regulatory Commission chairman said the zero interest rate policy of the U.S. Federal Reserve posed a “new systemic risk.”

Liu, using language reminiscent of warnings by NYU economist Nouriel Roubini and speaking at a financial forum in China’s capital Beijing, said:

This situation has already encouraged a huge dollar carry trade and had a massive impact on global asset prices… It is boosting speculative investment in stock and property markets and will pose new, insurmountable risks to the global recovery and, particularly, to the recovery in emerging markets.

In my view, this is pure political posturing by the Chinese in order to defuse any U.S. criticisms of Beijing’s currency peg. Call it a pre-emptive strike. The U.S. has seen the unemployment rate rise to 10.2% and the trade deficit rise quite dramatically as well. Many are blaming the Chinese and their currency peg to the U.S. dollar.

When Barack Obama visits China this week, the Chinese expect him to focus on the yuan dollar peg. His administration will find it increasingly difficult to hold protectionist pressures at bay given the yuan’s firm peg to the U.S. dollar even while the dollar has plummeted.  To prevent the U.S. from successfully painting the Chinese peg as the sole major risk to the global economic recovery, the Chinese must therefore point to the destabilizing effects from measures taken by the U.S. to reflate its domestic economy.

The Chinese have shown success thus far. Last week, Tim Geithner penned an Op-Ed in the Wall Street Journal along with the Finance Ministers of Indonesia and Singapore which pointed a critical finger at China by asking for “market-oriented exchange rates.” Yet when the APEC (Asian Pacific Economic Cooperation) summit in Singapore ended that same language was cut from the final commiunique.

On the other hand, there has been little change in the prospects of a revaluation of the yuan peg.

Reuters reports:

Chinese Vice Commerce Minister Chen Jian on Sunday played down talk of a shift in the central bank’s currency policy as well as mounting expectations of a rise in the yuan’s exchange rate.

Speculation that China might let the yuan resume its climb after a 16-month pause swirled after a change last Wednesday in the long-standing wording used by the People’s Bank of China to describe its currency stance.

In its third quarter monetary policy report, the central bank failed to refer to keeping the yuan "basically stable at a reasonable and balanced level" when discussing the outlook for the exchange rate.

Asked whether the PBOC was heralding a return to the gradual appreciation of the yuan against the dollar seen from July 2005-July 2008, Chen told Reuters: "I don’t think the central bank meant to say that."

And all indications suggest that we are now returning to the same unbalanced pre-crisis growth model – but with the global economy in a considerably more fragile state. In this climate, the issues of the yuan currency peg and low interest rates in the U.S. will continue to be front and center for some time to come.

Related posts:

• Chinese to start settling trade in Yuan
• China issues bonds to “promote the RMB in neighbouring countries”
• US angling to get Chinese to revalue renminbi
• China slams U.S. profligacy
• Is China avoiding using US dollars?

Hong Kong’s leader Donald Tsang has come out with a scathing criticism of U.S. monetary policy, comparing it to Japan’s which he believes contributed to 1997’s Asian crisis. This is the most direct and strident criticism of the U.S. Federal reserve’s monetary policy from a major international politician yet.

Bloomberg reports:

The Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis, Hong Kong’s leader said.

“I’m scared and leaders should look out,” said Donald Tsang, chief executive of the city, said in Singapore today. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown…

“We have a U.S. dollar carry trade at the moment,” Tsang, 65, said in a speech where leaders of the Asia Pacific Economic Cooperation forum are gathering for a weekend summit. The carry trade is where investors borrow cheaply in one currency and use the funds to invest in other currencies.

“Where is the money going — it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

Tsang’s criticisms are sure to draw attention as it comes during the APEC summit in Singapore, which is a cross-Pacific economic and political group now being used to show Asian-U.S. cooperation and harmony. Tsang has an especially painful memory of the Asian Crisis as he was Hong Kong’s financial secretary at the time and was forced with the central bank to spend $15 billion to defend Hong Kong’s currency peg as speculative capital fled Asian markets en masse. Depression ensued across wide swathes of Asia, leaving a psychological scar that reverberates today.

As for the comparisons of America to Japan, I find them very well placed.  Yesterday I posted an article in which Marshall Auerback and Fox’s Brian Sullivan discussed parallels between the two. Nouriel Roubini fears that a U.S. dollar carry trade is building which is being used to help inflate assets outside of the U.S. in a global financial bubble.

This is certainly what the Japanese had done in the 1990s. Last August, before the Lehman collapse and panic I wrote that Japan was an enabler of the tech bubble of the late nineties:

the Bank of Japan did not realize the limitations of monetary policy. It could provide easy money, but it could not control where that money ended up. So, ultimately it ended up in the carry trade and helped supply the fuel for the tech bubble.

Was the BOJ responsible for the Tech Bubble? That’s a question that cannot be answered. But, what is true is that the Japanese government and monetary authorities were very instrumental both in the late 1990s and earlier this decade in providing free money to global investors via the carry trade.

Tsang is saying that Japan’s easy money policy also infected Asian markets, helping to inflate an unsustainable bubble which led to collapse and depression. In a macabre repeat of economic history, he sees the same re-occurring now as the U.S. tries desperately to ward off deflation.

Source

Fed May Cause Next Crisis, Hong Kong’s Tsang Suggests – Bloomberg

Related posts:

• Japan’s easy money policy was the trigger for the tech wreck
• Is the U.S. dollar carry trade replacing the one in Japanese yen?
• Depression in Japan
• Asia is de-coupling
• Big Mac Index: Europe overvalued, Asia undervalued

In the video below, Marshall Auerback gives a even-handed analysis of the parallels between the US and Japan on Fox Business with Brian Sullivan.

Demographic trends, GDP trends and deleveraging trends are all similar. But, Marshall goes further by pointing to the misallocation of fiscal resources, the emergence of crony capitalism and the likelihood of zombie banking which he saw in Japan and is seeing now in the U.S.

Another similarity is low interest rates. One issue Marshall didn’t take on when asked about low interest rates by Brian is how this policy not only reduces the cost of capital, but also decreases investment returns, encouraging the carry trade and excessive risk.

When looking at how we are avoiding the mistakes of Japan, I didn’t find the arguments as convincing because it’s early days yet. But, there is hope.

The segment runs just over 5 minutes.

