The Market Ticker - Macro Economics

If The Economy Is Recovering.... (CAT)

nospam@example.com (Karl Denninger) — Thu, 18 Mar 2010 09:43:00 -0400

... then how come the wire has this story?

Co reports retail sales of machines declined 20% y/y in Feb and sales of reciprocating & turbine engines to retail users & OEMs declined 33% y/y in Feb

Another source off the wire has even uglier numbers:

 Caterpillar Inc Reports 3 month dealer statistics;
 Dec-Feb sales - filing
 - Retail Sales of Machines:

              Feb.10    Jan.10    Dec.09 
Asia/Pacific  DOWN 2%   UP 1%     DOWN 12% 
EAME*         DOWN 22%  DOWN 35%  DOWN 41% 
Latin America DOWN 20%  DOWN 15%  DOWN 24% 
ROW*          DOWN 15%  DOWN 19%  DOWN 28% 
North America DOWN 30%  DOWN 40%  DOWN 46% 
World         DOWN 20%  DOWN 27%  DOWN 35%

Sales of Reciporcating & Turbine Engines 
to Retail Users & OEMS by Business Sector

                Feb.10   Jan.10   Dec.09 
Electric Power  DOWN 26% DOWN 27% DOWN 27% 
Industrial      DOWN 15% DOWN 22% DOWN 44% 
Marine          DOWN 23% DOWN 18% DOWN 29% 
Petroleum       DOWN 47% DOWN 46% DOWN 46% 
Total           DOWN 33% DOWN 33% DOWN 36%

(Hattips to rebeltraders and aztrader)

I thought last February was pretty much "the depths of Hell" when it comes to the economy and heavy industrial orders?

That's what we've all been told, right? That the economy bottomed last winter and spring and it's all sunshine and great days ahead, yes?

Well, then how come we're seeing huge decreases from last February's run rate in one of the leading heavy-equipment manufacturers' sales everywhere except Asia, and there we're not seeing gains - just flat sales.

Various forms of fixed investment are coming back, yes? We don't need anything like big diesel engines or earth-moving machines to actually construct any of that sort of fixed investment, right?

The ToutTV pumpers wouldn't be lying, would they?

(Let's see when this is picked up on CNBS - of course you know the answer, right? NEVER!)

Disclosure: No position in CAT.

CPI: Look Behind The Headline

nospam@example.com (Karl Denninger) — Thu, 18 Mar 2010 08:49:00 -0400

I'm not particularly happy about this report, although the "street reaction" was that it was "pretty much as expected."

I note with some curiosity that the apparent math error from last month has not been revised out - it's still there (housing.) This month's computation, at first blush, looks ok.

The nastiness inside the report comes from the fact that medical care inflation is alive and well, running 1/2% month-on-month. This is the second month straight of that, which is well beyond the annualized 3.6% being claimed. If it continues, things get very interesting, especially given Obama's Health Care "reform" push.

Offsetting this is a material drop in rent, which is definitely not a bad thing from the consumer's perspective. Of course government-provided "gotta buy 'em" services (water and sewer) are up materially. Fortunately they're not a huge part of the equation.

All-in-all the report is pretty benign, but one has to wonder on the health care issues - is that people jacking prices ahead of Obama's "proposals"? Naw, nobody would ever do something like that.... would they?

More Color On The HAMP Ticker - Macro Level

nospam@example.com (Karl Denninger) — Tue, 16 Mar 2010 11:37:00 -0400

Let's put a bit more color on my morning HAMP Ticker - this time at a more-macro level of the economy.

To recap, here's the table in question:

From this we can "back in" to the median annual income of these completed mods. If $837.86 is the median home payment and post-modification it is 31% of gross income (Front end ratio) then we get $2,703 a month in median income, or $32,433 a year.

This is gross income - that is, before taxes.

As I pointed out such a person will pay (monthly) $206.70 in FICA and Medicare tax (the half they "see" in their check) and will have another $300 or so a month withheld in federal income tax.

So we start with a "baseline" of $2,196 monthly that comes in the door (ex payroll and federal withholding taxes, but not accounting for state income tax.)

We know, however, that these people have 59.8% of their gross income that goes to all debt service (house and all other mandatory debts), which means that they have $579.30 to spend on everything other than that mandatory debt service a month.

Now realize this: "Mandatory" debt service only includes minimum payments on revolving accounts such as credit cards! Making a minimum payment on a credit card, while charging nothing new, results in a pay-down period of many years. But most people will charge back up at least the principal paid down (which isn't much when paying the minimum especially if you have a 29% interest rate!)

Diane Olick and other analysts say that 2 million homes have "started" HAMP. Of those only something like 16% have wound up in permanent modifications - under 200,000 - which is what the above represents. In addition, another 2 million+ people have gone delinquent since the HAMP program began.

The remainder of the HAMP "starts" either have not or will not lead to permanent modifications. That is, their internals are either worse than or equal to the above - it is almost impossible they are better, or they'd be permanent modifications.

Let's put color on this. According to Diane Olick 7.5 million homes are either delinquent or in foreclosure. 23% of those delinquent properties have been so for more than a year yet have not foreclosed.

These are people who are spending in the economy, propping up GDP and economic numbers, because they are making no payment on their house at all.

Let's remember that when these loans "resolve", no matter how they do, that spending power will instantly evaporate in the economy. Whether their loan is modified into a "sustainable" one (ha!) or whether they are ejected from their house and become renters either way the more than $1,000 a month they are not paying for their mortgage, but are instead dumping into consumer spending will evaporate as they will be forced to spend that money on housing once again.

This is not an inconsequential amount of money. If we assume the "average" amount not tendered in mortgage (and spent into the economy) is $1,000 per month per home, this is $7,500,000,000 - or $7.5 billion a month (that is, $90 billion a year) that is being "contributed" to the economy falsely and will come back out - one way or another. It simply must. This is a bit more than 1/2% of GDP - hardly insignificant - and that consumer spending fuels economic activity with a multiplier effect (the money these people spend at Starbucks pays the employees of Starbucks, who then spend THAT money into the economy.) There is much argument about the multiplier effect of various government spending programs, but there is less dispute that private spending always has some multiplication factor associated with it. Therefore, the $90 billion number is understated - the gross GDP "goose" from these defaults may be as high as double that $90 billion, or 1% of GDP!

To this we must add the positive impact of credit-card and other defaults. The paradox is that failing to pay down debt - that is, defaulting instead of paying as agreed, actually increases GDP, because such a refusal to pay down debt while the money is spent elsewhere causes consumption to be supported.

This, along with the "fiscal juice" from running $1.5 trillion in deficits, are two of the biggest issues facing a "sustainable" economic recovery. The refusal to understand this dynamic is responsible, in large part, for the (false) belief that our economy is in fact recovering.

You can't really blame most of the ToutTV and media idiots for their lack of thinking in this regard. It requires analysis, which none of these folks actually do, in order to suss out what's going on. We haven't had a debt-overhang-fueled recession for 70 years - the last one was The Depression in the 1930s. Literally none of the current reporters and pundits was alive and trading in the markets or anywhere else the last time it happened, and all we have is a (biased) historical record - an incomplete recollection.

How many people think that the 1920s - the "Roaring 20s" - were a time of fiscal reason and a booming economy? Nonsense. The "Roaring 20s" were a time of rampant speculation and debt-binging. The illusion of prosperity was bought, paid for and maintained the same way it was this time in the 2000s - with debt. Yet if you read "history" you will find scant if any mention of this fact.

We're not out of this one folks, and we're not going to get out of it either, so long as we keep pretending that loans that aren't performing - and can't - are "money good." Further, the temporary and ethereal "boost" to consumption and thus GDP that comes from debt defaults will dissipate. It mathematically must, as eventually creditors run out of cash flow to maintain the illusion that they have "performing" assets when payments are in fact not being made.

New Fed Z1: Market Move Is NOT Sustainable

nospam@example.com (Karl Denninger) — Thu, 11 Mar 2010 12:54:00 -0500

Sorry guys and dolls.

The new Fed Z1 is out, and it makes clear exactly what's going on when it comes to the broader economy.

This isn't a market timing call, but it is an inevitable recognition of reality call - and it will come.

Note that the Federal (and to a lesser extent the State) governments have replaced credit expansion in the broader economy but it is not working anyway, as total outstanding credit continues to shrink. That is, the Q3 contraction "on balance" was not a statistical one-quarter fluke.

As of the 4th Quarter of 2009 there is no evidence of recovery in the broader economy's credit growth; to the contrary, it continues to shrink despite the government's attempts to halt it.

Here's some more detailed color on this:

Find the rising economic activity, as measured by the debt load in the system. Hmmm... let's see, a little bit in State, down everywhere else, except..... The Federal Government!

The Federal Government went from $5.122 trillion to $7.805 trillion in 24 months. That's $2.68 trillion dollars in 24 months, or almost exactly ten percent of GDP in net Federal borrow-and-spend to prop up consumption and output.

How long can this continue?

The economy operates on credit folks. Every category of net final private demand and economic activity is contracting. ALL OF THEM. The Federal Government is engaged in a furious game of "blow up the doll" while one of its fingers is cut off and the air leaks out faster than they put it in! This is shown by the top graph, which reveals that even with the Federal Government's machinations total economic activity as measured by credit outstanding continues to decrease.

Folks, there's no recovery. Not through Q4 2009 anyway. The Fed Z1 does not lie and the destruction in the financial space continues at breakneck speed, despite the idiots who think that buying stock in these companies is a good idea.

Best-a-luck folks if you're listening to ToutTV - there's a "use by" date on this nonsense, and if you find yourself on the wrong end of it you will not like the consequences.

Oh Mr. President and Congress (El-Erian)

nospam@example.com (Karl Denninger) — Thu, 11 Mar 2010 09:03:00 -0500

Well now this is a rather interesting editorial:

Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily - and excessively - through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. To stay ahead of the process, we should keep the following six points in mind.

El-Erian goes on to list six points that make most people's eyes glaze over. Indeed, the entire editorial is one of those things that reminds one of Alan Greenspan and his famous "how to write 3,000 words and yet never find two people who agree on what you said."

The final three paragraphs are worth reading though:

This leads to the sixth and final point. We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.

You mean things like taking in 30% of what the government spends via taxes, then dismissing this as "oh we'll just issue some more T-bills"?

There is a further complication. Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.

Uh, did you parse that one folks?

".....tyranny of backward-looking internal commitments"

That's code for "entitlements that were promised to people but cannot possibly be provided, no matter how long people howl - or how loudly."

Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised (sp), the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.

Forget it. One need only look to Greece, where telling people they have to actually go to work and produce something in order to earn a public-sector salary produces riots.

If you think we're "more advanced" in our thinking here in the United States you're simply insane.

Times like this require a man in the left seat with a big fat church-bell sized set of balls, and the willingness to be unpopular enough to be a one-term wonder. This is inherently in conflict with the narcissist personality required to run for President in the first place.

Nobody who wants the job and is electable to the office is fit for it at a time like this. I'd do it if drafted, but I'd never put up with the crap required to get there, nor am I electable - because I refuse to lie in the fashion required to obtain the office. Stumping for votes while pointing out that promising to pay $100 trillion in Social Security and Medicare that we don't have and can't acquire, that if we try to print our way out of debt that "obligation" will go from $100 trillion to $250 trillion (which still can't be paid), and that the sort of measures required to bring the economy and government back into balance - at both a state and federal level - will result in massive shifts in the economy's balance and, in the short-term, lead to even more pain, are not popular. To the contrary - not one person receiving those handouts would vote for me, and since they're nearly half the population there's not a snowball's chance in Hades that I could carry the day at the polls.

So what's required is a paradox. You need a man or woman who will run for the office saying all the "right things" while lying through their teeth. Someone who will shed that veneer the instant the election is over, then take the left seat and be a five-alarm bastard once in office, placing a big sign on the door "$ = NO!"

Someone who will take a look at The Constitution and if they can't find whatever it is being proposed in the four corners of the text, it's gone. That is, Social Security and Medicare - gone. Provide some sort of subsidy to the states with whatever we've actually got in the so-called "Trust Fund" (that is, distribute to them the "special Treasuries" in the so-called "box") and immediately end FICA. The States are then free to run the programs as they see fit. This will instantly force accountability and a transition to a privately-owned pair of accounts, or perhaps one account that provides both functions, since people move and won't accept anything else.

Someone who will align tax revenue with GDP permanently and radically. This means The Fair Tax, and if Congress won't enact it, then The President does it by executive order - by abolishing the IRS' funding and authority! Issue an executive order barring the DOJ and other Federal Law Enforcement from enforcing anything in The Internal Revenue Code, and suddenly Congress will become far more reasonable since in order to acquire funds they will have to do the right thing. Radical? Yes. Bye-bye 16th Amendment and "K Street."

Now go find the rest. Departments of Education and Agriculture, as just two examples: Gone. All State Mandates from The Federal Government: Gone.

If you can't find it in The Constitution it goes back to The States and is regulated within their borders. The ability of the people to freely migrate from one state to another enforces fiscal responsibility - if you behave like a jackass, such as California has done, you will be rapidly de-populated and without a tax base, your policies fail. End of discussion. No more Federal Welfare of any sort. If The States want to provide it and can fund it, goody for them. More likely what happens is that The States suddenly find that they can provide lots of workfare doing things that need done, provided they outlaw public employee unions first to disarm those thugs.

On monetary policy it's simple: The Fed either honors its actual written mandate or they're gone too. No more BS, no more opacity. Everything they do is public and published on The Internet. Send up a bill mandating that any gaming of economic statistics or monetary policy is a federal offense garnering you 20-to-life in the can and demand that it pass or you'll veto every bill that comes to your desk until it does.

On Credit Default Swaps and other instruments: All trade on a public exchange. All exchanges in the US are public, non-profit organizations. The Federal Government will run one and The States are welcome to set them up too - but only as public non-profits. National Best Bid and Offer (NBBO) is guaranteed by law with felony criminal penalties for anyone gaming it - like offering "Flash Orders." Any federally-chartered institution that fails to adhere to One Dollar of Capital is instantaneously closed - without exception. All firms trading on a public exchange or doing business in The United States across state borders (and therefore under proper federal regulation) is required to produce full, complete and truthful financial statements, without exception. This means the use of off-balance sheet anything is absolutely prohibited under pain of immediate delisting and felony fraud prosecution.

We adopt a national policy that tariffs are set to provide wage parity. This will produce howling from the WTO. Tough. No longer will we permit wage arbitrage as a reason to offshore jobs. This is not only Constitutional, it is the premise upon which this nation was founded in terms of how the Federal Government is supposed to acquire its funds! Combined with The Fair Tax, which will make the United States a corporate tax haven (zero corporate and personal income tax rate) this will result in an instantaneous flood of manufacturing and high-tech jobs back into the United States - all GDP boosters. The United States GDP would double within a decade.

Refuse to sign any budget that does not run a primary surplus, except in times of declared war. If Congress or The Administration wants to play International Cop it either funds the entire thing on-budget and pays for it or declares war and has the ability to do so via deficit spending.

