Friday, July 8, 2011

Economists React: Jobs Report an ‘Unmitigated Disaster’

By Phil Izzo

Overall the June Employment Report was quite disappointing , with basically no positive offsets to the poor headline results. The best we can say is that other data have shown better signs in recent weeks, including jobless claims, chain-store sales, gasoline prices, and auto production. Nevertheless, the weak trend in payroll employment indicates some downside risk to our second half growth views. –Goldman Sachs

Ugly. I mean really ugly., The June employment data were stunningly weak. Job gains were the lowest since last September when payrolls declined. Given the measurement error, you cannot even say that any new hiring occurred in June. Worse, the April and May gains were revised downward indicating that smaller businesses are not out there hiring either. That is consistent with the surveys coming out of the National Federation of Independent Business and is a discouraging trend since that is where most of the hiring occurs. Interestingly, there were almost no sectors that showed any strong gains but only a few industries cut sharply. –Naroff Economic Advisors

Nonfarm establishments added a scant 18,000 workers to their payrolls in June with private sector firms adding 57,000 while governments cut staff by 39,000. As if these markedly weaker than expected news isn’t enough, the weak May data were revised down. The exception to the overarching gloom in the headline numbers was the manufacturing sector, which added 6,000 workers after cutting payrolls by less in May than previously reported. Weakness permeated most industries including private sector education, which fell 17,000, the biggest cutback in nearly two years. Apart from manufacturing, two industries — leisure and hospitality and retail — behaved roughly as expected reversing some or all of the May declines. –David Resler, Nomura Global Economics

The unemployment rate rose for the third month in a row to 9.2% in June from 9.1% in May – up [0.4 percentage point] in three months and the highest since November 2010. Clearly, the large drop in the unemployment rate heading into the year was overdone. Moreover, the details behind the rise in the unemployment rate were poor. Household employment fell 445,000 in June, the biggest one-month decline since December 2009. –Ethan Harris, Bank of America Merrill Lynch

Neither indicator shows a pace of job creation that is fast enough to reduce the nation’s unemployment rate very quickly. If the jobless rate were 5%, this news would be tolerable. But when unemployment exceeds 9%, it should be unacceptable. Even taking a rosy view of employment gains over the past 6 or 12 months, it will be many years before the nation eliminates the current shortfall in jobs. To bring the adult employment rate back to its pre-recession level, we would need to add about 11 million new jobs. At the pace of job growth we have seen since the start of the year, that task may take decades. –Gary Burtless, Brookings Institution

As a result of the latest exodus from the labor force, the participation rate fell to a 27-year low of 64.1%. The employment-to-population ratio fell to 58.2, from 58.4, matching the lows set in December 2009 and then November 2010. The upshot is that exactly two years after the recovery began, broad labor market conditions haven’t improved at all.–Paul Ashworth, Capital Economics

Moody’s Analytics has revised its expectations through the end of this year downward, and now see monthly payroll gains remaining below the 200,000 required to bring down the unemployment rate. Employment gains are expected to accelerate and gain momentum in 2012. –Sophia Koropeckyj, Moody’s

We can see no silver lining in this employment report, which is weak, weak, weak. The three-month growth in employment is now in line with the last 12 months and the last two months have been significantly weaker. The unemployment rate edged up in June but the broader rate (including discouraged job seekers and forced part-time) surged to 16.2% from 15.8%. Total hours worked slowed and fell in manufacturing over the last three months. It is hard to excuse this report on supply-chain disruptions and it suggests that growth momentum evaporated as the second quarter drew to a close. –RDQ Economics

Industry trends generally supported the overall headline, with no particular private sector contributing an outsized boost or hindrance to the overall results. Temporary help hiring declined for the third consecutive month, and while there are various seasonal summer factors at play, the declines suggest that firms are particularly downbeat about their hiring prospects. –Guy LeBas, Janney Montgomery Scott

There is certainly no way to view the June report as anything but weak, and the fact that it follows on the heels of an equally soft May report is certainly disconcerting. That being said, we know that a number of temporary factors that held back the economy are likely to reverse in the third quarter and will help to boost growth. Currently, it seems that business sentiment is resting on a knife’s edge, with a few weak (strong) reports enough to push sentiment, and business decisions on hiring, into negative (positive) territory. The June payrolls report is jarring, but we continue to think that the economic data are set to improve in the third quarter, especially in the factory sector. –RBS

Supply-chain disruptions and bad weather are unconvincing as explanations for the extent of the weakness. A delayed response to the cumulative impact of surging commodity costs during the first half of the year is a more plausible explanation, but this report has dashed hopes that the economy was about to accelerate again now that those costs have eased back. –Nigel Gault, IHS Global Insight

More aggressive hiring is the key missing ingredient of our baseline forecast of a “self-sustaining” economic expansion in 2011-2012 that has been delayed but not derailed by higher energy prices, the disaster in Japan and sovereign debt problems in parts of southern Europe. As the impact of the former two partly reverse, the economy will climb out of its muddy “soft spot” to firmer ground in the latter half of this year and keep climbing in 2012. –Stuart Hoffman, PNC

Companies continue to focus on cost cutting instead of expanding their business in the search of profits. This confirms that CEO’s have no confidence in the sustainability of the recovery/expansion. –Steven Ricchiuto, Mizuho Securities

The economy still faces significant headwinds. The turbulence in the Middle East could cause gasoline prices to shoot up again. The housing is in a double-dip. The Euro zone is not stable affecting U.S. financial markets and exports. The developing real estate bubble in China, the primary locomotive of the world economy, is another worry. The recovery path for the economy will be volatile and rocky. –Sung Won Sohn, Smith School of Business and Economics