Related posts:

• Japan’s easy money policy was the trigger for the tech wreck
• Chart of the day: Aussie – Yen cross
• Hong Kong: “America is doing exactly what Japan did last time”
• Is the U.S. dollar carry trade replacing the one in Japanese yen?
• The carry trade unwinds and it’s not pretty

Is it just me or did Secretary Geithner just talk out of other side of his mouth? Today he wrote an Op-Ed in the Wall Street Journal with two Asian leaders to mark a big meeting of APEC (Asian Pacific Economic Cooperation) in Singapore.

The WSJ article started out with a bunch of diplomatic niceties about how everyone was working together and must continue to do so, so that all may prosper.

We have just lived through the greatest challenge to the world economy in generations. In acting together, policy makers have shown that they understand the most important lesson of this crisis: Our economies are inexorably linked. We must now work together to ensure strong, stable and balanced growth in the future…

We also must keep our sights on maximizing the potential of global markets. Both exports and imports remain critical stimulate the flow of knowledge and innovation that is enabling emerging economies to catch up with developed-world living standards.

Then it went on to re-affirm the utility of APEC, which people like Andy Xie are calling useless.

APEC will play an indispensable role in establishing strong, sustainable and balanced growth. Our 21 members—which include nine members of the G-20—account for 40% of the world’s population, over half of global GDP and nearly half of world trade. Our ranks include the world’s largest and fastest-growing economies.

But, you kind of got the feeling, this was leading to something else. Wait…wait… hold it… there it is – halfway through paragraph six:

Depending on individual economies’ circumstances, a combination of macroeconomic policy adjustments and structural reforms will be needed. Market-oriented exchange rates in line with economic fundamentals will be essential in assuring the resource and sectoral shifts to match and foster the new patterns of demand.

Everyone knows they are talking about the Renminbi. Remember, Secretary Geithner is the same fellow who accused the Chinese of manipulating their currency during his confirmation hearings. And most people think a freer floating Renminbi would be revalued not devalued.

Yesterday, I posted “Geithner impersonates Nicholson – America, you can’t handle the truth” in which Secretary Geithner was saying he supports a strong U.S. currency, but today he is talking about “market-oriented exchange rates.”

C’mon. We’re not that stupid.

Related posts:

• US angling to get Chinese to revalue renminbi
• China “serious about the plan to internationalise” Yuan
• The dollar is rising against floating currencies
• Japanese defend dollar’s status while China tears it down
• Geithner and Summers consolidate power

The latest number on unemployment claims shows a seasonally-adjusted 502,000 people applied for unemployment insurance last week, bringing the more meaningful 4-week average down to 519,750, the lowest since late November 2008. That is a good thing because it shows the labor market is improving.

Nevertheless, 500,000 initial claims in an environment of reduced hiring is still consistent with the loss of 200,000 jobs monthly.  We really need to see this number hit 450-475,000 before non-farm payrolls increase.

Of course, seasonal adjustments are a big factor here going into the holiday season.  Actual claims were 529,446, which is up nearly 50,000 from the prior week. The pre-New Year’s seasonal adjustment peak comes in early December (140% adjustment down) followed by another peak in early January (up to 180% downward adjustment).  If we see smaller spikes in these weeks (last January hit a peak of 956,791 actual claims), then this could be a harbinger of better to come in Q1.

Source

Unemployment Insurance Weekly Claims Report – U.S. Department of Labor

Related posts:

• A sustainable recovery with 530,000 weekly claims?
• Better last claims report before employment number
• Unemployment claims falling faster than in half of past recessions
• Jobless claims stuck near 530,000, point to structurally high unemployment
• U.S. initial jobless claims fall 21,000 to 554,000

Tim Geithner has issued a Code Red on the U.S. dollar, but he doesn’t think Americans can handle it.

I believe deeply that it’s very important to the United States, to the economic health of the United States, that we maintain a strong dollar.

Secretary, I have just one more question. If you gave an order that the dollar wasn’t to be touched and your orders are always followed, then why would the dollar be in danger?

I want the truth!

You can’t handle the truth!

I have a greater responsibility than you can possibly fathom. You weep for the dollar, you curse the U.S. Government. You have that luxury. You have the luxury of not knowing what I know – that the dollar’s death, while tragic, probably saved lives. And, my existence, while grotesque and incomprehensible to you, saves lives.

I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom that I provide and then questions the manner in which I provide it.

Did you order the Code Red?

You’re goddamn right I did.

Source

Geithner Says Strong Dollar ‘Very Important’ to U.S. – Bloomberg

Happy Veterans’ Day (especially to my dad, uncles and aunt and all of those no longer with us)

Related posts:

• Geithner and Summers consolidate power
• The U.S. is exporting unemployment with ‘Buy America’
• Rosenberg: The U.S. dollar could be next
• The dollar is rising against floating currencies
• Best Buy and Wal-mart sued over typical Chinese knockoffs

Andy Xie thinks the Fed is on an inflationary path.  Last month, he wrote an article in Caijing which says that ‘stagflation lite’ is the Federal Reserve’s preferred outcome. What’s interesting is his recent article about the need for China and Japan to join forces under an ASEAN umbrella, rejecting the APEC umbrella shared with the U.S.

In last month’s article, Xie said:

The bottom line is that, regardless what central banks say and do, the world will be awash in a lot more money after the crisis than before — money that will lead to inflation. Even though all central banks talk about being tough on inflation now, they are unlikely to act tough. After a debt bubble bursts, there are two effective options for deleveraging: bankruptcy or inflation. Government actions over the past year show they cannot accept the first option. The second is likely.

Hyperinflation was used in Germany in the 1920s and Russia in late 1990s to wipe slates clean. The technique was essentially mass default by debtors. But robbing savers en masse has serious political consequences. Existing governments, at least, will fall. Most governments would rather find another way out. Mild stagflation is probably the best one can hope for after a debt bubble. A benefit is that stagflation can spread the pain over many years. A downside is that the pain lingers.

If a central bank can keep real interest rates at zero, and real growth rates at 2.5 percent, leverage could be decreased 22 percent in a decade. If real interest rates can be kept at minus 1 percent, leverage could drop 30 percent in a decade. The cost is probably a 5 percent inflation rate. It works, but slowly.

If stagflation is the goal, why might central banks such as the Fed talk tough about inflation now? The purpose is to persuade bondholders to accept low bond yields. The Fed is effectively influencing mortgage interest rates by buying Fannie Mae bonds. This is the most important aspect of the Fed’s stimulus policy. It effectively limits Treasury yields, too. The Fed would be in no position to buy if all Treasury holders decide to sell, and high Treasury yields would push down the property market once again.