Adopt Freedom's Vision for monetary policy. No more debt-backed currency. If The Fed doesn't like being relegated to a clearing house for payments that's too damn bad. Tell the CFTC you'd like them to list a "boiled rope" futures contract just to underline the point.

Radical? Yes.

The only solution long-term? Yes.

Will it happen? Not unless our present Administration grows a set of balls, which it does not at present possess, or someone is willing to both lie themselves into office and then do it anyway.

As a consequence what El-Erian is talking about will happen - an "unexpected" recognition of the reality that what is being done today both is unsustainable and won't work, but we will do nothing appropriate about any of it until we find ourselves well-off the cliff and furiously pedaling in the air like Wile-E-Coyote - and at that point it will be to late to avoid the ugly consequences.

What's Our Credit Limit Again?

nospam@example.com (Karl Denninger) — Wed, 10 Mar 2010 14:18:00 -0500

50% of the federal budget right now goes to entitlements.

This last month we posted a record $220.9 billion budget deficit. We took in $107 billion but spent $328 billion.

Isn't that special. We only funded 32% of expenditures?

Remember - entitlements were half of that $328 billion.

So let's see if we can do the math here.

Entitlements were about $164 billion last month in spending. The rest was, of course, the rest.

But we only took in $107 billion.

So even if we eliminated all entitlement spending we still did not have enough money to cover the rest.

Yeah.

If you want to know why the market is floating higher it's for the same reason you feel all giddy and special when you strike out on the town with your shiny plastic. You have magic cards!

It doesn't matter if you have a job, it doesn't matter if you have any money in the bank, so long as you have magic cards.

For how long does the United States continue to have magic cards?

Remember, from my ticker the other day, the federal government is directly spending 9% more of GDP today than it was just two years ago.

The market and economy are absolutely dependent on the Federal Government continuing to do so. Should the government not be able (or willing) to continue to do so, S&P 666 or DOW 6,489 will look like a bull market.

Now add to this that the continued spending in this fashion inevitably will cause interest rates to rise. It simply must, whether that interest rate increase comes from actual Treasuries, or whether it comes from dollar devaluation and thus causes oil - and by extension virtually every other price in the market - to rise at a meteoric rate.

Oh, and if they choose the second (inflation)? Then, as I discussed earlier, that entitlement spending, which is set to go parabolic anyway as the boomer retire, will have an afterburner attached to its backside due to the fact that all of these programs are indexed to "inflation", with Medicare in particular being indexed at several multiples of inflation.

But for today, folks, it's "Rally On Garth" - even though all of the above is not conjecture, it's mathematical fact and inevitably must come to pass.

Yeah, This Will Work Out Fine (Budget)

nospam@example.com (Karl Denninger) — Sat, 06 Mar 2010 12:00:00 -0500

*CBO SAYS DEFICIT THIS YEAR TO AMOUNT TO $1.5 TRILLION
*CBO SAYS PUBLICLY HELD DEBT TO GROW TO 90% OF GDP BY 2020
*CBO SAYS OBAMA BUDGET WOULD PRODUCE $9.76 TRILLION IN DEFICITS

Not a snowball's chance in hell we get to 2020 doing this.

Oh, that's $1.4 trillion more than their last guess, mostly on lower tax collections (no really?)

Here's the problem with this new CBO number - it more than doubles the public Treasury debt float over the next nine years.

It also "predicts" that China and other investors will increase their holdings of US Government debt from their current $7.5 trillion (the current marketable paper) to $20.3 trillion by 2020. And under the CBO's optimistic view, interest payments would "only" quadruple, to some $900 billion annually.

Yet if GDP rises at a compound rate of 4% for the entire ten year period (no more recessions!) the tax base upon which to assess taxes to pay that quadrupled interest expense will expand by only 48%.

Best-a-luck on this one folks - we won't make it to 2020 on that trajectory before someone who has done the math (we're talking basic math here too folks, not grad school stuff) calls BS on this one.

Employment Situation: Welcome To Census Temp Jobs

nospam@example.com (Karl Denninger) — Fri, 05 Mar 2010 09:07:00 -0500

And hereeeeeeeeeees..... CENSUS!

In February, employment in the federal government edged up. The hiring of 15,000 temporary workers for Census 2010 was partially offset by a decline in U.S. Postal Service employment.

Yep.

Headline number was -35,000 and the unemployment rate held at 9.7%, both headline. Everyone's fear of a huge weather impact was instantly dashed, as the BLS said they couldn't quantify any changes in their sampling "accuracy." Given their methodology the most-likely place for any real impact to show up is in the hours worked, not the actual employment rate, and that did tick down by a tenth.

The internals in the household survey, however, showed real improvement.

Unfortunately we're nowhere near the 200,000 or so net job adds that we need to find in order to cover new entrants to the workforce, but these tables are a marked improvement over the previous months:

Essentially flat-lined. That's good, actually, off the household numbers.

Ah, that's where it came from. Essentially all of the "improvement" in the monthly household data came from those formerly leaving the labor force coming back in.

That is, there was no net hiring of new entrants to the labor force, but the insane rate of "drops" reversed and some of those who were discouraged re-entered the workforce. And indeed, if you look at the U-6 number you'll see that not-seasonally-adjusted it fell from 18.0 to 17.9. Note that on a seasonal adjusted basis BLS claims that the U-6 rate increased by three tenths (to 16.8 from 16.5), which is curious and implies that the seasonal expectation is for a big rise in shift out of "not-in-labor force" and other "marginally attached" people - and they didn't get it.

Interestingly enough if you look at the previous years monthly numbers do show a significant spike in this month. Is the BLS overly pessimistic with their seasonal adjustments or are we seeing a real turn? No idea - yet - but seasonal adjustments won't account for Census temporary hiring, which will continue through the spring (and then result in firing come summer!)

Everyone (myself included) expected census hiring to be significnat, and it is. The release of the data caused an immediate spike upward of a few points in the futures, but it also hammered the ten year Treasury rate (upward.)

The key is sustainability, and unfortunately the census employment will skew this in a way that is going to be extremely difficult to back out until the summer months when it ends and those people are laid off. If that hiring and the pay disbursed as a consequence produces a significant upward swing in spending, there could be a salutary knock-on effect in the private sector. But that's a big if, as it requirs that those people employed by the Census spend the money instead of paying down debt and deleverage their personal balance sheets.

All-in the report is a definite positive but right in line with expectations, given government activity. My short-term concern is the offsets from announced job actions in various state and local governments as they attempt to avoid their own insolvency, balanced by the Census activity.

It's Called DEFLATION Folks

nospam@example.com (Karl Denninger) — Thu, 04 Mar 2010 09:59:00 -0500

Never mind the man behind the curtain, who won't utter the word:

The Labor Department reported Thursday that productivity jumped at an annual rate of 6.9 percent in the fourth quarter, even better than an initial estimate of a 6.2 percent growth rate. Unit labor costs fell at a rate of 5.9 percent, a bigger drop than the 4.4 percent decline initially estimated.

In the real world this means:

Work harder and get more done.
Get paid less.
Suck it up, don't complain, or you're fired.

That's all.

And by the way, reduced pay per unit of work spells DEFLATION.

Now here's the problem: We have huge public-sector labor unions that are resisting this force. Yet this force is exactly what has to happen in order to bring the economy back into balance.

We have "advanced" promises made to these people - $200,000+ pensions and other similar obscenities - even though doing so is a ponzi scheme that is impossible to maintain. We have continually cow-towed and pandered to these unions, including educators, police and fire and all other manner of public sector employees with wage increases that exceed growth in aggregate output per-person when one counts both salary and benefits.

This, of course, cannot continue. It is yet another example of the expanding gap that opens up between two exponential functions - for those who have forgotten my favorite pair chart (two exponential curves, one with a slightly-higher exponent than the other), here it is again:

I understand that everyone wants to avoid taking the pain. I understand that everyone claims that "its not fair!"

None of this changes the facts. You cannot continually offshore your better-paying labor to China for the purpose of being able to have a $30 DVD player, destroying the $40/hour skilled job base and replacing it with $7/hour burger flippers and espresso-shot-pullers, and maintain the ability to commit compound annual growth rates of 5, 6, 7% or more to public-sector employees. Doing so inevitably destroys the tax base necessary to meet those commitments, and once the destruction has occurred it cannot be un-done.

You cannot falsely-report "growth" that is in fact no such thing, but rather is simply the addition of more debt, thereby creating false demand that never existed on an organic basis, and continue this process forever.

The person who loses their job can continue to spend as if they have not - for a while. They can run up the credit cards - for a while.

They can do so until the credit card company discerns that the ex-employee has no money, and thus will never pay them. Once that happens the credit card is cut off.

States, municipalities and nations are no different than people in this regard. We have played this game for 30 years. We have promised people they could have unlimited health care, unlimited prescription drugs and unlimited, compound increases in salaries and benefits. At the same time we have permitted our corporations to send their labor base overseas, destroying the income base to purchase these products and the tax base required to pay those benefits. All of this has been "facilitated" by a financial system that grew from about 7% of the marketplace to well north of 20% (in 2007) before it all fell apart.

Instead of allowing it to fall apart and return to a 5-7% of the market, which would be sustainable, politicians instead created false final demand of about 9% of GDP (~ $1.2 trillion annual increases in deficits on a $14t GDP) and then added $13 trillion of "guarantees" in the form of funny money to the financial system to prevent it from imploding (roughly equal to the entire financial debt in the system, which currently stands around $16 trillion.) This "prevented" the immediate recognition that the derivatives written by these firms were nothing more or less than a gigantic fraud, as there was no ability to pay - not at origination, not at maturity, not ever.

But none of this game-playing changes the mathematical fact that:

The money to pay these bets never existed, and never will. It was a fraud, but our politicians refuse to direct law enforcement (which reports to them) to enforce the law against fraud, as that would "hurt" their campaign donors (they'd go to jail!)
The offshoring of our production has destroyed both incomes and the tax base. "Replacing" that with more borrowing is exactly identical to an unemployed person using their credit card to maintain their standard of living. It will fail - we are simply arguing over when, not if.
Public sector employees are inherently parasites. It cannot be otherwise. The policeman, fireman and teacher do not directly produce anything. Their employment and the wages and benefits they can collect must therefore inexorably track the actual productive output of the nation.
Finance in all it's forms, whether banking or insurance - produces nothing either. Every dollar of such "activity" comes about only as a parasitic drain on production. It cannot be otherwise. Further, speculative activity in all of its forms produces losers in exact proportion to winners - if Goldman makes $100 million speculating on oil prices, someone else loses the same $100 million. The net benefit to our nation's economy? Zero - we merely moved money from one hand to another.

The actual private sector production worker is now being forced to recognize this. He's being told to work harder and longer for less money (per hour) or lose his job. That's what the statistics say. This sort of movement in the private labor force is unprecedented - it in fact exceeds that which formerly was accomplished with computerization in the 1980s and 1990s - and this time it's actual labor, not the introduction of new technology.

The first step to solving problems is admitting to what they truly are.

The recent pronouncements and announcements out of both the new governor of New Jersey but also California, where they have attempted to play "extend, pretend and charge-it-up" more and worse than anywhere else in the nation make clear that the credit line has run out and we either face the facts - like it or not - or we get the clue-by-four upside the face.

As usual, the politicians thought they could extend, pretend and lie until after the election. As in 2008, they're wrong, and if they don't cut it out we'll get a repeat of the 2008 disaster but this time around it will be much worse.

Welcome to 2010.

We're Schizoid! (Non-Manufacturing ISM)

nospam@example.com (Karl Denninger) — Wed, 03 Mar 2010 11:08:00 -0500

The latest non-manufacturing ISM is out, and schizoid is the best word I can use to describe it. Here's the table, appropriately highlighted:

Activity and production slowed its rate of acceleration slightly. New orders, however, accelerated a bit from their former "above replacement" rate.

The amusing part is that inventories are being drawn down, which is congruent with this. So all is right with the world, right?

Well, no. Inventory sentiment is that there's still too much inventory in the system.

So non-manufacturing (services) businesses are advancing order and production activity, while at the same time they think they have too much in inventory.

Uh......

In addition on the manufacturing side the current month showed deterioration both in production and new orders, and a SLOWING rate of change in inventory draw (instead of a quickening one.)

Uh, yeah.

Schizoid we be, trying to figure out whether we're actually going to see real final demand show up or if, as I have maintained for the last year, this is all a chimera of government borrow-and-spend - a chimera that is soon to come to an end and stick producers with huge amounts of unmarketable inventory.

CNBS' Kudlow and the rest of the "financial media" are desperate to get you to believe it's not the second. That "demand" - organic demand - is improving. This despite the raw mathematical fact that between Fiscal 2009 and Fiscal 2010 we're going to spend $3.1 trillion more than the government takes in, which incidentally is about $2.7 trillion more than was being "overspent" before the collapse. Put another way, that is about 10% of GDP which is not actual final demand but instead is comprised of the government borrowing money and showering it on the economy.

Ben Bernanke's helicopter? Nope - try Nancy Pelosi, Harry Reid and President Obama, and let's not forget that there is a sizable percentage of the population that not only believes that "President Obama is gonna pay my mortgage!" now, but that he'll continue to do so - and that he can continue to do so - forevermore.

Uh huh.

On that point, incidentally, don't talk to people in government contracting. I am hearing repeated reports of major shifts coming after the end of the quarter - that is, March 31st.

The Tinfoil brigage is out in force on this, claiming that we're about to have a "catastrophic" forced dollar devaluation. If that happens I'll eat my Wall Street Journal (part of a page anyway) on webcam for you all.

No, what's coming folks is major cutbacks in government budgeting, and it's not voluntary. Folks are putting in commitments on the current fiscal year to spend NOW rather than into the 3rd and 4th fiscal quarters.

This is normal coming into September 30th because of how the government does things. If you don't spend all of your budget, that which you "didn't need" will be stolen back for the next fiscal year. Thus there is always a mad rush to commit funds before the end of the Federal Fiscal year - always.

For this to happen now, with an end-of-second-quarter deadline, means that the government foresees either a major realignment of budgetary spending (and everyone is thus protecting claimed budgets by spending them NOW lest they be clawed back for other purposes) or worse, they foresee a problem with the bond market.

This also feeds into the manic desire to pass "health care reform" now, even though there will be no benefits to you, even as claimed by government, until 2013 - but the tax increases will start right now. The truth is that the "benefits" will come never and this entire "plan" is simply a scam to try to scare up more revenue that the federal government desperately needs, as the tax receipt numbers have absolutely gone through the floor.

You hope we don't get a bond-market blowup folks.

Really.

See What $1.6 Trillion In Deficits Buys?

nospam@example.com (Karl Denninger) — Mon, 01 Mar 2010 08:57:00 -0500

Funny how the numbers seem to line up:

Real disposable income decreased 0.6 percent in January, in contrast to an increase of 0.2 percent in December. Real PCE increased 0.3 percent, compared with an increase of 0.1 percent.

Yeah, we're not making anything in actual income, but the government is forking up billions in things like unemployment and such.