- If the May employment report was “alarmingly weak,” as I described it a month ago, then the June release is an unmitigated disaster. Every facet of the data is sharply worse than anticipated… And yet, while I was quite concerned about the economy after the May release, I am less worried today. Perhaps I have lost my marbles, but I look at this report and simply conclude that it is not to be taken at face value. To be absolutely clear, I have no doubt that the labor market softened over the last two months relative to the healthy readings seen earlier in the year. And, as I discussed in my preview of today’s report, it will undoubtedly take several months to get back to a happy place, as businesses, once they move into “caution mode,” take a little bit of time to regain their confidence. Having said all of that, there is too much statistical and anecdotal evidence to the contrary to believe, as these data suggest, that the labor market has essentially ground to a halt. A frustratingly slow recovery to be sure, but I do not believe that conditions are as bad as these data would indicate. –Stephen Stanley, Pierpoint Securities

There is no sugar coating the June employment report and based on the forward looking data we collect there are likely to be more disappointing payroll numbers in the next several months. What the data showed for June is a drop in the demand for labor – in terms of hours worked, the number of people needed, and the number of people unemployed. –Steven Blitz, ITG Investment Research

An unusually aggressive seasonal [adjustment] may explain at least some of the payroll weakness. The June seasonal is always negative (that is, the level of adjusted payrolls is less than the unadjusted level) to offset hiring for summer jobs. Last June, the SA-NSA spread in private payrolls was -920,000; this year it was -1.084,000.–Ian Shepherdson, High Frequency Economics

Space Shuttle Launch: Photos from the Final Atlantis Flight


Photo courtesy of NASA.


Photo courtesy of NASA.


Photo courtesy of NASA.



Photo courtesy of Ryan Matzner.



Photo courtesy of Ryan Matzner.


Photo courtesy of Ryan Matzner.


Photo courtesy of Ryan Matzner.



Photo courtesy of Ryan Matzner.

A Rare VIX Pattern is Appearing Again...

Today's 12 month VIX chart shows a pattern that is fairly rare. This chart pattern has appeared a number of times in the past and has been pretty accurate. The pattern is where the VIX's support level is the bottom of a circle and the touch points follow the bottom of the circle. The difference I see is that the older patterns occurred over a longer period of time within the circle area.

In any case, this pattern should be watched because if it holds to the pattern, it will generate higher/lows on the VIX which will correlate with increasing fear levels, and increasing market risk. So, unless the VIX aborts this pattern within the next few days (by moving sideways or lower), then the market will start to increase its risk and fear levels. (Reference Note: This chart is updated every morning in Section 4, Chart 9c of the paid subscriber site.)

Few Easy Choices for Fed in Wake of Jobs Report

by Jon Hilsenrath

Friday’s grim jobs report will no doubt have many Federal Reserve officials wondering what, if anything, they can do to support an economy that appears to be badly stumbling. Fed Chairman Ben Bernanke laid out his thinking in his June press conference.

Despite the bad jobs numbers, it appears unlikely that the Fed will choose to do anything soon.

As Mr. Bernanke explained in his press conference, “the current outlook is significantly different than what we were facing in August of last year.” Back then, the Fed was worried that consumer prices were going to start falling, sending the U.S. into a Japan-style bout of deflation. So it decided to buy $600 billion in Treasury securities to boost markets and hold long-term interest rates down. “We no longer have a deflation risk,” Mr. Bernanke said in June. “Inflation is above — at the moment — is above target.” Moreover, Fed officials are forecasting a turnaround in the second half of the year.

If Fed officials see signs that inflation is slowing again, or if the turnaround doesn’t materialize, the picture may change. Indeed, commodities prices have retreated in recent weeks. But Mr. Bernanke signaled in June that he wanted to take some time to watch the economy before deciding on next steps. It’s not obvious that the jobs number, as bad as it was, will be enough to shift his thinking.

If the Fed were to do more, Mr. Bernanke laid out four steps it could take:

–QE3: Officials believe that the first round of securities purchases, known as quantitative easing, worked well to stabilize markets, reduce interest rates and promote recovery and that the second round staved off deflation worries and boosted markets. But they worry that both rounds came with costs, including a bloated balance sheet that someday will need to be unwound and severe political backlash. Many investors are going to start screaming for “QE3.” But given the costs, there’s reason to believe it wouldn’t be the Fed’s first choice unless inflation really started to slow.

–PROMISES, PROMISES: Another potentially more promising intermediate step laid out by Mr. Bernanke was a change in communications strategy. The Fed has given an assurance to the public that it expects to keep short-term interest rates near zero for “an extended period.” This is meant to encourage risk-taking, spending and investment. The Fed could set parameters around the “extended period” language. For instance, it could say, as the Bank of Japan has in the past, that it won’t raise rates unless certain conditions are met, like a move of its inflation projections above the Fed’s 2% goal. An added benefit of this approach is that it is a step toward a more explicit inflation target, which Mr. Bernanke supports, as do many inflation hawks on the Federal Open Market Committee. A drawback is that few investors see any chance of the Fed raising interest rates any time soon anyway. So it’s not clear the Fed will get much out of it. The Fed could also be more explicit about what an extended period means. The Bank of Canada during the crisis said rates wouldn’t rise for at least a year. Fed officials weren’t crazy about that approach, but they haven’t dismissed it.

While the Fed already gives investors some guidance on its plans for short-term interest rates, it has given no explicit guidance on how long it plans to hold on to its vast portfolio of Treasury securities and mortgage debt. Mr. Bernanke made clear that the Fed might change that and be more explicit about its plans for the portfolio. “It’s something we have on the table, something we’ve thought about,” he said. An assurance that it won’t sell them could help to hold long-term interest rates down and give investors more confidence. Mr. Bernanke seemed to suggest that he could move in this direction. “We’ve not yet chosen to make any particular commitment about the time frame,” he said at the press conference in response to a question from The Wall Street Journal. Note the word, “yet.”