I certainly agree with him. You don’t have to be in the hyperinflation camp like Marc Faber to think the Fed takes Ken Rogoff’s suggestions about 6% inflation seriously. In a May post, I said:

Basically, the Fed wants to inflate our way out of this depression – that’s the dirty little secret.  There is really no other policy choice because the mountain of debt in the United States is immense.  And I think Bernanke, Geithner and Summers have proven they are willing to do anything to reflate this economy and avoid debt deflation dynamics.

And when I say anything, I mean create asset bubbles that are being given intellectual cover by the likes of Frederic Mishkin. This is a policy of economic weakness.

So what should the Asians do?  China is desperate to employ its tens of millions of countryside transplants cruising its cities in search of urban employment. That’s a major reason it keeps its exchange rate fixed to a plummeting dollar, making not just Americans but Europeans irate?  Japan has been in a modern day depression for twenty years. Its sovereign debt-to GDP is now over 200%, risking a downgrade.

Xie says the two should join forces – in part as a rejection of the U.S., which he basically calls a fading power (although the paragraph above points to serious weaknesses in China and Japan as well).

Here is an excerpt of Xie’s article:

Yet the fundamental case for Japan to increase integration with the rest of Asia and away from the United States grows stronger every day. Despite high per capita income, Japan remains an export-oriented economy, having missed an opportunity to develop a consumption-led economy in the 1980s and ’90s. In the foolish belief that rising property prices would spread wealth beyond the industrial heartland in the Tokyo-Osaka corridor, the government of former Prime Minister Kakuei Tanaka pursued a high-price land policy, discouraging the middle class from pursuing a consumer lifestyle as they saved for property purchases…

The point is that Japan has a strong and genuine case that favors more integration with East Asia. The United States is unlikely to recover soon and with enough strength to feed Japan’s export machine again. There is no more room for fiscal stimulus. Devaluing the yen to gain market share is not an option as long as Washington pursues a weak dollar policy. Without a new source of trade, Japan’s economy is doomed. Closer integration with East Asia is the only way out…

Five years ago, I wrote an op-ed piece for the Financial Times entitled China and Japan: Natural Partners. At the time, a prevailing sentiment was that China and Japan were antithetical: Both were still manufacturing export-led economies and could only gain at the other’s expense. I saw complementary demographics and capital: Japan had a declining labor force and China needed to employ tens of millions of youths migrating to cities from the countryside. China needed capital and Japan had surplus capital. And their trade relations indeed tightened, as Japan had increased the Chinese share of its overall trade to 17.4 percent in 2008 from 10.4 percent in ‘04.

Today, the situation has changed. China has a capital surplus rather than a shortage. Demographic complementarity is still good and could last another decade. As China shifts its development model from resource intensive to environmentally friendly, a new complementarity is emerging. Japan has already made the transition, and its technologies that supported the transition need a new market such as China’s. So even without a new trade agreement, bilateral trade will continue growing.

An FTA between China and Japan would significantly accelerate their trade, resulting in an efficiency gain of more than US$ 1 trillion. Japan’s aging population lends urgency to increasing the investment returns. On the other hand, as China prepares to make a numerical commitment to limiting greenhouse gas emissions at the upcoming Copenhagen summit on global warming, heavy investment and rapid restructuring are needed for its economy. Japanese technology could come in quite handy.

An FTA involving Japan and China would be a serious threat to American economic power. You can imagine that policy makers in Washington are opposed to this idea.  Let’s watch to see what kind of rhetoric comes out of Barack Obama’s China trip to see if this issue is discussed.

Xie’s article in its entirety is at the link below.

Source

Andy Xie: Why China and Japan Need an East Asia Bloc – Caijing

Related posts:

• Stephen Roach: Downturn in Asia less severe, but recovery later
• China: reflation play spells trouble for rest of the world
• Chart of the day: Aussie – Yen cross
• The Dollar
• China warns that the west’s quantitative easing is inflationary

For those of us interested in seeing more robust and knowledgeable regulators in government service, the recent news that Rick Bookstaber is joining the SEC is quite welcome. While I disagree vigorously with much of recent economic policy, I view the Bookstaber news as a signal that the Obama Administration is serious about overhauling America’s regulatory infrastructure.

Bookstaber is a market veteran who has a long and storied history of achievement. He worked at Bridgewater Associates, ran the Quantitative Equity Fund at FrontPoint Partners and was in charge of risk management at Moore Capital Management amongst other things.

Here is how Rick put it at his website:

I will be working in the SEC’s new division of Risk, Strategy and Financial Innovation as Senior Policy Adviser to the Director. Here is a brief article and the SEC announcement. We are facing a critical time for defining the future of the financial system; an opportunity for financial reform that comes only once in a generation (if that), and I am excited to be part of this.

I will still be able to write posts from time to time, but obviously with limits on topics and with appropriate disclaimers. How much free time I have to do so, though, remains to be seen.

I won’t be able to publish comments for this post related to the SEC.

Congratulations to Rick. Let’s wish him success is in this important role.

Related posts:

• Guest post: Regulation in Defense of Capitalism
• Guest post: Why do bankers make so much money?
• Bhagwati: The U.S. is underestimating inflation risk
• Ken Lewis is out as Chairman of Bank of America
• Tonight’s US Presidential debate

I have just taken a look at the consumer credit figures for September, released just yesterday by the Federal Reserve. The data do show some modest deleveraging, especially when looking at the recent increase in nominal GDP. However, it is still not clear to me that the scale of deleveraging is great enough to induce a recessionary relapse.

My baseline for deleveraging is Debt to Nominal GDP – when debt to GDP goes down, that shows deleveraging. For example, for the latest data released in September for Q2 2009, Private sector total debt to GDP (incl. financial services) in the U.S. was 292.2% of GDP. Because of the huge drop in nominal GDP, this was actually up from 283.0% when the recession began in Q4 2007. For households, the number was 96.8% in Q2 2009, up slightly from 95.9% at the end of Q4 2007.  What this shows is that deleveraging has yet to begin in earnest as debt levels have remained relatively high even while GDP had collapsed.

The lack of deleveraging is probably a result of financial stress. In the Great Depression, the personal savings rate dropped from 4.5% in 1929 to 4.1, 3.9, –0.9, and finally -1.5% in 1930-1933.  People had to use savings to service debt as the deflationary spiral took hold.