The fun part of this, of course, is that the only thing that has held up the economy is that deficit spending. But for it, as I noted in my missive of Feb 23, we've borrowed and spent 14% of GDP over the last 18 months - or roughly 10% annualized.

The premise behind all of this is that if you can "prime the pump" it will lead to sustainable growth.

The error in the premise is that borrowing has to pick up but we never destroyed the excessive debt leverage that was in the system originally. As such there is no borrowing capacity - recall that one must have both a willing lender and a willing and able borrower.

There is no recovery. Buffett is on CNBS this morning talking about a "slow recovery" but he's being intentionally misleading - or he's gone insane. He talks a good game about "strong medicine" but in point of fact he then says that he's seen little evidence of an actual turn-up in the economy as a whole.

Well Warren, which is it? Either there's no recovery coming - the economy is simply being propped up until the government becomes unable (or unwilling) to continue to spend at double its tax inputs, or you're wrong.

Me? I go with the data, which says that not only is the government "stimulus" not working to produce sustainable output gains, it can't work because the excessive debt that led us into this mess is still there as a direct and proximate consequence of our government refusing to allow those who made bad loans to go out of business - both on the borrowing and lending side.

Durables Goods - Oops

nospam@example.com (Karl Denninger) — Thu, 25 Feb 2010 08:34:29 -0500

Oops.....

New orders for manufactured durable goods in January increased $5.2 billion or 3.0 percent to $175.7 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly increase and followed a 1.9 percent December increase. Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders increased 1.6 percent.

Uh huh.

Ex-transports it's down.

Internals are not all that good either. Inventory on computers and electronics are being rapidly depleted - manufacturers (despite the BS claims of the media) are NOT replenishing stock. Take the so-called "pumping" and stuff it.

Not-seasonally-adjusted new orders and shipments are down significantly. Since most Christmas "stuff" is ordered and shipped in advance of December, this isn't very positive at all.

Most important in the "new orders" column is the decrease in computers and electronic components. Remember, we keep hearing how wonderful it has been in earnings reports. Well, if that's so, then explain the decrease from 31,577 to 23,146 in new orders month/over/month - that is almost a THIRTY PERCENT decrease!

Someone's been lying.

It's across the board too - not just computers, but also the subindex for communications equipment. NOT GOOD.

This is a leading indicator for hiring activity folks. I've harped on it before and will keep doing so. New employees = more computers and cell phones. If you're not seeing it there (and you're not) then the entire premise of "a recovering employment picture" is absolute crap.

Best-a-luck with that "recovery" thesis folks.

Un(Employment) Friday 2/5

nospam@example.com (Karl Denninger) — Fri, 05 Feb 2010 09:16:00 -0500

The data continues with the January Employment Situation Report.

The top-line was a loss of 20,000 jobs but the unemployment rate "as reported" fell from 10.0 to 9.7%.

This was good for an almost-immediate 10 point ramp in the futures, exactly as I had talked about last night in the video - the potential for anything "in line" to provoke a snapback was quite real, and it became realized - at least until people actually read inside the report, that is!

But one must dig into the report and try to determine if we're seeing real improvement, or whether we've got statistical adjustments, remembering that January is a difficult month under the best of times because of benchmark and annual revisions.

And here we find some problems.

First, let's start with the good news:

While we're not gaining employment yet the direction of the move is back toward gains - and has been since September. The trajectory continues, but one must remember that until this number has a positive sign in front of it, we're still losing.

The problem is that a big part of this has to do with revisions to population "guesses" that were put into the system for this month. When one looks there, we see a few problems - first, the usual "January Effect" change in the "Not In Labor Force" table:

It is common to find downticks in this chart in January - but whether they mean anything is another matter. We had one last year, we had one the year before, and we had one this year. While the last few years this has been a negative print (improvement) there are years in which the change was positive. Whether this is a consequence of the population normalization that happens every January or whether it's real will have to wait for another month or two. One month a trend does not make.

But in some of the other details things don't look so good, where we look at the product of these statistical adjustments that filter through to both sides of the sheet.

That ain't good. The total employed continues to decline, which is in line with the actual report. So in this case household and establishment are in alignment - and showing continued losses. The bad news is that in the household survey the trajectory of losses has resumed since September its downward trend - and shows no evidence of improvement.

Then there's the ugly.

That's real bad. This looked to be stabilizing in the middle of 2009, but no more.

This latter chart, ultimately, is the one you can't ignore, and it's the one that will, if it continues, eventually strip the government of its ability to both borrow and spend on an unlimited basis. To the extent that you believe that the government is both able and willing to prop up the civilian economy with various "stimulus" games such ability is absolutely reliant on the trend in the above chart not continuing its deterioration.

I'll make a prediction based on the above - there are going to be some truly ugly revisions to IRS tax receipt assumptions. I don't know if the bond market will sit up and pay attention ala Portugal, but if it does the "little sell-off" we've seen thus far is a nothingburger compared to what's coming.

GDP: There's Your Inventory Bounce

nospam@example.com (Karl Denninger) — Fri, 29 Jan 2010 09:04:00 -0500

4th Quarter GDP is out with a stunning 5.7% (annualized) rate of increase. Let's look inside and see if the numbers make sense.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from private inventory investment, exports, and personal consumption expenditures (PCE).

The first two are not a big surprise. The latter, however, is dangerous to rely on.

As I have repeatedly pointed out we have over the last 18 months added about $500 billion (annually) in transfer payments to the federal budget. This counts in the GDP report as PCE, but is not actual output any more than I am richer if I go to the bank and borrow $20,000 on my credit card.

If one was doing GDP as a "balance sheet" you'd have to subtract the addition in liabilities (debt) from the money spent, but of course GDP isn't computed that way. This results in a nutty overstatement of GDP when it is used as a measurement of economic health, which of course is how all the so-called "economists" use it.

Indeed, that $500 billion is an annualized distortion of a whopping 3.57% of the entire economy!

There are some problems in this report as well. The claim is made that real federal government expenditures and investment was flat (0.1% increase) .vs. an 8% annualized rate of change in the last quarter. I'm not sure I believe that either - but it may in fact be true, in that the aforementioned $500 billion diversion could reasonably be "all there is" in terms of what the government can and does spend. I'm particularly skeptical of this number after seeing the durables report and change in defense spending - those two numbers don't add correctly, and defense spending has been up strong all year (much to the chagrin of those who thought Obama would be drawing down our military spending and bringing the troops home!) State expenditures are down as expected (the states are broke!) but despite all the bleating about lack of money the change is small. You'd think there would be real cutting going on given the screams of distress - nope!

Export growth continued as did imports, but the import growth rate slowed dramatically from the third quarter. The latter mostly appears to account for inventory additions, which was 3.39% of the GDP increase - about what I expected. While this is additive to GDP it is not indicative by itself of economic strength. More is required, specifically, we need to see that 3.39% taken up in final demand in coming quarters, otherwise it turns into a millstone around the neck of merchants that will instead destroy profit margins. Nonetheless industry appears to have "taken the bet" on an economic recovery that actually takes hold.

The amusing part of the report is found in the personal income and outlays section:

Current-dollar personal income increased $119.2 billion (4.0 percent) in the fourth quarter, compared with an increase of $35.1 billion (1.2 percent) in the third.

Personal current taxes decreased $11.7 billion in the fourth quarter, in contrast to an increase of $3.5 billion in the third.

Got it? People aren't earning the money, the government is handing it out. You don't pay taxes on government handouts, for the most part. There was a potential "improvement" signal in the third quarter related to tax liabilities increasing, but that has now reversed - hard - which throws a big fat rock at the concept of employment turning in any meaningful way. Instead the "current dollar income" is being borrowed and given away by the government through unemployment extensions and other forms of handout.

Non-residential structures (commercial R/E) plummeted by 15.4% yet residential is claimed to have increased. Homebuyer tax-credit incentives? Probably.

Looking at the breakdown there are some warnings: Utility expense appears to be comparatively strong, which looks to be the lion's share of the Q4 household service change, with the rest being almost all in health care costs. This is not a good trend when an increasing percentage of personal income is comprised of government handouts.

Non-durable purchases were up significantly at bars and restaurants (normal during the 4th Quarter - look at 06 and 07) while gas and energy purchases were down in Q3 and Q4 - a not-good change considering the trajectory of prices for both (demand is decreasing significantly, as prices have been up a LOT, so if gross sales are slightly down.....)

The revisions to this report should be interesting. Remember that the last quarterly GDP report was revised downward some forty percent over time. I've archived this copy privately on The Market Ticker so as to preserve any "accidents" in this regard.

Bottom line: The market liked it (although the net change after thinking about it for a while was pretty much a non-event - we're up a whole two S&P points a half-hour after release) but most of the improvement was due to inventory build and transfer payments from the government (and the government borrowed the money), not actual earned personal income.

Uh, Where's My Recovery? (Durable Goods)

nospam@example.com (Karl Denninger) — Thu, 28 Jan 2010 08:48:00 -0500

Oh, the Census finally admitted to their revision?

New orders for manufactured durable goods in December increased $0.5 billion or 0.3 percent to $167.9 billion, the U.S. Census Bureau announced today. This increase followed two consecutive monthly decreases including a 0.4 percent November decrease. Excluding transportation, new orders increased 0.9 percent. Excluding defense, new orders increased 0.3 percent.

Remember, November was reported as an increase last month. Remember, this was part of the ramp job in the market at the end of December. REMEMBER?

I'll tell you what I don't like though: 15.9% year over year declines in shipments, and 20.2% decline in new orders.

And it's no better ex-transports and ex-defense - excluding defense it's 17.8% and 21.4% and ex-transports it was 16.4% and 17.7% respectively (shipments and orders), all declines.

Looking down the sheet I see exactly one column that has positive year/over/year numbers in it - defense, up 5.3% (orders) and 21.0% (!!!) for shipments, respectively.

Unfilled orders and total inventories were down hard as well with everything but computers down double-digits. Unfilled orders for computers were up 8.8% y/o/y while communications eeked out an 0.5% gain.

Note that communications equipment is a coincident indicator of hiring in high-tech and other "good paying" jobs, since new hires typically require new communications gear such as cell phones.

There's not a lot to see here folks, other than the fact that we've still got a very weak "recovery." There were indications of improved shipments and orders in the internals of the report, particularly in primary metals and machinery - both good signs. And semiconductor shipments were up huge, but with this being the month into Christmas, that's not a surprise (what 'ya think goes into all the "stuff" you buy?)

But the rest of the report was lukewarm at best, and the y/o/y numbers are pretty horrid. I'm particularly non-plussed with these given that by the time we got to December of last year we were at what everyone called "the bottom" from an economic perspective - and yet we're putting up numbers below that point - still.

Wake me up when we see annual comparisons flatten out.

That's an actual bottom.

Durable Goods "Mistake" Or FRAUD?

nospam@example.com (Karl Denninger) — Mon, 25 Jan 2010 11:18:00 -0500

On January 5th the durables report for November was 'released'.

It showed a 0.2% increase. I didn't write on it at the time, as it didn't appear to be particularly consequential. The report, of course, came in the middle of the first-week January market rally.

But now, in the dark of night, the number has been revised - to a decrease of 0.7%. The reason is a claimed "statistical error."

This, by the way, should have been obvious from the retail sales report, which I did write on.

Here's the ugly - the Census' link to the report is now listed as missing (that is, intentionally removed!) and what's worse the link they refer you to, the "Historical M3 Releases" does not have the corrected November data - it only has releases through October on it.

That is, November's report has disappeared.

No, the "historical" tab doesn't have it either. Attempting to retrieve it off the link in Google's search returns a "not currently available, see historical" message - but it's not there.

You would think that such an "error" would result in an immediate press release by Census identifying the cause of the error and a corrected report, along with CNBS and the rest of "ToutTV" talking about how this "mistake" happened and alerting investors to the fact that they had made decisions based on "mistaken" information and in fact durables had suffered a second sequential decline.

YOU WOULD BE WRONG.

Are we now down to rank fraud in "data releases" from our government, revised in the dark of night without public notice or press release, with the agencies claiming "statistical error"?

Folks, honest errors are immediately admitted to when discovered and disseminated to all of the people who the government or agency knows relies on these figures for economic decisions.

But when "errors" are less than honest the person or agency committing them attempts to hide the evidence instead of admitting to and publicly exposing their mistake.

You decide.

Economic Recovery Eh? Where's My Rail Demand?

nospam@example.com (Karl Denninger) — Tue, 19 Jan 2010 06:49:00 -0500

As I have said, freight volumes are one of the "tells" for the economy that are hard to manipulate. Well, where is it?

While rail volumes have improved since last spring, they started the year on a weaker note: U.S. railroads originated about 237,000 carloads in the week ended Jan. 9, according to the Association of American Railroads, down 12% from the same week a year ago and 28% from 2008.

2009 was a cliff-dive from 2008. While the rate of decline has slowed, the direction of change has not reversed on a total loadings basis.

Of particular concern is baseline traffic - it is not in good shape at all and in fact is tracking below last year.

Cyclical traffic is somewhat off the bottom, but I wouldn't call it "healthy" or "strongly recovering":

Of the sub-categories that are broken out chemicals, metals and automobiles are up significantly - about half in the case of metals and chemicals, and more than half in the case of autos. But remember - automobiles were essentially collapsed going into the GM and Chrysler bankruptcies.

Coal shipments remain down and this is of particular concern as coal is an excellent indicator of energy demand on a forward basis (since a huge percentage of US base electrical load is generated with coal.) There is simply no indication of material recovery in that demand on the US Rail system.

Nor is there any indication of forest (wood products) demand recovery either. Think housing and construction here folks - simply absent.

If we were poised for an actual strong economic recovery these numbers should be dramatically improving across the board, as these are all relatively long-lead items in terms of sales cycles.

They're not.

More Hot Air From The Raters

nospam@example.com (Karl Denninger) — Wed, 13 Jan 2010 15:48:00 -0500

So Fitch now issues a "warning" to the US:

"Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US's 'AAA' status", he said.

There isn't going to be any "meaningful measure" to reduce the deficit over the next three to five years.

Fitch notes reality, however:

Mr Coulton said the US is vulnerable to "potential interest rate shocks" due to its reliance on short-term debt and foreign investors. The average maturity of US government debt has fallen to four years, compared to seven for Europe's AAA club, and 10 for Britain. "The share of three-month bills has risen very sharply as a result of recapitalising banks," he said.

This raises the danger of a roll-over crisis. Chinese, Japanese, and Mid-East investors own almost half of the stock of US debt. They are more likely to liquidate holdings than domestic investors, if there were a loss of confidence in Washington or the Federal Reserve. Short maturities mean that any jump in interest rates will be felt quickly.

Right. And in this regard Fitch is spot-on.

But see, the purpose of a ratings agency is supposed to be to downgrade ahead of the event that blows you to bits, so people can be warned in advance.

Of course the raters didn't do this with subprime mortgages, they didn't do it with liar loans, and they haven't done it with sovereigns.

The fact of the matter is this - Fitch will "downgrade" America only after the rollover risk detonates in our face and the people who should be relying on their opinions get burned - just as has happened since this mess began.