–SHIFT THE PORTFOLIO: Fed officials believe that their securities purchases work in part because they induce risk-taking among investors by taking long-term securities — also known as “duration” — out of the market. Long-term securities are riskier than short-term securities because investors need to wait longer to get paid back. The thinking is that if there are few 10-year notes in the market, investors will go out and find other risky assets to invest in, like stocks or corporate bonds, thus pushing up stock prices and pushing down interest rates on other securities. The Fed could keep the overall size of its portfolio steady, but shift the makeup of the portfolio to have this impact. For instance, it could allow short-term holdings to mature and buy very long-term holdings in their place. Mr. Bernanke hinted at this in his press conference when he talked about structuring its portfolio in “different ways.” It’s hard to see the Fed generating very big confidence-inducing headlines from such a strategy. And it comes with costs — more long-term securities to sell one day when it’s time to exit. But it’s clearly on Mr. Bernanke’s list.

–NIBBLE AWAY AT SHORT-TERM RATES: The Fed now pays banks 0.25% for the money that they keep on reserve with the central bank. It could move this rate down a little further to give banks less incentive to park it in short-term markets and more incentive to lend it out. Because it is so close to zero, however, there’s not much more the Fed can do on this front. And lowering the rate comes with costs. If the Fed goes all the way to zero, it could hurt some important short-term lenders. The most obvious victims would be money-market mutual funds, which would be forced to find other ways to boost earnings on their piles of cash holdings. Right now, many U.S. money market funds have lent short-term funds to European banks. Does the Fed really want them taking more risk like that?

Taken together, the Fed is in a tough spot. The decision to purchase Treasurys last year was highly controversial internally for Fed officials. Doing it again, when inflation is moving up, would be even more so. And the policy tools don’t look terribly potent.

As Mr. Bernanke put it in his press conference: “We have an awful lot of uncertainty right now about how much of this slowdown is temporary, how much is permanent. So that would suggest, all else equal, that a little bit of time to see what’s going to happen is — it would be useful in making policy decisions. We’ll continue to look at the outlook and act, you know, as appropriately as the news comes in and the projections change.”

See the original article >>

Economists Predicting America's Jobs Numbers are Idiots

By J.D. Fain

The economists who said in consensus that America's June jobs numbers would be six times higher than they were are idiots.

There's no nicer way to say it. They're just idiots.

They need to get out of the insular world they work in and walk up and down Main Street America before making outrageous estimates, like predicting America would add 125,000 jobs in June.

Then they would find that most Americans aren't finding work.

Then we would have reasonable predictions that wouldn't set the stage for a big downer like Friday's news that unemployment is growing again in the U.S.

It's time we face the new reality in America: Jobs aren't coming back after the 2008 recession like they have in the past with other recessions because the nation's workplace is reshaping. Historically, jobs have come back between six months and 39 months after the recession.

But that was then.This is now.

People on Main Street aren't finding jobs because they jobs they once had are no longer in demand as they once were. This has less to do with recovery after a recession at this point than a complete reshaping of the American workplace economy. Union labor jobs are disappearing, and many service-oriented white collar jobs are disappearing as well as manufacturing and service sectors shift overseas.

Jobs training in America is not in accord with real needs, either. Most jobs growth in the U.S. now is in the areas of retail, leisure, hospitality and health care. Companies want people, but their business is changing so fast in this global, Internet world but they can't find candidates properly trained for the jobs. We talk in the digital age about living in a multie-media world, well in the workplace we are now living in the multi-skilled world, where savvy tech skills go hand-in-hand with public speaking skills.

In labor, tech skills are becoming a must, where it helps if one can program computer software and wield a wrench.

Until we have a complete evolution in adjustment in America, with proper education and skill development beginning at the high level in coordination with business needs, we are going to keep seeing economists miss the reality that's happening in this country when it comes to their predictions.

Or maybe the economists will just wake up and walk the same paths that the rest of us trek each and every day, and then they'll know the reality we live -- America's jobless number isn't going to improve any time soon.

Traders Not Fully Accepting the Implications of Today’s Dismal Employment Report

By DoctoRx

After today’s miserable employment report that supports, unfortunately, the downbeat view of the economy found on this blog for some time, please look at the chart below from Yahoo’s Finance section with an open mind. This is a five-year chart of the yield on the US 10-year Treasury bond. If this were a stock or commodity, then simply based on the chart, one would be bearish. One would be looking for the downtrend to continue. 

Today’s news supports this trend, in my opinion. 

This supports the “barbell” strategy I have been personally following and have been describing in my posts.
Please note that I “get” that a weakening economy will increase the fiscal deficit. I am also aware that empirically there is no correlation between deficits and Federal interest rates. There is, however, a correlation between private credit demands and interest rates.

The marketplace now allows the US Treasury to borrow for 3 full years at an annual interest rate of less than 0.70%. This rate dropped on the employment news, aware that a weakening economy increases the deficit. Markets have been known to be irrational and wrong, but so far since Bush 43 acceded to the Presidency, correctly taking the “under” on the economy has correlated with taking the side of lower interest rates. 

The US real economy may have more similarities with Japan than the authorities want to admit. We are now at all of 5 basis points yield on the 6-month Treasury bill. Pros and not retail buy this sort of debt instrument. They are obviously not looking for hyperinflation. I will have more on interest rates in a subsequent post.

The employment report is bullish for gold because it supports the likelihood that more monetary inflation is on the way. It is not bullish for any other commodity. Silver is mid-way between gold and the rest of the commodity sector. Silver, which would typically be up 2X or 3X the rise in gold in the up-cycle beginning last summer (“up-cycle” referring to the economy’s recovering from a minor “growth recession” earlier in 2010), is only up as much as gold on the futures market, whereas oil, which has no monetary characteristics, is down 2%. I suspect oil is headed for $80 as its next major move, perhaps by the fall, and $60 is not out of the question down the road in a more severe economic downturn. The stock market, which is down less than 1%, reminds me of Wile E. Coyote who refuses to look down and therefore does not fall.