So, in the absence of quarterly data on debt levels, I look at data from things like consumer credit for a proxy.  On a seasonally-adjusted basis, consumer credit declined to $2.471 to $2.456 trillion. That is the lowest since June 2007 and marks the ninth consecutive monthly drop.

However, looking at the non-seasonal data makes plain what is happening:

Nonrevolving credit is now increasing along with GDP. Look at the area highlighted in red; that coincides with the 3.5% real GDP print we just saw. On the other hand, revolving credit is getting crushed. Below is the reason why (click to expand):

Credit from commercial banks and savings institutions have dropped off a cliff.  When you hear people saying that banks aren’t lending, this is what they are talking about. In Q3, banks are lending again (think cash for clunkers) because nonrevolving debt is up.  That’s also why GDP is up. But, revolving credit lines (credit card lines) are being cut.

My conclusion is largely the same as last month, namely I had anticipated more deleveraging than we are seeing. However, consumer credit is only coming down on the nonrevolving side. And given the stabilization in house prices and increases in refinancing activity, I wouldn’t expect mortgage debt levels to be down substantially. When we see Household Debt to GDP levels from Q3, they probably will not be substantially lower than they were in Q2.

This does support recovery but only at the risk of continued high levels of debt to GDP.

G.19 data series – Federal Reserve

Related posts:

• Data on past consumer deleveraging during recessions
• Consumer credit falls 4.4% from year ago levels
• Why is everyone saying consumer credit is falling? It’s not.
• Do the personal income data demonstrate unbalanced reflation?
• Household debt as an indicator of secular bull and bear markets

The Canadian daily National Post has a good piece out today that highlights how the ‘Buy American’ provision is being seen in Canada.  Many see it as an affront that America could and would favor domestic firms over those of its largest trading partner and next-door neighbor despite the North American Free Trade Agreement.

For the second time in six months, pipe fittings in California are being ripped from the ground because they were stamped "Made in Canada," a move manufacturing companies say hurts both sides of the border.

Cambridge Brass Inc., a Canadian brass fittings manufacturer, discovered Thursday that it stands to lose more than $1.5- million in this most recent fallout from the Buy American protectionist measure.

Greg Bell, vice-president of sales and marketing for the Cambridge, Ont., company, received a call Thursday from the City of Sacramento, where the parts were being fitted into the public water system. He was told his product was no longer acceptable because it was not made in the United States.

"It’s disheartening. (The city) wants American-made products and there’s nothing I can do about it," Mr. Bell said. "Business is tough enough these days without having to deal with these roadblocks."

Anything already in the ground will have to be ripped back up at Cambridge Brass’s expense, Mr. Bell said. Between the costs of losing the project, pulling up the pipes and legal fees, he estimates his company stands to lose money in the seven-figure range.

Cambridge Brass has been based in southern Ontario for more than a century and has survived two world wars and the Great Depression, but Buy American may be what finally causes the company to bid farewell to the province.

Mr. Bell said losing a major project like this would mean more layoffs for the already suffering company.

It has already lost a supply distributor in Maine, and it has had to lay off half of its own employees in Cambridge – from a workforce of 140 it is now down to 77 – since the introduction of Buy American policies this year.

And if these protectionist measures continue, he said, the company will likely be forced to move its manufacturing to the United States in order to stay in business.

America seems clueless at how protectionist policies build rage that politicians abroad must quell or heed through retaliation. It’s as if only American politicians want to protect jobs.

It bears repeating because some people don’t get it: it’s not the act of protectionism itself which is so damaging, it is the retaliation and escalation that results.

"The government has got to stand up and propose some serious retaliation," said John Hayward, president of Hayward Gordon Ltd., noting the Halton Hills, Ont.-based industrial-pump manufacturing company has been barred from bidding on U.S. products. He said he has had to switch manufacturing from three Canadian plants to U.S. sites in order to stay in business, a survival decision that has resulted in local layoffs.

Read the full account below.

Source

‘Buy American horror stories’ building – National Post

Related posts:

• ‘Buy American’ will translate into a 21st century Smoot-Hawley
• Canada is furious about U.S. protectonism
• China launches retaliatory investigation into U.S auto subsidies
• The absurdities of ‘Buy American’
• China: we “will take steps to protect the interests of our domestic industries”

China on Friday accused the US of protectionist and biased trade policies less than a week before president Barack Obama’s first visit to Beijing.

In a stinging rebuke to Washington, China’s commerce ministry promised to take measures to protect its domestic industry after the US slapped anti-dumping duties on $2.6bn of Chinese steel pipe imports. The duties are part of a growing roster of trade conflicts between the two countries, despite a high-level meeting last week in China aimed at reducing tensions.

“China resolutely opposes such protectionist practices and will take steps to protect the interests of our domestic industries,” Yao Jian, ministry spokesman, said on its website.

I see this coming to a head.  More here.

Related posts:

• China launches retaliatory investigation into U.S auto subsidies
• China: reflation play spells trouble for rest of the world
• China issues bonds to “promote the RMB in neighbouring countries”
• Beijing starts a ‘Buy China’ policy
• Free trade is dead: victim of a poor economy

While I see the job numbers as pretty much what was expected, the data do make clear that we are seeing a major jobless recovery. David Rosenberg has a piece out today that goes right to the heart of the issue:

All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush.

But while Uncle Sam can try and stimulate spending on autos and housing and even mortgage credit via the myriad of policy measures that have been undertaken, the return to job creation is as elusive as ever. It is hard to fathom that, according to the White House estimates earlier this year, the stimulus was supposed to help cap the unemployment rate at 8.5%. Here we are today with both an unemployment rate and a fiscal deficit-to-GDP ratio both north of 10%. While real GDP did manage to rebound at a 3.5% annual rate in Q3 — stagnant if not for the government incursion — those dual 10%-plus figures cited in the previous sentence highlight the fact that GDP is not the only barometer of a nation’s economic health.

TODAY’S HEADLINE PAYROLL PRINT CONTAINED TROUBLING SIGNPOSTS
While the government can try to induce people to spend, no recovery can be sustained without a resumption in job growth and October’s employment data contained some troubling signposts.