If Mr. Coulton was not a eunuch he would have issued a downgrade now, given the fact that:

Our CBO says we're screwed and will run another ten trillion dollars in debt through the end of the decade.
President Obama, despite claims he would reduce deficits during the campaign instead has increased them, as is now being shown by both tax receipts and spending in FY2010.
There is solid evidence that in point of fact our government may have turned the $500 billion in "handouts and giveaways" that were ladled out over the last 12 months into structural additions to entitlement spending. Among these are repeated calls for more clunker cash, extensions of the homebuyer tax credit and pledges to continue indefinitely unemployment extensions, along with "handouts" to state and local governments that came with forced lock-ups of spending levels, thereby guaranteeing that deficits would not be reduced.

To make the case that The United States does not deserve a downgrade on its sovereign debt right now one must at minimum be able to make a cogent argument that #3 above is false. That piece of the puzzle alone is sufficient to GUARANTEE that we will never be able to reduce deficits below approximately $1 trillion annually, tax increases or no tax increases!

Simply put the problem is too much spending. The Keynesian prescription only works when there is additional debt service capacity in the private sector - when that is exhausted then the engine that is necessary to turn pump-priming into expansion (that is, private credit expansion) is absent and you are simply throwing the stimulus money down a black hole.

This recession began with the exhaustion of private debt-service capacity. It is for this reason that all the claimed Keynesian "solutions" have not and cannot work - there is simply no more margin between debt service capacity and outstanding debt levels in the private economy. This is proved month after month as bank credit continues to contract and consumer debt loads come down month after month.

Our government will not stop and abandon this failed course of action until it is forced. The ratings agencies would be doing The United States and her citizens a great favor if they were to issue a one-notch downgrade right now with a promise of more unless the Keynesian game is immediately halted.

Sadly, none of Fitch, Moody's or S&P have the balls to do it.

A "Macro Level" Look At The Economy

nospam@example.com (Karl Denninger) — Sun, 10 Jan 2010 13:25:00 -0500

I am going to present for you my "deconstruction" of the current economic view - based on facts, not hype or "hope and dreams."

We will begin with a couple of charts that should dispel one of the more-common myths that the goggle-eyed pundits like to express: the stock market is an accurate leading indicator of economic conditions.

First, mid-2006 into the first part of 2007, when the housing market had already peaked and the die had been cast for the housing and economic crash:

Next, the market from 1995 to the middle of 2000, when we had blown a tremendous bubble - and in point of fact, the Nasdaq had already collapsed at the right side this chart.

Or, if you prefer, this chart, showing that the economy was literally going to be in the toilet six months to a year later:

The point?

Those who claim that the stock market predicts the economy on a forward basis are pie-eyed idiots. They are cherry-picking their claims, using only those times when the market was in front of the economy, and ignoring those times when the market was in fact dead wrong about forward economic prospects.

In point of fact by the start of 2007 it was clear that we were headed for the economic cliff, yet the market kept rising for months, and ultimately peaked in October. In August of 2000 it was not only clear that the tech sector was going to fall apart it already had, with the Nasdaq 100 down roughly 30% while the broader market continued to rise, signaling that this was "just a blip."

And in 2002, while the recession had already ended (according to the NBER it ended in November of 2001!) the market was prognosticating a continuing economic collapse and had been for more than half a year after the recession was over. The prediction was wrong.

If you take a dispassionate view of the equity markets as "leading economic indicators" you are forced to conclude that they are in fact no better at forecasting than a coin toss. That's because the stock market isn't a "profit forecaster" or a "prosperity forecaster" - it is the expression of opinion based not on current return but rather on the speculative belief that someone will (or won't) pay more for a given security tomorrow than today.

So what can you look for in terms of forward economic expectations?

I have and continue to argue that there are three items that give us a short-to-intermediate view of the economic outlook. They are:

Sales tax receipts. This is virtually the only economic "count" that is not subject to being gamed when it comes to the current picture for consumer spending. Since personal consumption accounts for 70% of the US economy, this is the most-accurate indicator we have. It is both timely reported (monthly) and reliable, as no business will report and remit taxes that were not collected on actual sales. At the same time under-reporting (that is, refusing to pay taxes that are actually due) is punitive enough and caught quickly enough that most businesses will not attempt to cheat. Non-discretionary items (food and medicine) in most jurisdictions are not taxed, so this indicator has reasonable accuracy when it comes to what matters in the economy - discretionary spending. Finally, the tax is proportional, not regressive or progressive, so changes are proportional to actual discretionary spending.
Consumer credit. When it is expanding it is additive to GDP beyond actual output (wages, bonuses and other earnings.) When it is contracting it is subtractive to same. Note that as this number is not normed to population growth (that is, it is not "per-capita") it should expand at a roughly 1% rate per year simply to accommodate growth in the number of people in the United States. Therefore, a "zero" rate is actually negative by about 1%.
Civilian Employment Ratio. This is simply the percentage of all working-age people (16 to 65) that have a job and is derived from the household survey. This is arguably the most-important indicator of all in the intermediate (one to five years) term, as it provides the best view of the government's revenue capacity on a forward basis (that is, the tax base upon which the government can levy to obtain revenue.)

So what are these indicators telling us?

First, let's talk about "consumer spending" reports. These are predicated on same-store sales. The methodology is right in the government reports and on their web sites, but nobody reads beyond the first paragraph of the report.

A simple example will illustrate the problem with reporting methodology. Let us presume there are exactly two stores in the world. Each has $10,000 in sales a month. Same-store sales are reported as "flat" - that is, zero.

One month Store #2 goes out of business. It is deleted from the same-store sales report since it did not report both last month and this month. But Store #1 gets some of Store #2s former customers, and now sells $12,000 worth of goods.

The report will show a 20% gain, as that's what "same store sales" shows, where in fact 40% of the sales literally disappeared and didn't happen at all.

Likewise, if we had one store reporting $10,000 in sales and a new store opened, that new store would not be reported either. The old store might see its sales drop from $10,000 to $8,000, while the new store might have sold $5,000 in its first month.

The report will show a 20% decline, as again that's what "same store sales" shows, where in fact there was a 30% increase in total sales!

Now of course these are extreme examples because there are many more than one or two stores - but the point remains valid - during times of economic contraction the government will materially overstate consumer spending, and during times of economic expansion it will understate spending. Bluntly, the reports are unreliable and do not show what "Tout TV" claims.

Sales tax receipts suffer no such deficiency. A new store must report and pay taxes immediately. A closed store stops reporting and paying on the date it closes. John Mauldin cites the same numbers I do in a recent article:

I called Philippa Dunne at The Liscio Report. They survey the various states about taxes, among other things. "Sales taxes are not up and the current survey we are doing is pretty bad." She used the word "horrified" when commenting on some of the respondees' replies at the various state tax offices.

That's current economic activity folks, and it is why you keep hearing about states with horrifying budget problems.

The truth is that consumer spending is not advancing, it is contracting - still.

Now let's look at consumer credit. Remember, this number is not normed to population growth. I will start with the long view, since we're trying to do macro here:

The importance of this cannot be overstated. Notice that going all the way back to 1960 (the earliest we have data on the G.19 Fed release) the rate of growth in consumer credit has never been below -2% annualized, and only once dipped negative at all, in the early 1990s. If you want to know where the "great expansion" of our economy came from, you need look no further than here. We didn't earn it, we borrowed it.

Note that at a 7% expansion rate credit outstanding doubles every 10 years. Note also that at a 3% wage growth rate (roughly about right) it takes about 24 years for income to double. The problem with trying to grow the economy with credit expansion at double or more the rate of income growth should be obvious.

On the shorter-term we have two other charts that drive home two far-more-critical points: that de-leveraging continues and it is far from over in the consumer sector. First, the total consumer credit outstanding:

Note that while the rate of decline is quite impressive we have only removed $117 billion from the total outstanding of $2,581 billion at the peak, or a decline of just 4.5% thus far.

Those who believe that removing 4.5% from the total amount of consumer credit outstanding is sufficient to return the consumer to "health" are delusional. The credit bubble was created over literal decades - a 4.5% contraction, while certainly moving in the right direction to re-establish stability, is nowhere near enough.

How do we know that the consumer isn't done? Simple - he hasn't stopped pulling back on the revolving debt - indeed, the rate of decline continues to accelerate!

While the rate of non-revolving credit acceptance appears to have stabilized just under flat (that is, with a slight continuing loss) the rate of decrease in outstanding amounts for revolving (charge card) credit continues to accelerate and is now approaching -10% annualized. On an annualized basis this would remove about $90 billion of spending a year where in early 2008 it was adding about the same - that is, this is a swing in actual consumer spending of approximately $180 billion dollars annually, or about 1.3% of GDP.

Next, I want to look at employment trends. These are some of the most important of all; we will first look at the ratio of employed to the population, found in this graph:

The importance of this cannot be overstated - it points out a stark reality that nobody wants to face - the number of people being added to "not in labor force" has been rising precipitously since the 2000 recession and still is!

We have spent a full decade without returning one net person on an annualized basis to the labor force - indeed, during most of the decade people were leaving the labor force on a strictly numerical basis, not being added to it!

This is in fact much worse than it first appears because the population has grown from 282 million in the year 2000 to approximately 307 million in 2009, a net gain of 25 million people.

Not only have we not returned anyone to the labor force who left on a net basis during the entire 2000-2009 decade but we also added 25 million more people to the population and none of them are working either!

So while the total employed count is back to roughly where we were in March of 2004 when adjusted for population growth we're back where we were in the 1980s in terms of per-capita earnings capacity (ex-inflation of course), but with a spending appetite and debt load that more-correctly approximates 2007!

The following graph will illustrate the problem as it expresses debt as a percentage of GDP (as well as in raw numbers):

Note that in the early 1980s we had debt in the system of about 175% of GDP. Today it is about 370%.

In order to bring the system back into balance from a standpoint of the labor participation rate - that is, the percentage of people actually earning a living in regard to the population, we would have to cut the debt in the system by roughly HALF!

In short our nation's bankrupt policies over the last two decades and more - both under Democrat and Republican administrations - has led to a monstrous twenty five trillion dollar debt imbalance - roughly the sum total of two years output in our economy!

So how is the government keeping the plates spinning in the air up to this point?

Government handouts are now close to 20% of personal income, up from about 14% in 2007, a forty percent increase.

If you wondered where all that government debt was coming from and why we have $1.6 trillion in deficit (and on track to be that or more this year!) now you know. Not only have the banksters been bailed out the government has literally been trying to prevent the collapse of its own bankrupt policies that stretch back more than two decades by handing out "free money" to the population - money the government doesn't have!

It won't - and can't - work. PIMCO's Bill Gross outlined the "strategy" for 2009 that was employed with temporary success and levitated both the bond and stock markets:

Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds.

That's right - the Federal Reserve effectively monetized (that is, they printed money backed by used dog food - that is, nothing) to cover 80% of a $1.5 trillion deficit, or $1.2 trillion worth. Some $500 billion of that went into handouts to the population (6% of roughly $27,000 in per-capita income times 307 million Americans) and the other $700 billion went to bail out Wall Street. Only 20% of the total was actually sold to investors worldwide.

Can this continue indefinitely?

Not a prayer in hell.

There are many who argue that we "had to" do all this to avoid an economic collapse. But have we really avoided anything, or have we simply made the problem worse by embedding $500 billion in additional "handouts" into the budget each and every year on a forward basis - roughly one sixth of the total federal budget - that will prove politically impossible to take back and yet which are not covered by improving labor participation?

More than two years ago I wrote a letter to all 535 members of Congress in which I implored them to find and set aside $200 billion in actual cash - not for "hand outs" in the traditional sense, but rather for the provision of emergency food, shelter and clothing, possibly to be provided on formerly-closed military facilities for up to 25% of the American population for a period of one year or more. They of course ignored that entreaty to the best of my ability to discern, but the reason for it was clear to me at the time and still is - a hungry and homeless population is a dangerous population, and "discontent" when married to an empty belly can easily turn to armed rebellion, especially if and when the "rabble" discern (and they eventually will) that they have been systematically robbed for decades by Wall Street, K Street and 1600 Pennsylvania Avenue.

Today we are $1.5 trillion poorer than we were a year ago and yet we've fixed exactly nothing. The banks have not been forced to write down their bad loans and/or jettison them, over-levered consumers have not been forced into bankruptcy where they could throw off the anvil around their necks and the structural employment and entitlement problems have not only been left un-addressed they have been made much worse. We are on the cusp of adding to the idiocy of Medicare Part "D" with so-called "Health Care Reform" that will impoverish more people and drive even more of our nation from the workforce. We continue to allow nations that abuse their working populations (such as China) to be the source of our "offshored" production and thus the destruction of our working class citizens, we demand "easy money" and bubble economics even when it has been proved over the space of two decades to result in fewer people working as a percentage of the population rather than more and we continue to pray at the altar of debt leverage even though it has resulted in two horrific crashes in the last decade and, should we not quit genuflecting before the bankster mob will result in a third that may bring down our government and economic ability to survive.

How long can the plates be kept spinning? Hell if I know. I didn't think they'd get away with it for this long. The rest of the world figured it out almost immediately and stopped buying our debt on a net basis, but The Fed stepped in and played handmaiden to Congressional and Administration idiocy instead of administering a stern 2x4 to the head. I suspect that The Fed's motivation stemmed from Bernanke's belief that if he "just gave it a bit of time" things would turn around, but now we've had two years of "a bit of time" and yet consumer credit demand is through the floor and the labor participation rate shows that all we've done is shift more and more people as a percentage of the population to the dole. This inherently cannot continue or it will lead to the collapse of the government's ability to fund itself via taxation, as these facts and figures are not hidden from view - policymakers and investors worldwide that have to buy our debt can see this and about six months ago they gave up.

Ben gave it another six months, but now it appears he has discerned that neither Congress or The White House will stop whoring around so long as he's handing out $100 bills from an endless ATM machine.

Yet that path can't work in the long term either. Not only does the risk of a super-spike in energy prices loom large but more importantly the structural damage done to the employment base through the printing of money and continued offshoring of jobs in response ultimately destroys the funding capacity of the government itself. While an energy price spike would provide the "shock and awe" to engender an immediate response the employment base deterioration is much more serious as this is a multi-decade trend that cannot be repaired quickly and yet if not addressed it will destroy the government's ability to fund itself with certainty.

This is likely behind Bernanke's announced end to money printing, but whether the resolve to quit mainlining the heroin will stick when the market is forced to either absorb $1.5 trillion in debt sales or Treasury is forced to whack half or more off the deficit is another matter.

Either way the claimed "restoration of balance" in the economy is a fraud until and unless we see structural changes in approach by Congress and The Administration - and neither, at this juncture, looks likely.

401k/IRA Screw Job Coming?

nospam@example.com (Karl Denninger) — Fri, 08 Jan 2010 13:31:00 -0500

Now this is a guaranteed rape job.

In a short conversation this noontime that CNBC apparently has omitted from their archives (Why's that folks?) Rick Santelli was talking about a potential to effectively force money into the Treasury market.