See the original article >>

5 Bullish Forces for Gold

I recently published a column for Uncommon Wisdom Daily titled 3 Gold Charts You Need to See. In it, I showed you why: A) miners were really cheap on a price-to-earnings basis; B) miners were undervalued compared to the metals; and C) we were coming up to what should be a good time of year for gold.
Despite the recent volatility in gold, all those things remain true. In fact, here are five more forces that are bullish for gold:

Force #1: Gold Is Near the Bottom of a Cycle

Looking at this chart of the SPDR Gold Trust (GLD), which holds physical gold, you can see how gold bottomed on July 27, 2010, and then again 6 months later.
Macd stocks
It’s now six months after the last bottom, and we could be set up for another one. The previous bottoms have coincided with gold and the GLD touching their 150-day moving averages.
I don’t know if we’ll get that this time. In any case, if history is a guide, we could be coming up on a great buying opportunity.

What I would use as an indicator is MACD on the bottom of the chart. When it signals “buy” it will be time to load up.

Force #2: History Says the Next Move Could Be Big!

How much could gold go up? Last year, gold rose more than 22% from July 27 to December 6, when it started a speedy decline that took it into another low in January.

To be sure, looking at the chart I gave you in force #1, gold could decline before it blasts off. So let’s say it pulls back to $1,400. A 22% move higher from there is $1,708.

It doesn’t have to be that big. Gold’s recent surge from January to April was only a 15% move. But it could also be bigger. 

Other forecasters are already ratcheting up their gold targets. Erste Group’s Ronald Stoeferle recently issued a report titled In Gold We Trust in which he laid out a case for gold to surge to $2,300.

Force #3: The Market Is Expecting a Seasonal Bounce

‘Tis the season to invest in gold. Thackray’s 2011 Investor’s Guide says that the optimal period to own gold bullion is from July 12 to October 9 and the optimal time to own gold equities is from July 27 to September 25.

And the surge that we see in the metals extends to gold miners. In fact, the average return per period for the gold equity sector during the past 25 years was 6.8%, according to Thackray.

Psychology is a huge part of the market. If investors expect gold miners to move higher, they’ll put money to work, and it becomes a self-fulfilling prophecy.

Speaking of which, last week, gold mining stocks ended this most recent week UP (as measured by the $HUI and GDX) while gold ended the week DOWN. This disconnect tells us that the market may be realizing just how undervalued gold miners are.

Force #4: Central Banks Plan to Add to Gold Hoards

We know that central banks have been adding to their gold holdings. And indications are the trend is only going to accelerate.

First, what we know: Central bank gold reserves rose by more than 2% between 2008 and the end of 2010, with central banks in Brazil, Russia, India and China — as well as those in the Middle East — particularly strong buyers of the yellow metal, according to data from QNB Capital. 

Most recently, in the first quarter of this year, the Mexican central bank purchased 100 metric tonnes of the yellow metal.

This is a big turn-around from the trend in place in the previous decade, when central banks were steady and reliable sellers of gold.

Now, according to U.S. Global Investors, a survey of 80 central bank reserve managers predicted that the most significant change in their reserves over the next 10 years is they plan to buy more gold.

What’s more, over the next year the respondents forecasted that gold will be the best-performing asset class, citing sovereign debt defaults as the principal risk to the global economic landscape.

Force #5: South African Production Continues to Decline

South Africa’s gold output during the first quarter fell 9.3% compared to the fourth quarter of 2010. The Chamber of Mines also revised total gold production for 2010 to down to 6,751,506 ounces from the 6,766,709 ounces published earlier.

Remember, this is happening at a time when gold is over $1,400 an ounce. The fall in South African production is not because gold is too cheap.

One reason could be rising costs. According to Barron’s, in the first quarter of 2011, the average all-in cost for gold miners rose 19% from the previous year to $1,081 an ounce. Rising costs should boost prices by squeezing marginally profitable producers.

How You Can Play This

Gold and gold miners could probably get cheaper. Gold has strong support at $1,442 and $1,393. And that would be a heck of a buying opportunity. If we do get a pullback, consider adding to your physical gold, and you can always add the iShares Gold ETF (IAU) or SPDR Gold Shares (GLD) for a trade.

In any case, I plan on adding to my own physical gold holdings when the MACD indicator on that chart I showed you gives a buy signal. It’s probably the best buying opportunity we’re going to see for quite some time.

As for stocks, many of the best of them are tracked by the Market Vectors Gold Miners ETF (GDX).

See the original article >>

Labor Force Participation Rate Drops To Fresh 25 Year Low: 64.1%

This chart needs no commentary. At 64.1%, the Labor Force Paritipcation rate just dropped to a fresh 25 year low: the civilian labor force declined by 272K from 153,693 to 153,421. And tangentially, the employment to population ratio also slumped to a multi decade low of 58.2%.

Average Duration Of Unemployment; People Not In Labor Force Who Want A Job Now Both At All Time High

Two more self-explanatory charts: the number of people not in the labor force who want a job now surged to a fresh all time high 7,124 or up by a whopping 303K, while the average duration of unemployment also is at a new record of 39.9 weeks. 