While the -190,000 headline nonfarm payroll print was not that far off the consensus, and while there were upward revisions to the prior two months (of over 90,000), the major problem is that the Establishment Survey, at this time, is missing a very important part of the story, which is the strain that the small business sector continues to face. Small businesses have less cash on the balance sheet, less access to credit and less exposure to overseas growth dynamics compared to large companies. The Establishment Survey (nonfarm payrolls), has a “large company” bias that the companion Household Survey does not have. If you look at the historical record, you will find that at true turning points in the economic cycle, the Household Survey leads the Establishment Survey. This has always been the case heading into expansions and into recessions.

My interpretation of this is threefold:

• The headline data understate the severity of the problem because of “large company” bias and a low labor force participation rate. In reality the U-6 number of 17.5% is more reflective of the state of the economy – and that is a depressionary number.
• To the degree you expect the recovery to continue, labor force participation rates should be increasing, not decreasing. In my previous post, I failed to point this out, leading to the conclusion I saw the data as a net positive. I see the data as a net wash – as it was in line with expectations. However, when discouraged workers come back into the labor force, we are going to see a much higher headline unemployment rate.
• Given the fact that unemployment is pointing to depression but we are in a recovery, you should conclude that this recovery will fade once government stimulus is removed.

Lunch with Dave — U.S. Payrolls: 10-Plus (PDF, registration free but required) – David Rosenberg, Gluskin Sheff

Related posts:

• The weak employment situation summary for June 2009
• Payroll data mixed despite the bullish headline job loss figure
• Comprehensive unemployment rate is 17.5%
• U.S. employment data in line with estimates
• Payrolls fall by 159,000 in U.S.

The employment market is pretty grim. We’re talking a double digit unemployment rate – and that’s just the base rate. The comprehensive unemployment rate is now 17.5% in the US.  This is a fact not lost on our politicians. Today, Barack Obama signed a bill that extends unemployment benefits and home buyer tax credits. But,, let’s parse the data to get a real read of what’s happening.

The household survey

The unemployment rate is based on a household survey. Basically, the Bureau of Labor Statistics (BLS) asks a bunch of people, “do you have a job?  No? Are you looking? By asking enough different people these questions, the BLS can produce a statistic to represent the nationwide unemployment rate. That number is currently 10.2% – or 15.7 million of a labor force of 154.0 million in a population of 236.6 working age folks.

The two things to note are the rate 10.2% and the participation rate, now 65.1%, the lowest in 23 years. What this is telling us is that the actual toll of joblessness is much higher than 10.2% because a lot of people have given up looking for jobs.

The numbers above are all seasonally-adjusted. So, the true picture could be somewhat better because without adjustments the number of unemployed is actually 14.5 million, 9.5% of the active labor force and down from 15.2 million in August. Either way, it’s still a grim picture.

I actually like to watch year-on-year data as an indicator of directionality.  On this front, the report is looking much better. The increase in the number of unemployed is down from a peak of 6.0 million (6.2 million unadjusted) to 5.5 million (5.1 million unadjusted). So the year-on-year rate increase is now 3.6%, down from 3.9% in June.  Again, these numbers are grim (the peak y-o-y change was 1.8% in 2001, for example). But the direction of change is now down.

The establishment survey

This is where the BLS gets non-farm payrolls (NFPs), the number of job losses per month. Non-Farm Payrolls (130.8 million) are now at their lowest level since March 2004 (also 130.8 million). And if one goes back to the period before the previous recession, NFPs were 132.5 million in February 2001. That means we have lost 1.7 million jobs over a nine-year time frame. This is an ugly data point.

The silver lining here is that both unadjusted data and y-o-y changes are better. NFPs are now 132.0 million unadjusted and that is up 1 million from 2 months ago. year-on-year changes are now falling. Translation: the labor market is still grim, but the worst is over.

My read of the data is this: There were no big surprises. I expected losses of 200,000 based on the ADP number and the jobless claims numbers.  Yes, there was a jump in the unemployment rate, but jump was misleading because of a falloff in the labor participation rate. On the whole, the employment market is weak, but it is not deteriorating. Can we sustain a recovery even so? Probably.

Related posts:

• The weak employment situation summary for June 2009
• Unemployment rate to 9.7%, 216,000 jobs lost
• Payroll data mixed despite the bullish headline job loss figure
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• U.S. employment data in line with estimates

Average weekly hours a record low of 33.0. Stock futures now down. The household survey says we have lost 1.3 million jobs in three months. 17.5% U-6 unemployment. Median duration of unemployment is now 18.7 weeks from 15.4 just 3 months ago – ugly.

Here is an excerpt from the release (bolding added).

The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000), the U.S. Bureau of Labor Statistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade.

Household Survey Data

In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points. (See table A-1.)

Among the major worker groups, the unemployment rates for adult men (10.7 percent) and whites (9.5 percent) rose in October. The jobless rates for adult women (8.1 percent), teenagers (27.6 percent), blacks (15.7 percent), and Hispanics (13.1 percent) were little changed over the month. The unemployment rate for Asians was 7.5 percent, not seasonally adjusted. (See tables A-1, A-2, and A-3.)

The number of long-term unemployed (those jobless for 27 weeks and over) was little changed over the month at 5.6 million. In October, 35.6 percent of unemployed persons were jobless for 27 weeks or more. (See table A-9.)

The civilian labor force participation rate was little changed over the month
at 65.1 percent. The employment-population ratio continued to decline in October, falling to 58.5 percent. (See table A-1.)

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in October at 9.3 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

More info coming shortly.

Related posts:

• 467,000 jobs lost in the U.S. in June 2009
• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• U.S. loses 533,000 jobs, unemployment rate up to 6.7%
• U.S. unemployment rate 7.2%, 524,000 jobs lost
• Unemployment rate climbs to 9.4%

The Department of Labor data released this morning indicated that 512,000 people filed initial claims for unemployment insurance in the latest week.  This is down 20,000 from last week and marks the last data points we are to get on employment before tomorrows employment numbers are released.

All indications are that the number will come in around the 200,000 job loss range. Wednesday’s ADP number of –203,000 jobs is consistent with this. Stock futures rallied on the data and the Dow is up about 80 points in early trading.

Nonetheless, 512,000 weekly claims is still very high.

Source

Weekly Unemployment Claims Report – ETA Press Releases

Related posts:

• A sustainable recovery with 530,000 weekly claims?
• New unemployment claims are coming down
• U.S. initial jobless claims fall 21,000 to 554,000
• Jobless Claims: 404,000
• Jobless claims stuck near 530,000, point to structurally high unemployment

The sale to Canadian auto parts maker Magna International and its partner, Russian lender Sberbank is off. With bankruptcy now behind it, General Motors now feels confident it can proceed with Opel under the GM umbrella.

