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.