Average Duration of Unemployment:

People not in labor force who want jobs now:

The PIIGS Nations' Problems Are Structural Not Cyclical, Thus Bailout Loans Simply Pave the Way For Asset Confiscation Down the Road

As illustrated in Why The Taxpaying Populace Of Greece Better Get Some Grease, a visual representation of Greeece's gross government debt easily demonstrates that their problems are structural in nature, and not cyclical...
What does this mean? Well, first of all, bailout loans only help in cyclical situations where the loan recipient is in a downtun in its ecconomic cycle, but expects upticks to allow it to earn its way out of both its current economc situation and the added debt service from the bailout loans. As you can see from the chart above, Greece's expenditures have literally been a permanent fixture hanging considerably above its revenue, considerably above. For twenty years, Greece has been kicking the inevitable can down the road. Now, after a global credit implosion, with:
  1. asset values plunging
  2. and economic activity stagnating
  3. with the promise of even more stagnation down the pike in the form of intense austerity programs
  4. material push back from the labor forces, unions, and the few legit taxpayers there are
  5. and collapsed asset values that were perpetually overstated in and attempt to sell to fill the void left by the credit crisis
  6. an insolvent banking system stuffed to the gills with bonds trading at 50 cents on the dollar held at par at 40x leverage, NPAs bulging and mismarked,
  7. rates about to spike
  8. trading partners undergoing their own austerity programs reducing exports and tourism
  9. and most importantly tens, if not hundreds of billions of Euro in bailout funds with collateral strings attached...
Greece is somehow expected to earn its way out of this 20 year hole that was made lethal by the Pan-European Sovereign Debt Crisis. Does anyone really think this will happen, or is Greece getting set up to have its assets confiscated at firesale prices. Is the Greek culture up for highly discunted volume sale, Walmart style?

A Quick Backgrounder

Advanced economies continue to face challenges as they deal with the juxtaposition of a huge public finances, mounting debt rollovers, a still-impaired financial sector at a time when economic growth is at snail’s pace, and unemployment levels & social unrest are at unprecedented levels. Expansionary fiscal policy in the wake of the financial crisis has helped banks repair their balance sheet and reduce leverage. Indeed, the public indebtedness has replaced private indebtedness. Current budget deficits, partly cyclical were also swollen by policy responses to the crisis, and are large in relation to GDP.

Notable decline in national incomes as a result of slower growth and increased government expenditure, thanks to huge bail out packages, have caused a dramatic deterioration of fiscal positions in many industrial economies. Growth in Public debt is unlikely to be halted any time soon as economic recovery will be slow, tax revenues will be lackluster, and expenditures are expected to continue their march north. Tax revenue is not expected to reach pre-crisis levels sooner as most of the tax revenue was windfall, thanks to the boom in financial, credit, real estate & construction markets. With aging populations many industrial countries are expected to face rising pension and health costs, beyond 2011.

In addition, rising interest rates will exacerbate interest payments. In short, deficits are expected to remain at unsustainable levels not just in the near-term but also in the medium term posing a heightened risk of L-shaped economic scenario in the entire Western world. In addition, the deterioration of fiscal balances could also impede central banks’ task to keep inflation at stable levels. The ultimate cost of cleaning up the financial system is still unknown, but we do know this – it is significantly larger than nearly all policy makers anticipated and it morphs and transforms as if it were a sentient being attempting to avoid capture.

Banks in several large and strategically pertinent countries are still fragile while being exposed to volatile financial markets and a deteriorating commercial real estate market at the same time that global interest rates are poised to enter a nearly unprecedented period of volatility. This “perfect storm” of ingredients leave the FICC businesses of these fragile banks open to significant ruin, as detailed in our article The Next Step in the Bank Implosion Cycle???

To make matters worse, the financial intertwining of European economies over the past decade has only increased the costs of such spill over. The dominant theme within the credit market currently is the fears over the solvency of peripheral European sovereign.
The market focus on $12bn debt roll over by Greece is myopic. Even if Greece is able to restructure $12bn of debt, the next trance would not be more than a year away, and an even greater need the following year, with a greater portion of debt the year after that. Overall, Greece has $55bn of debt maturing over the next 12 months and $195bn over next five years. To give a perspective, Greece has to roll over debt equating to 17% of its GDP (a number which is most likely overstated) over next 12 months compared with 14% for Spain, 12% for Portugal and 6% for Ireland. Total debt rollover over the next five years is c60% of GDP for Greece, 43% for Portugal, 34% for Spain and 24% for Ireland.

Yer damn skippy. Look what really happens when Greece needs the Grease,

As excerpted from It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Banking Crisis

If you think those charts look painful, imagine if the Maastricht treaty was actually respected. Our models haven’t pushed passed 80% debt to GDP, but if you were to put the treaty’s debt ceiling in you would see the very definition of contagion. The following chart represents the first order consequences of a 62% haircut on Greek debt…

Despite the fact that the only way out of this is a true default and destruction of the debt capital proffered during profligate times, TPTB will try their best to find a workaround, because what's best for the people of Greece, Portugal, Ireland and as we have already seen - Iceland, is absolute anathema to the bankers that binged on this stuff at 40x leverage ans sitting on 50% devaluations as we speak. You simply do the math: 40 x (-50%) = what kind of returns? Insolvency, first and foremost!

Generali CDS Surges To All Time Wide

Three days ago, and 30 basis point tighter, we said Assecurazioni Generali "one of Italy's largest insurers, is a highly levered windsock for Italian and other PIIGS stress, and better yet, can be played in either equity or CDS" concluding that "anyone who wishes to play the developing contagion and awakening bond vigilantism via either equity or CDS, this is without doubt the best proxy." When we wrote that the CDS was at 177 bps. Thre days later it is at 205 bps, virtually at its all time wide, which is about to trigger the buy to cover stops, and surge to a 3-handle any second, a move which will only be catalyzed if and when Tremonti bails.

Europe without Turkey

Most European citizens (for example, more than 60% in France and Germany) believe that Turkey should not become part of the European Union. There are various reasons for this opposition – some valid, some based on prejudice: Turkey is too big; Turkish migrant workers might swamp other members; Turkey has a shaky human rights record; Turkey oppresses the Kurds; Turkey hasn’t solved its problems with Greece over Cyprus.

But the main reason is surely that Turkey, a mostly Muslim country, governed by a Muslim party, is viewed as too foreign. In the words of former French President Valéry Giscard d’Estaing, one of the authors of the EU Constitution, “Turkey is not a European country.”