From the GM press release:

Given an improving business environment for GM over the past few months, and the importance of Opel//Vauxhall to GM’s global strategy, the GM Board of Directors has decided to retain Opel and will initiate a restructuring of its European operations in earnest.

“GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration,” said Fritz Henderson, president and CEO. “We understand the complexity and length of this issue has been draining for all involved. However, from the outset, our goal has been to secure the best long term solution for our customers, employee, suppliers, and dealers, which is reflected in the decision reached today. This was deemed to be the most stable and least costly approach for securing Opel/Vauxhall’s long-term future.”

On a preliminary basis, the GM plan entails total restructuring expenses of about € 3 billion, significantly lower than all bids submitted as part of the investor solicitation. GM will work with all European labor unions to develop a plan for meaningful contributions to Opel’s restructuring. While Opel continues to outperform against its viability plan assumptions and immediate liquidity is stable, time is of the essence.

“While strained, the business environment in Europe has improved.” Henderson said. “At the same time, GM’s overall financial health and stability have improved significantly over the past few months, giving us confidence that the European business can be successfully restructured. We are grateful for the hard work of the German and other EU governments in navigating this difficult economic period. We’re also appreciative of the effort put forward by Magna and its partners in Russia in trying to reach an equitable agreement.”

I will be speaking about this issue in an hour’s time on the BBC. But, look at this as a result of economic reflation. GM has exited bankruptcy and feels confident enough of the future path of the economy to keep Opel instead of having to sell in a fire sale. 

The Germans are livid, according to the Wall Street Journal.

The governor of the German state of Hesse, where General Motors Co.’s Opel unit is headquartered, said Wednesday he is "concerned and at the same time annoyed that the months-long efforts to find a good solution for Opel have failed because of GM."

In a statement, Roland Koch, a confidant of German chancellor Angela Merkel, said that considering the "negative experience in recent years with GM’s corporate policy, I’m worried a lot about the future of (Opel) and its staff."

In a surprise move, GM’s board late Tuesday decided it wants to retain its core European operations after talks over a possible sale have been dragging on for months.

Koch said he expects GM to repay by Nov. 30 the bridge financing provided by the German state "so that the German tax payer doesn’t get harmed."

Remember that other EU countries came out of the woodwork saying, in effect, that the Germans had bought off GM and were being advantaged by unfair subsidies while in places like Belgium and Spain workers were suffering.

Very interesting. More after the BBC show!

Related posts:

• GM considers keeping Opel, raising capital
• GM looks to use US and Canadian tax money to bailout Opel
• Economic nationalism and GM’s decision to keep Opel and Vauxhall
• Germans reject Chinese offer for Opel
• Germany gives GM a stiff arm on state aid

The data released this morning by the U.S. Department of Commerce’s Bureau of Economic Analysis on personal income somehow managed to show weakness in income and consumption as well as savings.  I see this as proof that Americans are not saving and hence not deleveraging, but they are also so income constrained that their consumption should not be expected to increase markedly either. This points to a mild recovery.

The numbers from September show a significant decline in consumption from the cash-for-clunkers juiced August numbers.

Personal outlays — PCE, personal interest payments, and personal current transfer payments — decreased $48.8 billion in September, in contrast to an increase of $138.2 billion in August. PCE decreased $47.2 billion, in contrast to an increase of $139.8 billion.

If you take out August and cash-for-clunkers and look back at June and July, September’s consumption numbers are up a tick (annualized $10.53 trillion in personal outlays versus $10.44 trillion for July and $10.42 trillion for June).

So consumers are spending money. You can see this in the savings data as well.

Personal saving — DPI less personal outlays — was $355.6 billion in September, compared with $307.0 billion in August. Personal saving as a percentage of disposable personal income was 3.3 percent in September, compared with 2.8 percent in August.

3.3 percent is higher than 2.8 percent but it is a lot lower than 5.9 percent, which is where things were in May. I took this issue up at length in my post, “Americans are not increasing savings” earlier this month saying:

Savings rates averaged 9% through 1982. They were consistently above 7% through 1992. Since then, savings rates have collapsed. From Jan 1969 to November 1997 (comprising all monthly data since record-keeping began), the 10-year average savings rate was higher in every single month than the 5.9% savings rate achieved in May 2009.

So 2.8% is ridiculously low and inadequate to meet Americans’ needs in terms of reducing debt and Baby Boomers’ preparing for retirement. Absent asset-price appreciation as a source of savings, we are going to be in for some tough sledding in a few years. Clearly, record low interest rates are reducing the propensity to save.

On the other hand, incomes are still constrained. The BEA reports:

Personal income decreased $0.1 billion, or less than 0.1 percent, and disposable personal income (DPI) decreased $0.2 billion, or less than 0.1 percent, in September, according to the Bureau of Economic Analysis…

Real disposable income decreased 0.1 percent in September, compared with a decrease of 0.2 percent in August. Real PCE decreased 0.6 percent, in contrast to an increase of 1.0 percent.

This puts personal income on par with Aug 2007 levels, as income is being reduced by high unemployment.

My analysis says the data are pointing to a mild recovery on the back of consumer spending which is being spurred by low interest rates. As a result, savings are now going back down to dangerously low levels. This mix is a direct result of policy decisions made in Washington, which are designed to recreate the pre-crisis status quo ante. Thus far, they have been successful.

Related posts:

• Do the personal income data demonstrate unbalanced reflation?
• Savings in America hit 5%, up from nil last year
• Third quarter GDP growth comes in at 3.5%
• Highlights from report with Q1 U.S. GDP down 6.1%
• Why the personal consumption data is important to the stock market

When it comes to the housing meltdowns in the richest economies, the US has been matched only by Spain, Ireland and the UK. All four countries have seen spectacular losses of wealth in the housing sector over the last two years.

The response by all four governments was to apply as much stimulus as they reasonably could to prevent their economies from descending into free fall. This has opened up gaping holes in each countries’ government accounts. However, in contrast to the United States or the UK, both Spain and Ireland have the Euro as an external constraint which limits their policy choices.  This has resulted in credit downgrades for the sovereign debt in Ireland and Spain.