Where would they get this?

From your 401k and IRA accounts!

From Businessweek:

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

Let me tell you what this is - it is an attempt to prevent the collapse of the Treasury market!

Forcing people into Treasuries as an "annuity" is exactly what Social Security allegedly is. Except that Treasury stole the money that was collected in FICA taxes and spent it!

Guess what? They'll do that here too - you're going to "invest" in Treasuries which of course are effectively a CALL option on the future taxing ability of the government.

The problem is that with an aging population and the immigrant problem (illegal immigrants that is), along with offshoring, the aggregate wage base will drop and thus this is the most dangerous investment of all!

What's even worse is that the government has intentionally suppressed Treasury yields during this crisis (and will keep doing so by various means, including manipulating the CPI - the "inflation index" - as they have for the last 30 years) so as to guarantee that you lose over time compared to actual purchasing power.

THIS HAS BEEN THE CASE SINCE THE 1980s AND IT WILL NOT CHANGE!

I have been talking about this for quite some time and recall writing a Ticker on it a year or more ago, although I can't find the entry immediately.

Let me be clear:

I have no quarrel with the government mandating that you have a choice in your IRA or 401k account to buy short-duration Treasuries - much like the "G" fund that government and civil-service workers have.

But - "choices" have a funny way of turning into mandates, and this looks to me like a raw admission that Treasury knows it will not be able to sell its debt in the open market - so they will effectively tax you by forcing your "retirement" money to buy them!

This may be the only way for Treasury to hold down interest rates to something reasonable in the intermediate term, but doing so will instantaneously remove a major source of funding for the stock market - that is, the monthly and quarterly inflows from retirement accounts.

You can bet this won't be good for you, the ordinary American.

You can also bet that once such an "option" is made available there is a very high probability of the government doing things that either promote or simply don't stand in the way of another stock market crash as a means of "herding" your money into Treasuries - so they can blow it - all under the guise of being allegedly "safe".

Of course this begs the question - what if the government can't pay down the road when you retire, just as they can't pay on a forward basis with Social Security and Medicare?

This "proposal" can only mean one thing - Treasury smells smoke. Maybe you should pay attention to what they're huffing!

And before you say "oh they'd never do that" I want you to read this:

Here is a warning to us all. The Argentine state is taking control of the country’s privately-managed pension funds in a drastic move to raise cash.

...

My fear is that governments in the US, Britain, and Europe will display similar reflexes. Indeed, they have already done so. The forced-feeding of banks with fresh capital – whether they want it or not – and the seizure of the Fannie/Freddie mortgage giants before they were in fact in trouble (in order to prevent a Chinese buying strike of US bonds and prevent a spike in US mortgage rates), shows that private property can be co-opted – or eliminated – with little due process if that is required to serve the collective welfare.

Any questions?

PS: If the video shows up I'll update this ticker.... and if you're wondering what hammered the dollar starting at about 9:00 today, this is probably it. Such a "move" would free the government to further abuse the issuance of Treasuries rather than take necessary austerity steps and places us even further down the road toward a political and economic collapse.

Wholesale Inventories and Sales: Seasonal

nospam@example.com (Karl Denninger) — Fri, 08 Jan 2010 10:38:00 -0500

Many people have crowed about the November wholesale inventory and sales report this morning on ToutTV:

Sales:
The U.S. Census Bureau announced today that November 2009 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $337.4 billion, up 3.3 percent (+/-0.7%) from the revised October level and were up 0.6 percent (+/-1.6%)* from the November 2008 level.

Not awful, but not much-changed from November 2008. But let's look at inventories:

Inventories:
Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $386.3 billion at the end of November, up 1.5 percent (+/-0.4%) from the revised October level, but were down 11.0 percent (+/-1.1%) from a year ago.

Aha.

So on an annualized basis we have a small increase (this removes seasonal changes) from shipments in the month ahead of Christmas, but inventories continue to be drawn down from levels prior to last Christmas.

This makes perfect sense; last Christmas retailers and wholesalers got caught with a huge amount of unsold inventory and had to slash prices to get it to move. This year they came in much leaner, as the numbers now show - and back up the anecdotes.

But the 0.6% increase in sales on an annualized basis hardly shows "significant" economic recovery. This, in turn, was born out by the employment situation report this morning.

The internals of report (unadjusted) are a bit nastier. Sales of durables were down 4.2% on an annualized basis, made up for by a large boost in non-durables. The largest contributors to the positive movement were in places you don't want to see them - farm products and petroleum - as those both signal major price inflation pressures in the coming months. Drugs were up 7.1% annualized (gee, that'll be good for price inflation and personal disposable income too, right?)

In durables the downstrokes were also in places you don't want to see them - furniture and lumber (construction does flag in the winter, but this is particularly bad) along with metals and machinery, both of which took a huge dive (-38.7 and -19.8 respectively.)

All in all I don't like it. The inventory contraction is healthy for a "new normal" but the price signals being sent from some of the internals are trouble, and when looked at from an annualized basis (which is what counts to remove seasonal influence) there's nothing to cheer about in this report. It's not a disaster, but it does signal potential price inflation trouble in the year ahead - especially if oil continues to spike higher.

Non-Farm Payrolls 12/2009 - Eek

nospam@example.com (Karl Denninger) — Fri, 08 Jan 2010 09:46:00 -0500

This is not a good report.

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

This is huge, and is why last month the report was an actual "green shoot" but not conclusive evidence of a turn.

This month threw cold water on the premise that the corner has been reached and we are now on the "upswing".

While the number of employed is not dropping as quickly on an annual comparison basis, it is still declining. For me to get somewhat-positive that red line has to go above zero and remain there, as it did in the middle of 2002.

But the truly bad news is found here when it comes to sustainable recovery and a look forward in terms of budget deficits and thus being able to "work our way out of the hole" on systemic debt:

After dipping back momentarily the inexorable rise continues.

This graph, more than anything else, shows the structural problem our economy faces going forward, and is one of the reasons that I believe "this time it's different" when it comes to sustainable recovery.

We have not managed to add people back into the labor force on an annualized basis since this series began!

This means that there are more and more people who are sucking on the government teat, which is not true GDP - it is a transfer tax. It is part and parcel of the Ponzi. And since this downturn began both of the indications that we might be seeing "hope" - the first around the end of 2008 and now this year at the end of 2009 - proved to be nothing more than tiny downward blips in a pattern that shows incredible and continuing deterioration.

Government fools have already been out this morning talking about further extending unemployment benefits. All that will do is cause interest rates to move higher (due to more government borrowing) and further smash housing and other long-running investment.

Sorry folks.

This report is, unfortunately, a whole bottle of "Round Up" dumped on the top of the previous month's "Green Shoot."

What is especially troubling in this report is the implication that employers, who usually hold off on firing until after Christmas, didn't this time around. That has nasty written all over it - and leaves open the possibility that we're nowhere near the bottom on this cycle.

Did You Need a PhD For That?

nospam@example.com (Karl Denninger) — Wed, 06 Jan 2010 11:18:00 -0500

Sigh....

"The recession is not over," said Michael Intriligator, professor of economics at the University of California, Los Angeles. He predicted economic output would not return to pre-crisis levels until 2013, while the job market would not fully recover until 2016.

No, really?

Actually, I don't think the job market will recover at all, if you define "recover" to be "return to a level of employment as a percentage of those working-age adults consistent with when we actually made things - that is, the 1960s and 1970s."

Why not? So-called "globalism" and "populism", which is better defined as "people voting for the politician who promises them the biggest handout."

For that reason, Stiglitz said, what has so far emerged in terms of regulatory reform proposals is far too meek to have any effects. "The regulatory reforms on the table are totally inadequate," he said. Stiglitz said the idea that record banking profits were warranted because of a large degree of "financial innovation" was plainly wrong.

MIT's Johnson went further. What he calls the "mythology of financial innovation" was really "a way to extract rents out of consumers."

That's overly-complex.

Here's reality and a much-more succinct view: These "financial innovations" were and are a raw fraud.

Again, back to basic laws of business balance:

Nobody works for free. Ever.
The risk-adjusted return available on any lending transaction is a fact and not subject to "massage." While default on any single loan is binary (it either does or doesn't) default on a sufficiently-large and diverse group of loans with a known set of characteristics is a statistical function.
Each person who touches such a transaction or group of transactions, therefore, must inevitably reduce the total amount of return below the risk-adjusted amount, and the more people who touch it - that is, the more complex it is - the more the total return must inevitably be BELOW the risk-adjusted amount.
The less transparency in a given set of transactions the more "spread" or "vig" those who process the transaction are able to retain for themselves through the obstruction of price discovery.

This leads to axiom #1:

IN EACH AND EVERY CASE OF FINANCIAL INNOVATION THE RETURN PAID TO INVESTORS MUST ALWAYS BE LESS THAN THE RISK-ADJUSTED RETURN. THAT IS THE MORE COMPLEX THE INSTRUMENT THE WORSE INVESTORS GET SCREWED.

We then add to the first axoim the following:

For each alleged means of "hedging risk" the person offering the hedge must also get paid.
The parallel with fire insurance is clear: If you own one house you buy fire insurance because you cannot afford the damage a fire may cause, even though a fire is improbable. But if you own 100,000 houses spread across the entire nation you're an idiot to buy fire insurance since the insurance company must either charge you more than the actual loss expected across those 100,000 houses or they will be unable to pay when the fires occur.
As a direct consequence of (1) and (2) it is not possible to buy both a security and insurance against it defaulting and have the total blended return be greater than a risk-free security. Either (1) the return will be lower or (2) the seller of the insurance will not be able to pay.

This leads to axiom #2:

ANY REPRESENTATION THAT ONE CAN CONSTRUCT A SYNTHETIC "RISK FREE" DEBT INSTRUMENT BY PURCHASING BOTH A RISKIER INSTRUMENT AND INSURANCE AGAINST IT DEFAULTING THAT WILL RETURN MORE THAN THE RISK-FREE INSTRUMENT IS FRAUDULENT. EITHER THE SELLER OF THE INSURANCE WILL BE UNABLE TO PAY OR THE RETURN WILL BE LESS THAN IF YOU HAD SIMPLY BOUGHT THE RISK-FREE INSTRUMENT.

This is the essence of "financial innovation" folks: IT IS A SCAM.

I can make a crapload of money selling you "auto insurance" for $100 a year. If I was to do so I would probably make $100 million dollars in three months! My initial books would look great - only a few of you would have accidents immediately and so long as I kept selling policies faster than people crashed everything would be fine.

But this does not change the fact that over the course of the year there is no chance I would be able to pay off on the claims. It is mathematically impossible for the full term of those contracts to be honored.

This is what the so-called "financial innovation" was, in point of fact. It was nothing more complicated than a Ponzi Scheme that INEVITABLY had to fail.

The bad news is that we have NOT removed the Ponzi - indeed, we are once again seeing things like PIK/Toggle bonds and the CDS monster has not been neutered.

As a consequence of these facts it is inevitable that a second crash will occur, as we have not learned a damn thing. We have not locked up those who made mathematically-impossible claims of performance and we have not barred them from doing so now and in the future. We have instead bailed out the mathematically impossible - this time - while allowing the scam to continue and in fact increase in intensity, which guarantees not only a second crash but a worse one.

This outcome is assured folks. It is simply the math of the matter - 2 + 2 cannot equal 6, no matter how many times someone tries to claim it does.

Where's My Recovery? (Tax Receipts)

nospam@example.com (Karl Denninger) — Wed, 06 Jan 2010 08:23:00 -0500

From The Wall Street Examiner:

Month to date tax receipts are now in for the entire month of December. They’re down 7.7% from December 2008, which is exactly the same rate of decline as November’s. We know that the TBAC and Treasury officials were not anticipating that in their debt sales forecast for the first quarter. They had assumed that a recovery was taking root and would continue to do so.

But I thought that we were in the midst of a strong economic recovery? So say all the pundits, all the Tout TV folks, everyone...

So how come I can't find it in the sales tax receipts of the states, and I also can't find it in the Federal tax receipts?

Doesn't recovery mean more spending, some hiring, or at least people getting more hours even if they don't have new jobs?

If this is all happening, as we're being told incessantly on ToutTV, shouldn't tax receipts be going up?

Remember, last December was pretty much the bottom, or so the pundits have told us. We keep hearing that sales are improving, durable goods are improving, employers aren't firing any more (and indeed many people are looking for a positive employment number for December and a positive revision to +ve for November) - and yet none of that makes any sense - especially employment turning to an actual positive number - if Treasury tax receipts are actually down on a y/o/y basis from last December.

That's not the worst of it when it comes to macro level stuff. From The Wall Street Journal came this piece that was largely ignored:

First, in most state capitals the stimulus enticed state lawmakers to spend on new programs rather than adjusting to lean times. They added health and welfare benefits and child care programs. Now they have to pay for those additions with their own state's money.

Second, stimulus dollars came with strings attached that are now causing enormous budget headaches. Many environmental grants have matching requirements, so to get a federal dollar, states and cities had to spend a dollar even when they were facing huge deficits. The new construction projects built with federal funds also have federal Davis-Bacon wage requirements that raise state building costs to pay inflated union salaries.

Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes.

Wait a minute.

Isn't there a requirement in State Constitutions that a bill go through the Legislature to authorize spending that is then signed by the Governor (or vetoed and overridden)?

The article goes on to say:

A few governors, such as Mitch Daniels of Indiana and Rick Perry of Texas, had the foresight to turn down their share of the $7 billion for unemployment insurance, realizing that once the federal funds run out, benefits would be unpayable. "One of the smartest decisions we made," says Mr. Daniels. Many governors now probably wish they had done the same.

The Governor of a State does not have the right to legislate from his office!

This sort of crap has been pulled by The Federal Government for decades - shove a program down The State's throat, acceptance of which is either automatic in some form or which occurs by the action of some administrative agency within a state and thus bypasses the entire State Legislative process.

This is beyond outrageous and yet it is one of the means by which our Federal Government has effectively destroyed the Federal/State boundary, usurping into The Federal Tax mechanism state governments and legislatures.

It would be one thing if the legislature was to have taken up these "stimulus" packages and passed acceptance of them as an act of the legislature, signed by the governor. That would be lawful.

But they didn't. In some cases the governor explicitly acted, but in others the decision was effectively made by an administrative arm of the state (e.g. the road department) via acceptance of Federal Funds.

Both are blatantly unlawful as acts of legislation without the legislature!

The States should have put a stop to this crap back in the days of "double nickel" speed limits, when it made its "high pressure" debut, demanding that all such effective appropriations occur through legislative action.

They didn't.

Now the States are saddled with impossible-to-pay budgetary requirements, in some cases leaving them with as little as 10% of their budgets open to discretionary action - all as a result of unlawful appropriations made without the state legislatures passing a bill that is then signed by the governor!

The Journal continues onward with claims that this is all a liberal conspiracy.

Nonsense.

This is a raw abuse by both political parties that has been crammed down the throat of the states since the 1970s, through both Republican and Democrat Congresses and Administrations, and it is flatly unlawful as it violates the Constitution of every state of the union to legislate without action of the legislature!