This is hard to take for members of the secular, Westernized Turkish elite, who have spent decades, if not longer, trying to prove their European bona fides. As one highly educated Turk, working for an international organization, put it to me recently: “We play football with them, sing songs with them on TV, do business with them, improved our human rights, and democratized our politics. We do everything they ask us to do, and still they don’t want us.”

That’s right, said another Turk within earshot, a fluent English speaker who spent much time in London, worked for NGOs promoting human rights, and was jailed in the 1980’s for opposing the military regime: “I hate Europe. I’m not European, and who needs Europe, anyway?”

Good question. While the Greek crisis is tearing at the seams of the eurozone, the Turkish economy is booming. To be sure, “Europe” was for many years a symbol, not just of wealth, but also of liberal politics, open societies, and human rights. And Turkish society has benefited greatly from its attempt – not yet perfect, not yet complete – to come up to European standards.

But more and more Europeans are disillusioned with the Union. Far from being a model of democracy, the EU is associated with an arrogant, out-of-touch mandarinate that issues rules and edicts with paternalistic and highhanded disregard for ordinary citizens. And some of its new members – Romania, Bulgaria, and Hungary, for example – are not exactly paragons of open liberal democracy.

So, if Europeans don’t even believe in their own union, why should Turkey wish to join it? In fact, the woman who protested that she hated Europe would still like very much to see Turkey in the EU. Her venom was that of a spurned lover.

Members of Turkey’s secular, pro-European elite, governing almost continuously since Kemal Atatürk founded the republic in 1923, are now being squeezed from two directions. Obstructed by the EU, they are also being pushed from their positions of privilege by a new elite that is more provincial, more religious, and less liberal, but not necessarily less democratic – a cohort personified by the highly popular prime minister, Recep Tayyip Erdoğan.

For these Westernized Turks, acceptance by the EU represents a lifeline against the currents of Islamic populism that Erdoğan represents. And they need encouragement, for Erdoğan’s Islamists may be democratic, but the secularists, on the whole, are more liberal.

But the old privileged elite is not the only group in Turkey that stands to gain from being part of Europe. Minorities do well in empires, especially benevolent empires. Like the Catalans or the Scots, the Kurds in Turkey are in favor of EU membership, because it offers a refuge from their own country’s majority.

The sheer size of Turkey, and its population, worries Europeans, with some reason. But this fear is probably exaggerated. Now that the Turkish economy is thriving, there will be less reason for poor Turks to seek work in other countries, let alone “swamp” them. And if the EU’s hugely expanded membership were to stand in the way of a future federal state, this might not be such a bad thing. In any case, the addition of Turkey would hardly make the crucial difference.

From the perspective of the Western-minded Turks, the pride of European membership is perhaps less important than the pain of rejection. But the same goes for the Europeans. If the most Westernized, most modern, most democratic republic in the Islamic world were to be soured by anti-European resentment, this could not be a good outcome for the West – or, indeed, for the rest of the world.

Turkey is in a good position to guide other Muslim countries in a more liberal-democratic direction. Moreover, with a real prospect of joining Europe, Turkey would be better placed to defuse actual and potential tensions between Europe and the Middle East. Without Turkey, EU involvement in the Middle East still looks like Western imperialism.

The prospect of EU membership for Turkey would also dispel the outdated notion that Europe stands for Christendom. Christian religions certainly helped to shape European civilization. But not all European citizens are practicing Christians. Many are not Christians at all.

If a large democracy, with a majority Muslim population, can join the EU, it will be easier to accept French, British, Dutch, or German Muslims as fellow Europeans, too. Those who believe that common interests and liberal institutions should define the EU would gain by this acceptance. Those who seek a European identity based on culture and faith will resist it.

Alas, at this time of economic crisis, growing nationalism, and inward-looking populism, the chances of a Muslim country becoming a member of the EU are slim, to say the least. Such a process cannot be forced on people. To insist on it, against the wishes of most European citizens, would smack of precisely the kind of undemocratic paternalism that has turned many Europeans against the EU already.

But the majority is not always right. And times might change. Then again, we might live to regret that times did not change fast enough.

Ian Buruma is Professor of Democracy and Human Rights at Bard College, and the author of Taming the Gods: Religion and Democracy on Three Continents.

UniCredit Stock Halted After Plunge As Fresh Wave Of Italian Fears Emerges

Another day, another implosion in Italy, this time focusing on core bank UniCredit, which earlier dropped by 6.5% resulting in a stock halt, only to reopen just modestly higher. There was no immediate catalyst, just more of the same: rumors that FinMin Tremonti is resigning, especially following the arrest of Marco Milanese which indicates the fallout is imminent (see below), rumors that Italian banks are failing stress tests, rumors that Italy has the most exposure to Greece, and other generalized fears which today coalesced around the bank that was the most active today on the European version of Sigma X.In other news, 2 Year government spreads are once again surging as GDP-weighted EU sovereign risk is at fresh all time highs (probably to make company to the Dow Jones Transportation index).

UniCredit stock plunging:

Most active Goldman's European dark pool:

2 Year spread moves this week:

And from Reuters on the Milanese affair, explaining why Tremonti is about to go, pushing the Italy domino over:
Italian Prime Minister Silvio Berlusconi declared on Friday he would not run again when his term expires in 2013, as fresh squabbling hit his government and his economy minister was drawn into a corruption investigation.

In an interview with the daily La Repubblica, Berlusconi repeated remarks that he has made on a number of occasions in recent months, saying that he would not run again and nominating Justice Minister Angelino Alfano as his preferred successor.

He also made disparaging comments about Economy Minister Giulio Tremonti, whose position has been weakened by disputes with other ministers and who came under pressure on Friday after the arrest of one of his closest associates.

"If I could, I would give it up now," Berlusconi was quoted as saying by the newspaper, one of his fiercest media critics. "I am not resigning ... but one could want to."