Looking at Spain, there was massive over-building in the property sector, which attracted a lot of labor to Spain. Now that these jobs have been vaporized, the unemployment rate has soared to near 18%. The problem is quite acute and there are few policy solutions. Reinforcing this point for me was a discussion I had with Spain-expert Edward Hugh, who writes at the blogs Global Economy Matters and A Fistful of Euros, in the wake of some downbeat comments by Paul Krugman about the country.

Edward wrote:

The problem is Spain can only create jobs through exports. The problem is, with Brussels prices we cannot attract investment to build new factories to create high volume unskilled employment. At this stage in the game we are not in competition with Brussels, but with Bratislava. That may not be a pleasant truth, but it is simply like that. We have attracted a large quantity of people here to work in unskilled low-value employment. The industry that gave them work just permanently disappeared out of sight. We need, urgently to find alternatives since we cannot pay them all 420 euros a month for ever. This is more than a simple academic exercise, it is now a question of life and death for the Spanish economy.

Basically we need to go back to 2000 wages and prices and start again. Maybe you don’t like this idea, but can you point me to anyone who has an alternative?"

Obviously, a huge cut in nominal wages is never going to fly in any country because wage prices are sticky. Call it “money illusion” or call it a desire to maintain a decent standard of living, across-the-board nominal wage cuts are a political non-starter. But, this is what is needed in Spain.

Edward does address the standard-of-living problem this presents:

This is not simply about bringing down wages. It is about simulating a devaluation by bringing down prices AND wages together. So you as an employee should be in the same situation as before. The only realistic way to do this is through a pact between employers, unions and political parties, everyone.

The only real problem is with the debts, since they will also need adjusting down, but see another thread here on this.

But OK, I’m not saying this is going to be easy, just that we have no alternative. We shouldn’t have inflated the housing bubble in the first place.

Of course, being able to devalue the currency is one way to achieve this. But, Spain does not have that option. These are the very real policy cul-de-sacs faced in the aftermath of a debt-fueled asset bubble. And since another one seems to be inflating right now, I reckon the U.S. and the U.K. will be joining Ireland and Spain on this dead-end street in due course whether their currencies are weak or not.

Related posts:

• European House Prices are slowing
• Spain and Ireland ‘thrown to the wolves’ after ECB move
• Spain intervenes to save Caja Castilla La Mancha
• UK real wages falling
• Spain gets deflation

That’s what we seem to be expecting based on the huge uptick in equities since March. While stock markets have long since moved it up a gear, the employment market is stuck in neutral. The latest seasonally-adjusted jobless claims numbers came in at 530,000. The widely-followed four week average is still 526,250 and is not coming down.

These numbers are more consistent with a loss of 200,000 jobs per month than of one of declining unemployment. When you have more people losing jobs than getting them, you don’t have the pre-conditions for a sustainable recovery. The economy needs to move it up a notch or we are looking at a double dip.

Source

Weekly Unemployment Claims Report – ETA Press Releases

Related posts:

• New unemployment claims are coming down
• Better last claims report before employment number
• U.S. initial jobless claims fall 21,000 to 554,000
• Jobless Claims: 404,000
• Jobless claims stuck near 530,000, point to structurally high unemployment

While a positive number was expected, let’s wait to crunch the numbers before we pop the cork on the Moet – the price index was only 0.8% versus an expected 1.4%. So I will want to see what is happening with nominal GDP.  I also want to see how inventories look given the huge purges in inventories we saw in Q1 and Q2.

Notice that personal income was down but personal outcome was up because the savings rate decreased in Q3; this gives further support to my contention that consumers are not deleveraging.

I may have more to say about this in another post later today

For the time being, here are excerpts of the BEA press release (emphasis now added):

GROSS DOMESTIC PRODUCT:  THIRD QUARTER 2009 (ADVANCE ESTIMATE)

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.5 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the "advance" estimate released by the Bureau of Economic Analysis.  In the second quarter, real GDP decreased 0.7 percent.

The Bureau emphasized that the third-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 5).  The “second" estimate for the third quarter, based on more complete data, will be released on November 24, 2009.

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased.

The upturn in real GDP in the third quarter primarily reflected upturns in PCE, in private inventory investment, in exports, and in residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by an upturn in imports, a downturn in state and local government spending, and a deceleration in federal government spending.

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP after adding 0.19 percentage point to the second-quarter change.  Final sales of computers subtracted 0.11 percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point from the second-quarter change…

Real personal consumption expenditures increased 3.4 percent in the third quarter, in contrast to a decrease of 0.9 percent in the second.  Durable goods increased 22.3 percent, in contrast to a decrease of 5.6 percent.  The third-quarter increase largely reflected motor vehicle purchases under the Consumer Assistance to Recycle and Save Act of 2009 (popularly called, “Cash for Clunkers” Program). Nondurable goods increased 2.0 percent in the third quarter, in contrast to a decrease of 1.9 percent in the second.  Services increased 1.2 percent, compared with an increase of 0.2 percent.

Real nonresidential fixed investment decreased 2.5 percent in the third quarter, compared with a decrease of 9.6 percent in the second.  Nonresidential structures decreased 9.0 percent, compared with a decrease of 17.3 percent.  Equipment and software increased 1.1 percent, in contrast to a decrease of 4.9 percent.  Real residential fixed investment increased 23.4 percent, in contrast to a decrease of 23.3 percent.

Real exports of goods and services increased 14.7 percent in the third quarter, in contrast to a decrease of 4.1 percent in the second.  Real imports of goods and services increased 16.4 percent, in contrast to a decrease of 14.7 percent.

The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP after subtracting 1.42 percentage points from the second-quarter change.  Private businesses decreased inventories $130.8 billion in the third quarter, following decreases of $160.2 billion in the second quarter and $113.9 billion in the first…

Disposition of personal income

Current-dollar personal income decreased $15.5 billion (0.5 percent) in the third quarter, in contrast to an increase of $19.1 billion (0.6 percent) in the second…

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second.  Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

Personal outlays increased $148.2 billion (5.8 percent) in the third quarter, compared with an increase of $8.2 billion (0.3 percent) in the second.  Personal saving — disposable personal income less personal outlays — was $364.6 billion in the third quarter, compared with $533.1 billion in the second. The personal saving rate — saving as a percentage of disposable personal income — was 3.3 percent in the third quarter, compared with 4.9 percent in the second.  For a comparison of personal saving in BEA’s national income and product accounts with personal saving in the Federal Reserve Board’s flow of funds accounts and data on changes in net worth, go to http://www.bea.gov/national/nipaweb/Nipa-Frb.asp…

Related posts:

• Highlights from report with Q1 U.S. GDP down 6.1%
• US personal income data for September shows pullback
• GDP revised to down 5.7% for Q1 2009
• Durable goods orders down 4.5%, double expectations
• ADP report shows 371,000 jobs lost

Annaly Capital Management’s blog has a good piece up on foreclosures, inspired by yesterday’s Case-Shiller data (hat tip Scott). If you missed it, The S&P/Case-Shiller index showed a pretty steep 1.2% month-on-month increase in U.S. house prices in its latest figures (for August 2009). This is the fourth consecutive month of increases, signaling to some that residential real estate prices have bottomed (see my post on Case-Shiller here).