The States must rise and pass 10th Amendment resolutions with the binding force of law that all such unlawfully-enacted "appropriations" are void as unconstitutional usurpations of The State Legislature and will not be complied with.

This is no longer a matter of political expedience. It is now a matter of budgetary survival and maintenance of what we are supposed to be as a nation - a union of States that each have a Constitution that must be respected and abided by all parties.

A Warning To Western Governments And Investors

nospam@example.com (Karl Denninger) — Tue, 05 Jan 2010 11:28:00 -0500

The equity markets are ignoring this... for now.....

The American investment group said it will be a net seller of UK Government bonds this year, at the very point when the Bank of England brings its £200bn programme of purchases to and end and the Treasury attempts to raise unprecedented sums through the capital markets.

The move is doubly embarrassing for the Government because the head of Pimco's European investment team is Andrew Balls, brother of Schools Secretary Ed Balls, who is mastering the Government's re-election strategy. The move will be seen as a financial vote of no-confidence in the Government's handling of the economy.

PIMCO has also said it is reducing its holdings of American Treasury debt.

This is, indeed, a "no confidence" vote on government fiscal and monetary policy. It is an expression of belief that the budget situations in both nations are both unsustainable and will not be dealt with, and more importantly that the central banks of both nations will lose control of their attempt to monetize the debt - that is, inflate it away.

I wondered how long PIMCO would continue to parrot the line that "everything is under control and Bernanke has this situation well in hand." I guess I got my answer.

Nobody cares in the equity markets - for now. The move yesterday and then again this morning - where there was no reaction to this at all - either means that PIMCO is wrong or the equity market traders, egged on by the likes of CNBS and the rest of Tout Journalism, are stupid.

Note that PIMCO's decision was not reported in the American media to the best of my ability to determine. You don't think that might have something to do with their bias and attempt to drive Americans into the equity markets and cause them to (again) wind up on the losing end of these trades, do you?

I am reminded of the early days of the 2000 tech wreck when there was a literal every day barrage of crooners on the television and in the "business pages" telling you how CISCO was a great buy at 60, because it was "fairly priced" at 80 and at $60 you were buying at 25% off.

It ultimately fell to $13, and today trades at $24.67, or less than ONE THIRD of its $82 high reached on 3/27/2000.

Folks, PIMCO has a record of being not only right but privvy to "analysis" that you and I simply never, ever have or will get access to. How that happens is the matter of some conjecture - there are many, myself included, who believe that they're privvy to information sources that "ordinary peons" never will be given access to and in the debt markets insider trading is (for the most part) legal.

As a result when an announcement like this is made you're a rank idiot to ignore it or believe "it doesn't matter." It most certainly does matter and the odds are that they're right - and if you go against them you will be proved in the fullness of time to not only be wrong but poor on top of it.

There's a call this morning out of Stephen Roach (Morgan Stanley Asia) to either put up or shut up:

Jan. 5 (Bloomberg) -- Morgan Stanley Asia Ltd. Chairman Stephen Roach said U.S. policy makers should start to exit emergency stimulus measures now if the economic recovery is as strong as they say it is.

“There is never an easy time to do it,” Roach said on Bloomberg Television today. “The longer they wait, the greater the chance they sow the seeds for the next bubble. So I’m in favor of an early exit strategy.”

The problem is that there is no real strength in the economy. Housing has been propped up by The Fed buying more MBS than were issued in the last year, not "supporting" the market but rather being the market. Likewise, ex-"quantitative easing" the entire US debt issue was under $200 billion last year - but this year between corporate and government we need to issue far more than ten times as much.

Tout TV will not tell you that the impact this has had on the markets - both stock and bond - is mathematically impossible to sustain on a permanently basis and as a consequence we are re-living 1999 in the Nasdaq.

For those who forgot this is what happened in the Nasdaq:

Remember this? Remember Cramer's "10 stocks you must buy for the new paradigm?" Remember "The titans of Tech?"

What came next?

Hmmm....

And today?

It's different this time. I'm sure of it.

This, of course, is why Bernanke still has interest rates at zero, why he's buying MBS hand-over-fist and has not disclosed how he intends to "exit" from his tampering and why the government has not pulled back on its so-called "stimulus" plans.

The economy is really strong, these valuations are entirely reasonable and based on very strong economic growth, and we have prosperity to look forward to, right?

Once again I want you to look at this graph:

In the 2000s we roughly doubled the outstanding debt in the system. $25 trillion dollars, approximately.

And before you say "oh that didn't matter" I want you to pay close attention to that table on the right again. Specifically, the percent of GDP that was actually more debt being added to the system during the last decade. It stands at 21.57%.

Therefore, if we simply flat-line debt in the system - that is, we add nothing - and all other things remain as good as they were in the 2000s, we would record GDP growth that is 21.57% lower than the last decade.

GDP growth from 2000-2009 was an annualized 5.2%. This means we could achieve (with no debt increase) a maximum of 4.08% GDP growth assuming business conditions are otherwise as favorable as they were in the 2000s.

But debt addition has a multiplicative effect, because the people you hire with the debt acquisition spend money too. So the compounding effect is in fact much higher than it first appears.

What's dramatically worse is the civilian employment picture. We've literally regressed some 30 years (some would argue all the way back to the 1970s!) in this regard, with a smaller and smaller percentage of the population being the "working class."

Yet the non-working not only do not contribute to output they actively deplete it through various "social programs" (e.g. unemployment insurance, food stamps, etc.) As such there is a multiplier effect there as well, and both of these run the wrong way.

I find it ludicrous that we will achieve 4% GDP growth for the next ten years, or even the next five years. The spending plans of government, ensconced in health care legislation, tax increases and the like will prevent it, along with the carrying costs of all that government borrowing.

Yet the stock market's price increases are in fact pricing in GDP growth closer to 6% for the next decade!

This is exactly the same "error" that the market made in 1999. It was precisely the same argument that I heard on BubbleTV for roughly the year prior to the implosion. I scoffed at it then and I scoff at it now - those numbers were not achievable then even with the insane debt increases.

NOW such a prediction is beyond ludicrous - it's the product of certifiable insanity. To even get within 20% of that prediction - 5% GDP growth - we would have to be able to expand debt outstanding from $53 trillion to approximately $90 trillion by 2019.

Explain how that both can and will happen in an environment where the largest bond fund in the world is shunning both UK and US sovereign debt issues, while both governments remain committed to "pump priming" (putting the lie to the belief that a recovery has in fact taken hold) and I'm on board with the predictions.

Until you do I remain in the camp that we're looking at a repeat of 1999, complete with sentiment indicators that are at levels higher than 1999 and were last reached in 1987 just before the market crashed.

How far does the collectivity insanity go before we play Wile-E-Coyote? I have no idea. I didn't know when it would "crack" in 1999 either - only that it would happen, with certainty, and I said so at the time in multiple interviews, some of which you can still find on the net.

I'll gladly go on record with that same viewpoint once again - the rubber band is again being stretched by those who are willfully blind to the mathematical realities that underlie all economic growth and production, and they are leading you, the consumer and "retail" investor, straight toward the cliff.

The longer this charade goes on the worse the inevitable reaction.

Note that we have just recorded the first ever negative decade in the S&P 500. That's right - never before in history has the S&P had a negative return over a full decade. It has now.

I will leave you with the following - the last time we played this game we lost everything from December of 1996 to spring of 2000 in less than three years. If we do not stop being stupid - soon - I fully expect we will trade under 500 on the NDX and under 600 on the S&P.

And if you prefer the S&P 500....

I know, I know, everyone is looking at 2003 on the S&P and saying that we should have a 2004-like year, then more acceleration.

But in 2003 credit was rapidly expanding, as it was in 2004. This is why the S&P expanded back to (and slightly beyond) it's previous high - that was all financial leverage. The Nasdaq, made up of companies that made "things" (and services) for the most part, did not recover because it was not able to play financial engineering.

Now credit is contracting strongly ex-government, and even with the government's borrow-and-spend policies total outstanding credit is not expanding at any meaningful pace.

So if the S&P's recovery in the 2000s was based on financial leverage (it was) while the Nasdaq's "recovery" was what you get minus that leverage what happens to the broader indices that are polluted with the "leverage required" firms when the market figures out that the leverage is not coming back?

I argue in reply that without the expansion of credit a durable recovery in asset prices is not just unlikely it is mathematically impossible, and that in fact current asset prices are both predicated and dependent on credit expansion that is in fact not happening now and mathematically CANNOT happen on a forward basis.

We'll see who's right.

State Sales Tax Numbers: The Truth Appears

nospam@example.com (Karl Denninger) — Wed, 30 Dec 2009 10:44:00 -0500

Leave it to the WSJ to report the truth - and then try to paper over it:

Sales taxes declined 9% to $70 billion in the third quarter compared with the year-ago period, the Census Bureau said. Income taxes plunged 12% to about $58 billion. Together, sales and income taxes make up roughly half of state and local tax revenue.

The WSJ then goes on to opine:

State and local tax revenues tend to lag behind the downturns as well as the upturns in the economy because of the time it takes for collections to catch up with depressed store sales and diminished incomes.

This is true for income taxes.

It is absolutely false when it comes to sales taxes.

As someone who ran a registered establishment for more than a decade that was responsible for filing and paying sales taxes (I signed more returns "under penalty of perjury" than I can count during those years!) I can state that it is an absolute fact that sales tax returns are filed and monies are remitted MONTHLY - if there is an upturn in business - an actual upturn - it shows up NOT MORE THAN ONE MONTH LATER in sales tax receipts. Period.

There has been no recovery in final retail demand and the proof is right here in the form of sales tax remittances.

Don't be fooled.

Chicago PMI: Look At The Comments

nospam@example.com (Karl Denninger) — Wed, 30 Dec 2009 10:15:00 -0500

Interesting report...

First, the non-seasonally-adjusted number actually fell to 52.8. Seasonal "adjustments" boosted it to 60.0, which was "better than expectations."

Production, unadjusted, edged higher. New orders less seasonal adjustment were actually lower, and so were backlogs.

But the "seasonal adjustments" made for the following comments: "Highest in over a year" and "highest since May 2007."

Funny how seasonal adjustments change things, eh?

Inventories were up sans seasonal adjustment, but down including it. Employment? Up (duh, it's called The Holiday.) Supplier deliveries were down raw, but again, with seasonal adjustment, improved (huh)? Prices paid were up in both cases.

Is this "seasonal adjustment" valid or is it noise? We'll see in the coming months. But "behind the headline" there are also comments in this report, and they're rather telling:

“Supplier inventories seem to be inadequate and lead-times are increasing. Hesitance to build resources to accommodate increase demands seems to be stifling potential growth. Excessive demands on surviving employees is wearing thin but, fear and desperation will always prevail.”

and

“2010 is shaping up to be another record year for profits on flat to decreasing sales - no pay raises for the 3rd year and no bonuses for the second year.“

That which can't continue forever won't, and unemployed people buy a lot less "stuff" than employed people.

Squeezing your remaining staff looks good until they revolt, unless, of course, you can play the "fear card" (work harder or yourrrrreeeee FIRED!)

Good luck with that as a sustainable business practice.

Hmmm... 3Q GDP... Goebbels Truth Leaks?

nospam@example.com (Karl Denninger) — Tue, 22 Dec 2009 11:37:00 -0500

The Goebbels Ministry Of Truth is at it again...

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 2.2 percent in the third quarter of
2009, (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.

Notice a few things here. "Goods and Services produced by labor and property"? Uh, property produces things? Me thinks not. But we'll leave that alone for a minute.....

2.2% eh? I thought it was 2.8%? Or was it 3.5%?

Looks like close to 40% of the so-called "growth" disappeared!

Let us not forget that on the day the original "release" was made the market was up by 20ish SPX points, or about 2%. Today, we discover that the "second revision" cuts 40% off the so-called "growth" and the market yawns.

But let us look inside, shall we?

Motor vehicle output added 1.45 percentage points to the third-quarter change in real GDP..

Cash for clunkers, remember? What did they say back in October?

Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP

Well some of the change was there... where's most of the rest?

Real federal government consumption expenditures and gross investment increased 8.0 percent in the third quarter

Heh, that's up a bit from the first look, yes?

Real federal government consumption expenditures and gross investment increased 7.9 percent in the third quarter..

Indeed.

So where's the change? Mostly inventories - remember the much-vaunted inventory build? Well....

The change in real private inventories added 0.69 percentage point to the third-quarter change in real GDP

So they say now. Then?

The change in real private inventories added 0.94 percentage point to the third-quarter change in real GDP

Well there's part of it.

What else?

Real residential fixed investment increased 18.9 percent

It is, eh? What did you say two months ago?

the "big change" in private domestic investment is all residential fixed - up 23.4%.

Uh..... that's not a small change folks - off by 20%? Hmmm....

Reality is that if you wanted to pump the market there would be few better ways than to "accidentally" make initial reports "better", then revise it away later when "higher quality" numbers show up.

The ugly reality, however, is that with the government being 30% of the economy and up 8%, the government's "pump" was responsible for 2.4% GDP "growth" - or more than the entire claimed increase.

That is, with this revision we now have proof that we're exactly where I said we were in October: The economy is not expanding at all in the private sector, rather, other than explicitly government spending, even with so-called "rebates" and "special deals" - IT IS STILL CONTRACTING!

The funny part is that if you read inside the preliminary release you'll find the confidence levels - that is, the revision boundaries. One wonders - are these really "revisions to data" (when they hit the boundary exactly) or does the Goebbels Ministry of Truth live on, and they simply didn't want the facts - as I believed to be the case in October - to be revealed?

Will market participants figure this out? Probably not right away. But you can bet on one thing with certainty: Cash flow always wins in the end, irrespective of whatever false light government (and their handmaidens in the media) would prefer to present to you.

There Is No Way Out Of This Box....

nospam@example.com (Karl Denninger) — Fri, 18 Dec 2009 18:31:00 -0500

... that does not involve serious pain.

Go ahead folks - tell me how we can simply ignore this.

How we can pretend that the outstanding debt does not have to come back down to reasonable levels.

That these levels are "reasonable" - and that these rates of growth are "reasonable."

This is the "magic of compounding" writ large - and in a fashion that is going to inflict severe pain on our population - and the longer we wait to deal with it, the worse it will be.

Bernanke, who was at The Fed during Greenspan's time there, should have used his "education" - his claimed knowledge of economics - to make a lot of noise about this and demand that interest rates NOT be lowered to further encourage more debt-based consumption.

He did exactly the opposite.

As this decade wore on he should have sounded the alarm on our debt binge in all sectors, especially in the financial and consumer sectors where the growth in indebtedness has been the highest.

He did exactly the opposite.

Since this crisis began, in fact, every single government official who has spoken on the matter has emphasized even more lending, that is, cranking the amount of debt outstanding even higher, and The Federal Government has made good on their intent by, in the last year, spending more than $1.7 trillion dollars they did not have - that is, they borrowed even more.

That "pumping" of credit is why the stock market has "recovered."