The problems facing Tremonti, widely credited with shielding Italy from the crisis through his rigid insistence on deficit-cutting measures, grew after Naples prosecutors filed a request for the arrest of his former adviser Marco Milanese on corruption charges.

Tremonti, who until Thursday night used to stay in a house belonging to Milanese for part of each week when he was working in Rome, issued a statement saying he had moved out after magistrates raised the graft allegations.

The fresh troubles for the government came as pressure on Italy, one of the world's most heavily-indebted countries, mounted on financial markets already on high alert over the escalating euro debt crisis.

The premium investors demand to buy Italian debt rather than benchmark German bonds widened to its largest since the introduction of the euro more than a decade ago.

See the original article >>

Prices for Rare Earth Metals Will Continue to Soar with China's Monopoly Intact

By David Zeiler

The discovery of a massive trove of rare earth metals at the bottom of the Pacific Ocean last week triggered a fleeting hope that China's monopoly on the materials would be broken.

Unfortunately, the discovery may not have the impact many had hoped, which means prices for rare earth metals will continue to soar. That's bad news for countries like the United States and Japan, which count on the scarce materials for high-tech industries.

Developed countries require rare earths to manufacture a wide range of high-tech products, including flat-panel displays, computers, hybrid car batteries, cell phones, solar panels and some advanced weapons systems.

For instance, there are more than 50 pounds of rare earth metals under the hood of a Toyota Motor Corp. (NYSE ADR: TM) Prius. Terbium can cut the electricity demand of lights by up to 80% and fractions of dysprosium can significantly reduce the weight of magnets in electric motors.

But China, which produces 97% of the world's rare earth metals, has drastically reduced its exports over the past several years, driving prices skyward.

Citing "environmental protection," China cut its rare earth exports to just 30,259 metric tons in 2010 from 67,521 metric tons in 2005.

That has caused runaway price increases for many of the 17 metals.

Over the past year dysprosium, used in specialized magnets, shot up from $300 per kilogram to $1,900 per kilogram and even higher. Neodymium has spiked to $450 per kilogram from $45 per kilogram late last year.

The Market Vectors Rare Earth Metals ETF (NYSE: REMX) is up 7.25% year-to-date and 32% over the past 12 months, as a result.

That's why many analysts - and Western companies - breathed a sigh of relief this week when the World Trade Organization (WTO) ruled that China's strict export policies on certain raw materials such as manganese, silicon carbide and yellow phosphorus, had broken global trade rules.

Although the WTO ruling did not apply to rare earth metals, most expect China to reconsider those export policies as a result of the decision.

That ruling was followed by the deep-sea discovery, which was made by Japanese scientists who found huge deposits of rare earth metals in the Pacific.

"The deposits have a heavy concentration of rare earths. Just one square kilometer [0.4 square mile] of deposits will be able to provide one-fifth of the current global annual consumption," Yasuhiro Kato, the University of Tokyo associate professor of earth science who led the team, told Reuters.

Kato estimated the rare earth deposits he discovered equal about ten times that of known global reserves. The metals were found in 78 locations in international waters east and west of Hawaii as well as east of Tahiti.

"Sea mud can be brought up to ships and we can extract rare earths right there using simple acid leaching," Kato said. "Using diluted acid, the process is fast, and within a few hours we can extract 80-90% of rare earths from the mud."

However, the mud containing the rare earth deposits lies in deep parts of the Pacific - under 11,500 to 20,000 feet of water - a daunting challenge Kato did not address.

Many analysts believe that finding a practical way to extract the metals at those depths would take years, if not decades. And the costs could be prohibitive, making mining economically unfeasible.

"Japan will need to build a giant set of SCUBA gear for Godzilla to use while scraping this stuff off the bottom, because there is zero chance they will be building any mines off the coast of Hawaii any time soon," said Money Morning Contributing Writer Jack Barnes, an expert in global-macro investment trends.

"The Japanese have no choice but to look for new on-land sources," Barnes continued, acknowledging the rare earth supply constraints facing the island nation. "Japan needs to consider the Chinese model of buying physical resources and developing it themselves. Greenland comes to mind."

That means Western countries will have to look elsewhere for a savior.

With any luck, Brazil's Vale (NYSE ADR: VALE) could fill that void, as it is considering entrée into the sector.

"Vale would bring big benefits to Brazil by entering into this rare earth market and I think it's an important thing for the west as a whole." Brazil's science and technology minister, Aloizio Mercadante told the Financial Times. "It would also benefit Vale as a company,"

After lining up a possible $12 billion investment by iPhone maker Foxconn Technology Co. in April, Brazil is looking for more ways to develop its technology industry. It's introduced tax benefits for foreign companies and laid groundwork for production of semiconductors. Establishment as a major producer of rare earth minerals could go a long way towards attracting even more investment.

The Debt-Ceiling Debate: Three Federal Tax Increases That Could Save the U.S. Economy

By Martin Hutchinson

As the debt-ceiling debate escalates, U.S President Barack Obama says federal tax increases are necessary to close the U.S. budget deficit.

Although Republicans then said that tax hikes were "off the table," this statement is reminiscent of a toddler who threatens to hold his breath until he turns blue if you make him eat spinach.

Given that our elected leaders in Congress just can't seem to curb their spending addiction, the unpleasant reality is that some types of tax hikes are essentially inevitable.

Truth be told, I can show you three tax increases that should be enacted.

As a taxpayer, that statement will probably make you wince in anticipated pain.

But once I've made my case, I'm betting that the investor in you will agree that these three federal tax increases could save the U.S. economic recovery.

Let's take a look ...

Federal Tax Increases We Don't Want to See

If we ignore the debt-ceiling debate (and the Aug. 2 deadline for increasing the ceiling) for a minute, and just consider the health and welfare of the U.S. economy, we can see that there are a number of federal tax increases that would be highly counterproductive.

One example: boosting the corporate tax rate above 35%.