Not so fast. First, we need to see this trend hold through the winter months after incentives have dissipated and after the summer selling season is less of a factor driving sales.  But, there’s something more ominous lurking in the data, and Annaly points this out. It’s the growing gap between delinquencies and foreclosures.

The S&P/Case-Shiller Home Price Index grew 1.2% month-over-month, and expanded for the third month in a row, according to data released this morning.  It would appear that the housing recovery is upon us.  To maintain this sunny outlook, we advise readers to please stop their analysis of the health of the housing market right there.  For braver souls, LPS (a provider of data and services to mortgage lenders and servicers) releases its Monthly Mortgage Monitor in the middle of every month.  The growing disparity between delinquencies and foreclosure starts is in focus in the chart below, from October’s release.

As the graph illustrates, delinquencies are rising, but foreclosure starts are not.  As of September 2009, 90+deterioration more than doubled actual foreclosure starts.  LPS has dubbed this “shadow foreclosure inventory.”  Higher unemployment begets delinquencies and defaults, but foreclosures aren’t flowing through due to modification efforts and various moratoria.  Depending on the success of programs like HAMP, more than a few of these loans are still destined for foreclosure.

This is the result of what is known as extend and pretend because a rolling loan gathers no moss or credit writedowns, but does gather fee income.  On the one hand, a lot of home owners are finding it difficult to get loan modification terms. But, on the other hand, mortgage delinquencies have more than doubled since the recession began, so the absolute number getting modifications has risen. The question is not so much whether enough modifications are being done, but rather under which circumstances are lenders modifying loans.

The Annaly data and graph above suggest that lenders are actually modifying a decent number of mortgages that fall delinquent – so much so that foreclosure statistics understate the overall distress in the housing market. So, this is a little bit of damned if you do, damned if you don’t as far as banks are concerned. On the one hand, they are getting pilloried for not modifying loans. Yet, on the other hand, in modifying loans they can be accused of “delay and pray” tactics in order to avoid writedowns. Both accusations seem fair given the enormous increase in foreclosures. Nevertheless, you can understand the dilemma. If you want a real-life story about how extend and pretend works in practice, see my post, “Short Sales in North County: “Feeding Frenzy” as banks pretend and extend.”

These cases are where the shadow inventory everyone keeps talking about comes from: houses that have not been foreclosed but where delinquencies show an increased probability of foreclosure, especially in a weak economic environment.

For banks looking to husband capital, it makes sense to extend and pretend where one thinks there is a reasonable chance that this will result in fewer loan losses. But, at the same time, given the securitized nature of the mortgage market, it is mortgage servicers which have an increased measure of control in loan modifications. And their incentives do not appear to align with those of the mortgagees. Time will tell how all of this impacts house prices.

Source

Who Knows What Evil Lurks In The Hearts of Men? – Annaly Salvos

Related posts:

• Prime Foreclosures greater than subprime
• Ivy Zelman: “Home prices are going back down”
• Case-Shiller: House prices up for second month
• Subprime, Alt-A Delinquencies Rise
• Consumer loan delinquencies paint bleak picture

Nouriel Roubini seems to think so. In remarks quoted via Bloomberg, he called the enormous increase in asset prices “the mother of all carry trades.”

Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”

If you recall, this is the same trade the world’s punters were putting on via the Japanese yen when the Japanese were pumping out huge amounts of liquidity earlier in this decade.  The yen’s real effective exchange rate only hit post Plaza Accord trade-weighted lows in 2007 when the carry trade was all the rage and just when all hell was breaking loose in subprime.

Reuters said then:

The yen’s real trade-weighted value slipped in October as the Federal Reserve’s interest rate cuts gave a boost to global stock markets and prompted investors to sell the Japanese currency in carry trades.

Bank of Japan data on Friday showed its index of the yen’s real effective exchange rate fell 1.9 percent in October to 96.7 JPYEEXR=J.

The retreat in the BOJ’s REER index took it closer to a 22-year low of 92.8 hit in both June and July, when the currency was sliding as carry trades flourished.

That was the weakest since the September 1985 Plaza Accord in which the five biggest industrialised countries agreed to depreciate the dollar against the German mark and the yen via intervention, aiming to correct the giant U.S. trade deficit at the time.

For the year the yen’s real value has lost 3.6 percent despite periodic bouts of strength as the credit market crunch this year and worries about the U.S. economy prompted market players to unwind risky carry trades.

The yen has suffered in the past few years from carry trades in which investors use the low-yielding Japanese currency as a cheap source of funds to buy higher-yielding currencies or rising assets, such as stocks or commodities.

My view has been that the Japanese yen carry trade was a major contributor to asset bubbles globally as the Bank of Japan’s excess liquidity found its way to other asset markets via the carry trade.  Last August, in my post “Japan’s easy money policy was the trigger for the tech wreck” I also pointed to the yen carry trade as a major factor in the Internet bubble. And I certainly see it as a major factor in this decade’s housing bubbles.

Now the U.S. dollar is the carry trade currency of choice, with zero percent interest rates funding asset purchases globally. This play is certainly pumping up all manner of asset prices. But as with the yen carry trade before it, I do not see this ending well.

Roubini takes a similar tack:

The risk is that we are planting the seeds of the next financial crisis,” said Roubini, chairman of New York-based research and advisory service Roubini Global Economics. “This asset bubble is totally inconsistent with a weaker recovery of economic and financial fundamentals.

Source

Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble – Bloomberg

Related posts:

• China slams U.S. for inflating global asset prices via carry trade
• U.S. Bailout: the mother of all carry trades?
• Hong Kong: “America is doing exactly what Japan did last time”
• Japan’s easy money policy was the trigger for the tech wreck
• Chart of the day: Aussie – Yen cross