BUT IT CANNOT AND WILL NOT STAY "recovered", because the debt that is outstanding is unsustainable - interest costs are crushing innovation and we are now absolutely reliant on near-zero interest rates lest everything collapse.

How bad is it?

During the same time period that we essentially doubled the debt of households, businesses, the federal government and financial institutions (2000-2009) we added just 40.8% to GDP ($10.129tn to $14.266tn)

You might think it wasn't as bad from 1990-2000 - we went from $5.846tn to $10.129tn in GDP (a 73% increase) while household debt went from 3.58tn to 6.53tn (an 82% increase) and non-financial corporate debt from 3.768tn to 6.195tn (a 64% increase.) This looks reasonable. But financial leverage during that decade went from 2.613tn to 7.521tn, a monstrous 187% increase (!) and government debt from 2.613tn to 7.521tn, also a 187% increase (!), both nearly double the GDP growth rate.

The 1980-1990 years? GDP expanded from $2.915tn to $5.846tn, a clean double. Pretty good! Consumer debt, however, went from $860 billion to $3.58 trillion, a 316% increase. Non-financial corporate leverage went from $1.387tn to $3.768tn, a 172% increase, the Federal Government went from $668 billion to 2.498tn, a 273% increase and financial leverage went from $526 billion to $2.614tn, a 396% increase.

The path we have chosen for the last 30 years in this country is clear, convincing, and impossible to continue upon.

THE MATH DOES NOT LIE.

We have not created GDP growth through final demand procured as a consequence of production - that is, people like you and I working with our hands or minds to produce something, then spending the fruits of that labor to buy the things we want and need.

Instead, we have used financial leverage to present to ourselves and the world a false belief and "visage" of prosperity that in fact did not and does not exist, with the continuation of this charade absolutely dependent on the unending ability to forever take on more and more debt compared to growth in actual economic output.

Let's just take ONE example of this: Larry Summers, President Obama's "chief economic advisor", thought he could outrun the math at Harvard - where he gave approval to enter into complex derivative trades. They blew up in the school's face:

The swaps, which assumed that interest rates would rise, proved so toxic that the 373-year-old institution agreed to pay banks a total of almost $1 billion to terminate them. Most of the wrong-way bets were made in 2004, when Lawrence Summers, now President Barack Obama’s economic adviser, led the university. Cranes were recently removed from the construction site of a $1 billion science center that was to be the expansion’s centerpiece, a reminder of Summers’s ambition. The school suspended work on the building last week.

“For nonprofits, this is going to be written up as a case study of what not to do,” said Mark Williams, a finance professor at Boston University, who specializes in risk management and has studied Harvard’s finances. “Harvard throws itself out as a beacon of what to do in higher learning. Clearly, there have been major missteps.”

MISSTEPS? This is fifth-grade math! It is willful and intentional ignorance of fundamental and basic mathematics over the last 30 years that is the proximate cause of the mess we are in today - a mess that to this very day none of these jackasses will come out and talk about or have an honest debate over!

These are the so-called "bastions" of higher education - the places where so-called "experts" receive what is claimed to be an "education" in how finance and business work. If you need an explanation for how our government, regulators and businesses could possibly be so dumb as to make this sort of mistake over the course of three decades you need look no further than the "intelligence" displayed by these institutions.

That there are actually people - young and old - who pay $40,000 a year or more for this "quality" of education (and they then use that sheepskin to infest business and government alike) simply demonstrates that PT Barnum was right: There really is a sucker born every minute.

Let me be clear lest anyone misunderstand me: There is no means by which we can return this economy to reasonable forward prosperity except by first deflating the excess debt, even though doing so will cause those who have too much leverage outstanding to fail - that is, go bankrupt - either as consumers or businesses.

We have in fact hit the wall, as I clearly stated had occurred simply from an examination of the math in the middle of 2007.

The facts are in and the math is incontrovertible.

To the politicians of both major political parties:

You can either deal with reality or have it slap you upside the head in the form of political, economic and civil collapse.

To the people of this nation:

You can either deal with reality and be prepared for the politicians refusing to deal with reality, or you will suffer the consequences of being unprepared when, not if there is political, economic and civil collapse.

Ben Bernanke absolutely must not be reconfirmed. He has been aware of these figures as a scholar and as a Fed Governor for more than a decade (the tables from which that graph was produced are from The Federal Reserve itself) while absolutely refusing to discuss them in public in an honest and forthright manner.

What's worse is that even today Bernanke has refused to take responsibility for his part in intentionally engineering this disaster and allowing it to continue to the point of near-literal insolvency of not only the private sector but government as well!

Our Congress and President absolutely must deal with this reality right now. Not tomorrow, not next week, not next year or after the elections. NOW. "Health Care Reform" is important but this nation will not make it to 2013 when the "new plans" come into effect if actions are not taken NOW to reverse what is going on here. We can and must address entitlements and health care generally - after we get the immediate situation under control.

It is my belief that our Congress and President WILL NOT deal with this reality, and therefore it is incumbent upon each and every American to be prepared - from this point forward - for the inevitable mathematical consequence of the willful refusal of our Congress and Executive to address the issue of excessive leverage in our business and consumer lending space.

There are many things that Congress and our Executive Branch can do right now to address these issues; among them:

The immediate re-instatement of Glass-Steagall and both replacement and enforcement of hard 12:1 leverage limits for both banks and other financial institutions, without exception, loophole or dodge. Fractional reserve lending is a privilege that must come with strong protections against over-expansion of credit in the system and systemic instability.
The immediate withdrawal of excess liquidity from the banking and financial system and the forced marking to the market, recognizing the losses that have occurred already, even though this can (and will) bankrupt many institutions and individuals. Bankruptcies clear debt and reduce the numbers in the above table. This must happen, even though those affected will feel economic pain.
The re-imposition of usury laws; this will stop debt-pyramiding by corporations and individuals. I suggest a hard cap of 10 or 15% over "Fed Funds" for all loans; if a bank cannot make money with a gross profit margin on funds of 120% (12:1 leverage @ 10% over cost of funds) they are doing something very, very wrong - like lending to people who can't pay back the money they are lent.
An absolute ban on "naked" credit-default swaps. These are gambling instruments to the extent they do not represent an actual insurance policy against an actual insurable risk. To the extent that they, or any other derivative, represents a legitimate hedge against economic risk we must insist that the instrument be traded on a public exchange with a published bid, offer, last and open interest with a neutral middleman counterparty exactly as is done today for listed options and futures. This will guarantee nightly mark-to-market accounting and margining for all positions and end the thermonuclear threat these instruments pose to the financial system.
ALL banking system regulators who oppose any of these positions or who will not swear an oath under criminal sanction to enforce and uphold these operating standards must be relieved of their positions and replaced. No exceptions.

Each and every one of these positions has been brought up by myself in the past in previous Tickers. We have seen time and time again over the last two and a half years that banking regulators coddle the regulated entities and enable lying, cheating and in many cases outright fraud.

As our government has fiddled our financial system has burned. It has not been stabilized by the actions of The Fed and Treasury; rather, it has been made more dangerous and less stable while those who committed evil and knowingly-unsound acts have been allowed to further asset-strip Americans and enrich themselves.

But irrespective of what people - including Congress, The Administration or even Wall Street want, the math simply can't be argued with.

Beware and be prepared America.

Big Blah (CPI)

nospam@example.com (Karl Denninger) — Wed, 16 Dec 2009 09:14:00 -0500

From the Bullcrap Lie Society (BLS) of our government this morning:

On a seasonally adjusted basis, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in November, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months the index increased 1.8 percent before seasonal adjustment, the first positive 12-month change since February 2009.

Most of the change was due to energy; gasoline was up sharply (as we saw yesterday in the PPI.)

Core was a literal zero.

Food was up a bit, but I continued to be puzzled by the difference between gasoline and "fuel oil."

Why? Because "fuel oil" (that is, heating oil) is exactly the same thing as #2 diesel - that is, road diesel fuel. The only difference is the tax (and the presence of dye in the heating oil to denote that the tax has not been paid.) But for the legal (tax) issues you can run "heating oil" in your diesel car or truck, and vice-versa - they are identical products.

Used vehicles were also up materially - a reflection of the distortion from "cash for clunkers" still present in the data (it hit its maximum in October at +3.4%) Prices for new vehicles were also up (again, the maximum was in October) - again denoting the "back-door" bailout of the automakers from cash-for-clunkers. Unlike the new vehicle deal however, which you got a tax credit for, the buyer of a used car just got plain old-fashioned screwed through price-jacking caused by constraints in supply. (Just wait though - in the new year when people can't make the payments on those CFC deals, you'll see what happens to used car prices.... supply and demand you know.. )

Medical care was up as usual (gee, how come it keeps rising faster than overall inflation?) and shelter costs were down (remember, this is not "housing", as that would expose reality - it is "owners equivalent rent")

All in all a blah report - but given the PPI that's expected - the fun and games in the CPI report resulting from yesterday's PPI should show up in a month or two.

Oh Oh.... PPI / Empire (Both Bad)

nospam@example.com (Karl Denninger) — Tue, 15 Dec 2009 09:06:00 -0500

Now here's a smoking shoot!

The Producer Price Index for Finished Goods rose 1.8 percent in November, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This increase followed a 0.3-percent advance in October and a 0.6-percent decrease in September. In November, at the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.4 percent, and the crude goods index rose 5.7 percent. On an unadjusted basis, prices for finished goods moved up 2.4 percent for the 12 months ended November 2009, their first 12-month increase since November 2008. (See table A.)

We can't use the "I" word, right? Well guess what - the PPI report just did, and the result was rather immediate. The futures ticked down fairly strongly, with both bond rates rising and the dollar holding what had been strong gains.

What? Why?

Because Europe is in trouble this morning. Both the pound and Euro are getting trashed - are the PIIGS coming home to roost?

I have said quite some time ago that I believed there was a decent chance the Euro Zone would literally implode - that is, fracture and disintegrate. That's a simple function of the fact that you have producer and leach, er, "consumer" nations in the EU Zone and this sort of imbalance only works while one can expand credit in a willy-nilly fashion to paper over the imbalances.

Now Greece, among others, is facing down the reality of such actions.

Gee, where else in the world has that been tried? Might there be dead Presidents on that nation's currency?

Crude good price pressures are now two months running up over 5% and intermediate goods are accelerating as well. A huge piece of the headline was energy in November but not in October, meaning that we're in big trouble when the crude goods number flows through the python and picks up the energy cost increases as well.

It would not surprise me to see a high single-digit price change for finished goods on the producer end in either January or February - and if so, that is going to spook the market BAD.

The problem appears to be, broadly, energy price speculation (big surprise, right) with y/o/y change up 12.2% This was first signaled last month with an 8.3% annualized rise. The only hope for containment in this regard would be a popping of the energy price bubble - a pop that may be in process now. It better be, or the PPI is going to take off like a rocket and shut down the long end of the bond curve, forcing both The Fed and Government hands.

Service industry producer prices continued to decline, with a big part of it showing up in health care (!) That's unexpected.... are people running into cost pressure between their wallet and hospitals, even with both insurance and "freebies" that can be offloaded to the taxpayer? Maybe.

The internals are interesting on this report. Food prices actually fell on an annualized basis, down 1.7% from last year this month. Finished consumer goods, excluding foods, however, rose 4.7%, a monstrous rise on an annualized basis. Strong gains were found in booze prices (3.6%), gasoline (35.9%!), pharmaceuticals (5.8%), toys (5.4%), tobacco (7.1%) and jewelry (7.4%). Big declines were registered in natural gas (-15.6%), heating oil (-7.1%), electronics (-5.7%) and novelties (-2.4%).

Isn't it funny how heating oil is down 7% while gasoline is up 36% - yet both come from the same place (crude oil)? Hmmm.... is there a bit of a game being played here?

In addition one might ask what the government intends to do about the pharmaceutical problem - in a "zero inflation, zero interest rate" environment drugs are up 6%. Nice eh? Not if you're one of the over-medicated Americans it isn't!

In the capital equipment section prices for computers were down 15.7% (!) and office machines declined 6.4%. The only strong price increases were in ships (5.1%) and heavy trucks (4.2%) with the latter in particular impacted by upcoming emissions regulation changes.

This report paints a picture of extremely weak technology demand, moderately weak industrial tool demand (-2.6%), but cost-push inflation pressures bearing down on the indices through distortions in the energy market and, of course, the "Big Pig Pharma" companies.

The Empire Manufacturing Index appears to confirm the picture here - weak industrial demand - coming in with a huge miss down to 2.6:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers leveled off in December, following four months of improvement. The general business conditions index fell 21 points, to 2.6. The indexes for new orders and shipments posted somewhat more moderate declines but also moved close to zero. Input prices picked up a bit, as the prices paid index rebounded to roughly its November level; however, the prices received index moved further into negative territory, suggesting that price increases are not being passed along. Current employment indexes slipped back into negative territory. Future indexes remained well above zero but signaled somewhat less widespread optimism than in recent months. Indexes for expected prices paid and received declined moderately but remained well above zero.

So this makes two indicators on the same day, both reporting, by my analysis, the same outlook.

The Bottom Line: The pump is wearing off and the ability to reignite the game looks to be quite constrained, as we now are seeing the blowback from The Fed and Government stupidity (stoking speculation via "ZIRP" and spendthrift policies) appear in the PPI - which typically flows through to the CPI in a couple of months.

Insanity: Doing The Same Thing (Obama)

nospam@example.com (Karl Denninger) — Wed, 09 Dec 2009 08:28:00 -0500

There is dumb and then there is dumber. Our President has crossed from one to the other, no doubt egged on by the failure of his policies thus far to take root:

WASHINGTON - President Barack Obama outlined new multibillion-dollar stimulus and jobs proposals Tuesday, saying the nation must continue to "spend our way out of this recession" until more Americans are back at work.

You can't spend your way out of a debt problem any more than you can drink yourself sober. This sort of bankrupt policy is an attempt to stop this:

But that - decreases in consumer credit outstanding - is good, not bad (in the intermediate and longer term.) We have roughly doubled the per-capita debt-to-income ratio over the last 20 years. It is unsustainable, and why we are in this mess. The tiny contraction we have seen thus far is nowhere near enough to restore balance, yet it is mathematically impossible to return to a "normal" economy until balance is restored. Unless our President has a plan to roughly double wages without commensurate price inflation, debt levels must come down - a lot - to restore that balance.

To remind everyone, here's how much stupidity we have managed to take on over the last two decades:

That's the root of the problem. Making it worse - which is what government spending inherently does, because the government is spending more than it makes, will not foster economic recovery. At best it will provide a short-term "pump" followed by another disaster, with each successive crash worse than the last.

All we are doing at present is guaranteeing that the final toll of the pain that must be absorbed in our economy will be worse, in total, than is necessary now.

"We avoided the depression many feared," Obama said in a speech at the Brookings Institution, a Washington think tank. But, he added, "Our work is far from done."

No we did not. I will note that this sort of "pump by claim" is common, to wit:

May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.” – President Hoover

June 29, 1930
“The worst is over without a doubt.” – James J. Davis, Secretary of Labor.