Except for Japan, the United States already has the highest corporate tax rate in the Organisation for Economic Co-operation and Development (OECD). Corporations don't pay much tax because they are able to keep profits overseas in tax-free jurisdictions and employ leasing and other tax breaks. It would make much more sense to lower the corporate tax rate - perhaps to 30% - and close many of the loopholes so that the "yield" (what's actually collected) is the same or perhaps even a little higher.

Similarly, it makes no sense to increase the 15% tax on dividend income. Dividends are paid by corporations out of their after-tax income. The levy on dividends - paid by the company's shareholders - means those companies actually suffer from a "double-taxation" rate of about 47%.

This encourages companies to fool around with stock options, repurchase agreements and with overpriced acquisitions, thus ripping off ordinary shareholders and reducing the economy's efficiency

The best system would be to make dividends fully tax-deductible at the corporate level - just like debt interest - and then tax them as ordinary income at the individual level. We would benefit as investors and shareholders, because it would put more money in our pocket. That would make us very hostile to tax shelters and other management gambits - which at the end of the day would very likely increase overall tax yields.

Increasing individual rates of income tax and capital gains tax is also economically inefficient, but less so.

Learning From the Laffer Curve

The Laffer Curve is a way of demonstrating the relationship between government tax revenue and tax rates. According to Arthur Laffer, tax-rate increases decrease the taxes' yield below what you would expect.

That's a very important truth. But there's a bit of a catch.

In the Laffer Curve's extreme form, where you actually get less money when you increase tax rates, it's only true at very high rates.

At lower tax rates, the Laffer Curve is much less effective. The Laffer Curve effect for increasing capital-gains tax from 15% to 20% would be modest, reducing the additional revenue only slightly below that expected by simple proportionality arithmetic.

The Laffer Curve bends at lower rates for capital gains than it does for income tax: That's why the 35% capital-gains-tax rate of the 1970s appears to have yielded less than the 28% rate that succeeded it.

We saw a similar effect in 2001, when the top income tax rate was reduced from 39.6% to 35%. The Laffer Curve offsetting revenue gain was modest.

Since 2001, however, Congress has added a Medicare surtax, and from 2014 onward there's an additional 3.8% surtax on top investment incomes.

When you include state taxes (which have also risen in many cases), high-income taxpayers are now subject to a top rate of more than 50%. At that point, the Laffer Curve effect substantially reduces the additional income from tax rate increases, though it probably does not eliminate it altogether.

That means that restoring the pre-Bush administration (II) rates on top incomes will produce much less revenue than is being predicted by the computer models that Congress is using.

And it will mess up the economy, too.

The Three Federal Tax Increases We Need to See

There is no Laffer Curve effect from closing loopholes. As an extreme case, the Republicans would like to end $6 billion in annual subsidies for ethanol producers. That will produce substantial additional revenue, including revenue from gasoline taxes as oil refiners change the mix they sell to gas stations. It will also make the economy more efficient, not less, effectively reducing a wasteful farm subsidy.

The same applies to several "tax preferences" in the tax code for individuals. The largest of these are the tax deductions for state and local taxes, home-mortgage interest, charitable contributions, health-insurance premiums and pension contributions.

federal tax increases
Of that group, the following three deductions could be eliminated - thereby serving as three tax increases that could help save the U.S. economy:

  • The tax deduction for home-mortgage interest cost $89 billion in the 12 months that end in September. It benefits mostly those living in high-cost areas: At today's interest rates the deduction on a 4.5%, $300,000 mortgage is only $13,500, barely enough to make it worth "itemizing" for those with no other major deductions. Eliminating the deduction would reduce house prices in high-cost areas, and push the wealthy into investing in productive industry - instead of in vulgar "McMansions." It should go.
  • The tax deduction for state and local taxes costs the government $38 billion. And the tax exemption on municipal-bond interest costs an additional $31 billion. I'm of two minds here: Eliminating these deductions would push people to move to lower-tax states, increasing the out-migration from California and New York - and as a New York resident, I object to this! On the other hand, the tax exemption for municipal-bond interest pushes municipal bonds into their own little market, separate from the corporate bond market. It's thus very inefficient. The federal government would save money by abolishing the exemption and paying (preferably somewhat less) money directly to the states.
  • The tax deduction for charitable contributions costs $50 billion. And various other tax privileges for charities cost the federal government an additional $50 billion or more. These are the tax preferences I would eliminate first. The idea that some Wall Street trader can tax-deduct his $1,000 charitable dinner that boosts his flashy social life is deeply offensive. Members of the super-rich set take huge advantage of this deduction, while normal people are much less able to do so. There are many charities that do great work. Unfortunately, there are just enough "charities" that are actually either scams, huge pointless bureaucracies or leftist political activism thinly disguised to conclude that the economy would hugely benefit by shrinkage of this sector. At the very least, this deduction should be limited to the 28% tax rate, so that the millionaire's charitable dinner is treated the same as the middle-class donation to his church.
The other two deductions, although even more expensive, are I think justified:

  • The health-insurance contributions deduction cost $174 billion in 2011. Eliminating it would "level the playing field" between employer-provided and self-provided health insurance, which is a good thing. However, increasing the net cost of everyone's health insurance is highly unattractive - it's not as if people incur healthcare expenses for fun. I'd be in favor of a tax credit - as opposed to a tax deduction - that would "level the playing field" without impoverishing those with poor health.
  • Last, but not least, are the pension, 401(K) and IRA deductions that cost the government $120 billion. No doubt here - I would keep these: They encourage saving, which God knows the U.S. economy needs.
So if you are frustrated by everything you're reading about the debt-ceiling debate, write your congressional representative, and tell him or her: If you must increase taxes, do it by cutting out the home-mortgage and charitable deductions, other "corporate welfare" loopholes and the tax exemption for municipal-bond interest.

These increases would actually help the economy, or at worst be neutral; other federal tax increases would be damaging to this feeble recovery - some of them hugely so.

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