How did that work out, exactly?

Never mind this ditty:

He called the bank bailout, under the 2008 Troubled Asset Relief Program (TARP), "galling."

"There has rarely been a less loved — or more necessary — emergency program," Obama said.

Really? How many assets did this program buy Mr. President?

"What is zero, Alex?"

That's right. This "necessary" program wasn't necessary at all. The bill was sold to you (I remind you that you voted for it) as a program that was necessary to purchase distressed assets to free up lending capacity and restart lending into the economy.

Not one asset was actually purchased, and the claimed "restart" of lending never happened. The so-called "distressed" assets remain stuck where they were in October of 2008 - rotting away behind fraudulent accounting scams that both the former and now your administration have both enabled and, in the case of your administration, literally demanded.

And don't start this crap about blaming Republicans. There's plenty to go around, and both your party and you personally, as a Senator, deserve part of the responsibility:

"And we were forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it to others to solve."

Riiiight. Larry Summers was one of the chief architects of the repeal of Glass-Steagall, which is where all the leverage came from, along with the expansion of that leverage that a Republican Administration permitted when Henry Paulson (then of Goldman) asked.

BOTH Republican and Democrat administrations are directly responsible for profligate spending, insane leverage increases, predatory lending being considered "ok" and mandates that were utterly unsustainable - and outrageous.

NEITHER party had the gonads to stop Credit Default Swaps and other OTC derivatives, neither party put a stop to AIG's writing of contracts with zero capital, neither party wanted to pull the punchbowl and neither party has spent the people's money in a sustainable (that is, no more than you take in via taxes!) fashion.

Both parties have practiced federal accounting that would land any private business executive in prison, including refusing to recognize more than $60 trillion of future liabilities for Social Security and Medicare.

And both parties voted for a fraudulent "asset purchase" program that, it was later admitted to Congress, had its purpose changed before Congress passed it, yet Treasury never informed the Congress of this fact nor was anyone held to account for lying to Congress as to the true purpose and intended use of those funds.

Mr. President, I realize part of your job is to cheerlead. It comes with being a President. That's ok.

What's not ok is bankrupting the nation and lying about it. Indeed, lying to Congress and The American People has, in the past, been considered just and proper grounds for impeachment.

In case you haven't been paying attention the debt-rating agencies are all warning about deficit spending and unsustainable debt.

They're serious, even if (very) late.

Dubai is just one example of what can (and will) happen if you don't cut this stupidity out.

The simple fact of the matter is that if you want to do something positive for Main Street you could put a 99% "windfall profit" tax on all compensation and earnings from the big banks, then spend THAT into Main Street, and drop it ONLY when they consent to re-imposition of Glass-Steagall, the end of their participation in financial speculation, and realignment of the credit process so that productive investment became the dominant feature among American business.

But that means kicking people like Jamie Dimon in the proverbial nuts, instead of kneeling before him and his ilk.

That's a bridge too far Mr. President, isn't it?

Heh, An Actual "Green Shoot!"

nospam@example.com (Karl Denninger) — Fri, 04 Dec 2009 09:11:00 -0500

Yes, there really is one in the "jobs report" today.

No, not the seasonally-adjusted trash. I give that as much credibility as I do a carnival barker on the midway.

No, I'm talking about the internals of the report, which is what I look at. And here, there is, for the first time, a hint of hope.

I am referring to this chart, specifically:

This is the first bit of turn in the annualized rate of change, which is what I use to null out the seasonal influences. But note that the monthly change has just gone to (nearly) zero. The key test for this series comes next month when we must print a positive number. If we do, there is a strong presumption that employment is actually on the upswing and this leg of the recession probably ended in November. (No Dennis, not September, not August and damn sure not June - November.)

But that "if" is important, and it correlates with this chart:

Same story here. The monthly change is decreasing (good) but note that we had that sort of blip before, and even went negative late last spring. Again, the annualized change must remain in the right direction next month (that is, the blue dotted line must go below zero) and the red line must continue to decline.

The reaction in the market was stunning with the futures tacking on more than a dozen handles almost instantly. But the dollar skyrocketed too as did the 10 year interest rate, which blasted off on afterburners, up to 3.47.

The key for equities will be what comes once people sift through this and we find out who got caught offsides (and how badly) in the various markets. If rates continue to back up then The Fed will be forced to contract liquidity and follow the market up and that is likely to have a dramatic impact on the dollar - and the carry therein may begin to unwind.

Gold is also getting pounded, down more than $30.

This is the sort of number that can produce dislocations in various markets, especially in the futures where leverage is large and the potential to get creamed very real.

Whether this winds up being of net benefit or whether it causes some blow-ups in very bad places is an unknown right now, but this much is certain - this sort of "tectonic shift" in the markets was unexpected by many, and the sharp and disorderly moves that have occurred thus far should make for an interesting Friday to say the least.

I will be watching very closely this channel in the dollar - a channel that, with the exception of a couple of spike overthrows that failed to hold through the close, has been pretty solid since June. If it breaks to the upside things are likely to get very interesting very fast as those short dollars and long commodities - the big "leverage play" of the last six months - will be taking enormous pain.

ISM Services CONTRACTION!!!

nospam@example.com (Karl Denninger) — Thu, 03 Dec 2009 11:40:00 -0500

Oops..... 48.7 - that's contraction in the services sector folks, and very not-expected.

The NMI (Non-Manufacturing Index) registered 48.7 percent in November, 1.9 percentage points lower than the 50.6 percent registered in October, indicating contraction in the non-manufacturing sector after two consecutive months of expansion.

Contraction in services is a problem - a big problem, considering that services are more important (in terms of contribution to GDP) than goods these days, and have been for quite some time. This strongly implies that the so-called "recovery" was fueled not by private activity but rather by "pump priming" that is now wearing off.

The Non-Manufacturing Business Activity Index decreased 5.6 percentage points to 49.6 percent, reflecting contraction after three consecutive months of growth. The New Orders Index decreased 0.5 percentage point to 55.1 percent, and the Employment Index increased 0.5 percentage point to 41.6 percent. The Prices Index increased 4.8 percentage points to 57.8 percent in November, indicating an increase in prices paid from October.

We should also be concerned about the prices index. Specifically, increasing prices in front of employment gains will stunt if not detonate employment recovery. The simple reality is that hammering unemployed people with higher prices is not conducive to economic recovery.

Who's expanding?

Other Services; Health Care & Social Assistance; Construction; Finance & Insurance; Retail Trade; and Information.

Health care, no surprise. Construction is a bit of a surprise. F&I? Yeah, nice bubble you got there. Retail trade? It's Christmas. Information? Ok.

But the rest are bad news:

Real Estate, Rental & Leasing; Management of Companies & Support Services; Mining; Arts, Entertainment & Recreation; Public Administration; Accommodation & Food Services; Educational Services; Wholesale Trade; Transportation & Warehousing; Professional, Scientific & Technical Services; and Utilities.

Uh, wait a second. Construction up, Real Estate down? Hmmmm... someone's wrong on that one. I'll bet the construction folks are going to get an ugly (and painful) surprise.

The anecdotes are interesting too. The most important:

"Capital markets remain very tight; lenders are not releasing funds for development projects, limiting expansion." (Accommodation & Food Services)

Right. The reason for this is that The Fed's policy, ratified by the government playing handmaiden with them (and they to The Government) has been to guarantee credit expansion and support only for large financial institutions.

But we're in a debt trap, as I have repeatedly shown, and which this chart clearly shows:

Debt levels have to come down!

But - if we simply contract all liquidity the economy will utterly collapse. Contracting back to a level that can be sustained by earnings is prudent. Throwing it all in the fire and burning it to the ground is not.

The issue is evident when you look at the break-out chart on the debt:

The proper policy response is to force the contraction of "Financial Instruments" and "Household" credit - that is, the so-called "speculative and trading credit" side of the debt balance sheet, along with the "pulled forward demand" game. Then you use some of that (but not all, and definitely not more than all you took back!) to help Main Street.

If you pulled in outstanding credit to $40 trillion - cutting back financial instruments by half (total of $8 trillion) and Consumer Credit by 20% (about $3 trillion) we would go a long way toward re-establishing credibility. More importantly we would get somewhat reasonably-close to the level of debt leverage that existed around the year 2000, which while still too high, would probably be enough to keep the Debt Monster from eating us.

If we then prevented credit aggregate growth (through liquidity control, which is The Fed's job) until GDP caught up and got debt-to-GDP levels down to around 150% in the system (this would take a couple of decades if done responsibly), we would have re-established global credibility, the dollar would be strong and our financial system safe and secure.

Wall Street would scream but Main Street would roar with prosperity.

There's your solution folks. It takes only will - not ability.

More on this later once I can clip up the Bernanke BS from today's hearing.

Seasonally, You're Fired

nospam@example.com (Karl Denninger) — Wed, 25 Nov 2009 10:12:00 -0500

You have to love the media and it's spin on the jobless claims numbers:

In the week ending Nov. 21, the advance figure for seasonally adjusted initial claims was 466,000, a decrease of 35,000 from the previous week's revised figure of 501,000. The 4-week moving average was 496,500, a decrease of 16,500 from the previous week's revised average of 513,000.

The advance seasonally adjusted insured unemployment rate was 4.1 percent for the week ending Nov. 14, a decrease of 0.2 percentage point from the prior week's unrevised rate of 4.3 percent.

The advance number for seasonally adjusted insured unemployment during the week ending Nov. 14 was 5,423,000, a decrease of 190,000 from the preceding week's revised level of 5,613,000. The 4-week moving average was 5,613,750, a decrease of 98,500 from the preceding week's revised average of 5,712,250.

That's good, right? A decrease of 35,000 claims. The first-blush look would be "as expected, holiday hiring of temporary help."

Wait a second...

The advance number of actual initial claims under state programs, unadjusted, totaled 543,926 in the week ending Nov. 21, an increase of 68,080 from the previous week. There were 609,138 initial claims in the comparable week in 2008.

What?

So you're going to tell me that seasonal adjustments removed 100,000 claims from the raw numbers for this week, or roughly 18% of the total claims?

An 18% seasonal adjustment?!

Extended benefits are also falling off. Is this due to hiring or is this due to people simply falling off the rolls - that is, not being counted any more at all, but still jobless?

I don't know, as the weekly DOL data doesn't tell me. But the monthly data, when it is released, will - by the "NILF" number (not in labor force), which has been rising steadily, despite the alleged "improvement" in the reported firing rate.

Believe the labor market is improving if you wish - indeed, it damn well ought to be, since seasonal hiring (mostly part-time) should have been in full force last week with Black Friday due in two days. Indeed, the firing rate should have slowed a lot last week, not a little, and yet the unadjusted numbers show an increase.

We'll see what the employment situation reports for November when it is released.... as is my usual practice I'll be looking at the "Not In Labor Force" and "Total Employed" numbers from the household survey to tell me what is really going on.

I fully expect an improvement, given the usual seasonal pattern of required part-time help being hired for the holiday season.

For the sake of our economy and the so-called "green shoots" folks it damn well better be there.

GDP: 20% Miss (Yes, Really)

nospam@example.com (Karl Denninger) — Tue, 24 Nov 2009 09:56:00 -0500

GDP 3Q 2009 "Second Estimate" is out and it is 2.8%.

But let's remember - it was 3.5% on the "preliminary" report.

That's a 20% decline.

Was that an error, or was that an intentional overstatement to pump the markets and "confidence" in the original "preliminary" estimate?

Oh, and cash-for-clunkers? It was responsible for half of the so-called "advance" in the 3rd quarter (1.45%), it was a one-time deal, and it was and is just more pulled-forward demand.

Government expenses? Up 8.3%. State and local governments? They were essentially flat (down 0.1%)

The GDP report also claims that real domestic purchases were up 3.5%, but the sales tax report says otherwise.

Where did the "error" come from?

The second estimate of the third-quarter increase in real GDP is 0.7 percentage point lower, or $23.7 billion, than the advance estimate issued last month, primarily reflecting an upward revision to imports and downward revisions to personal consumption expenditures and to nonresidential fixed investment that were partly offset by an upward revision to exports.

Commercial Real Estate and actual personal spending.

Both not what they claimed.

Gee, such a shock, given the sales tax data from the states.

NOT.

PS: The claimed numbers are still, in my opinion, BS, as the sales tax numbers from the states do not support the claimed "expansion."

Who's Lying About Personal Spending?

nospam@example.com (Karl Denninger) — Mon, 23 Nov 2009 14:42:00 -0500

Here are your possibilities:

The BEA is lying. In the third quarter they claim that PCE changed +0.2, +1.4, and -0.6% for July, August and September, respectively, leading to an aggregate change of +1.2%.
Business that remit sales tax are lying. The overall sales tax collections in the 3rd quarter were down 8.2% from last year's levels, and this is the fourth quarter in a row that year-over-year declines were posted.

One of these two reports is a lie.

One is a count of actual monies remitted by businesses in satisfaction of taxes collected by them from real consumers processing real retail transactions (that's the spending that matters in the real economy, right?)

The other, if you read the BEA methodology papers, has the word estimate peppered liberally throughout.

Which do you believe?

Do you believe that retailers are intentionally under-reporting and under-paying sales taxes?

Or do you believe the BEA's "estimates" are complete horsecrap and that the government is intentionally overstating economic activity?

When you have two radically different claims of measurement of the same activity (in this case consumer spending) that are impossible to reconcile within reasonable "measurement error" the conclusion one is forced to reach is that one of the two reports is false.

When faced with such a conundrum it is my contention that the default position is that the purported actual count is the one you trust, and the one that contains "estimates" is presumed to be "cooked" until and unless proved otherwise.

Reality .vs. Spin - Confidence And Trade

nospam@example.com (Karl Denninger) — Fri, 13 Nov 2009 09:56:00 -0500

The spinmeisters were out this morning on the trade data:

The gap grew a larger-than-anticipated 18 percent to $36.5 billion, the highest level since January, from a revised $30.8 billion in August, the Commerce Department said today in Washington. Imports surged by the most in 16 years, swamping a gain in exports.

This is being cited as "evidence" that the consumer has turned the corner - that consumption is increasing, and the economy recovering.

“Sometimes what looks bad on the surface is actually quite good and I think that’s the case this time around,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Exports are growing strongly and imports are turning up because domestic spending has turned the corner.”

Ok, if that's true, where are the clear and obvious increases in sales tax receipts?

That data is near-real-time, it is not gamed, and it automatically (mostly) excludes food, since food sales are not taxed in most jurisdictions.

It thus correlates very well with discretionary consumer spending on goods - you know, the things that are imported?

Sal Guatieri hasn't bothered to look at those numbers, because they don't support his thesis. Yet sales tax receipts aren't just "support" for a thesis, they are in fact the final word on it, as they're not subject to government game-playing or "adjustments."

Consumer confidence came in at 66 even, much lower than expected. Big surprise? How? Were you freaking blind with the 10.2% unemployment number, and expected that consumers wouldn't be impacted by that?

Told 'ya so.