April 28, 2017

Core Eurozone Inflation Surges To 4 Year High As CPI Nears ECB Target

Mario Draghi's job just became a little more difficult, because one day after the head of the ECB surprised markets with a more dovish statement than expected stressing risks for European inflation, on Friday morning Eurostat reported that Euro zone inflation rose by more than expected to the European Central Bank's target and core inflation increased to its highest level in four years.

Inflation in the 19 countries sharing the euro was 1.9 percent year-on-year, Eurostat estimated, up from 1.5 percent in March and just short of the four-year high of 2.0 percent recorded in February. The print was also above the 1.8% consensus estimate, even though German inflation data released on Thursday which also came in hotter than expected had prepared markets for a potential stronger figure for the bloc.

The April print (released before the month is even over) was also just shy of the ECB's medium-term target for inflation of 2 percent.

Overall inflation was higher primarily because of a 7.5% rise in energy prices and of 2.2% for unprocessed food. Prices for food, alcohol and tobacco went up by 1.5% in April, slightly lower than the 1.8% figure for March. In the services sector, the largest in the euro zone economy, prices rose by 1.8 percent in April, compared with 1.0 percent in March.

Core inflation, excluding volatile prices of energy and unprocessed food and which the European Central Bank monitors even more closely, jumped to 1.2% year-on-year in April from 0.8% in March, above market expectations of 1.0 percent. The core level was at its highest level since September 2013.

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April 27, 2017

Have We Just Reached Peak Stock Market Absurdity?

Have you ever wondered how tech companies that have been losing hundreds of millions of dollars year after year can somehow be worth billions of dollars according to the stock market?  Because I run a website called “The Economic Collapse“, there are naysayers out there that take glee in mocking me by pointing out how well the stock market has been doing.  This week, the Dow is flirting with 21,000 and the Nasdaq crossed the 6,000 threshold for the first time ever.  But a lot of the “soaring stocks” that have been fueling this rally have been losing giant mountains of money every single year, and just like the first tech bubble this madness will eventually come to an end in a spectacular fiery crash in which investors will lose trillions of dollars.

Anyone that cannot see that we are in the midst of an absolutely insane stock market bubble simply does not understand economics.  Every valuation indicator that you can possibly point to says that we are in a bubble of epic proportions, and history teaches us that all bubbles inevitably come to an end at some point.

Earlier today, I came across an article by Graham Summers in which he persuasively argued that the price to sales ratio indicates that stock prices are far more inflated than they were just prior to the great stock market crash of 2008…

Sales cannot be gimmicked. Either money comes in the door, or it doesn’t. And if a company is caught messing around with its sales numbers, someone is going to jail.

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April 26, 2017

Feudalism And The "Algorithmic Economy"

For the sake of this essay, feudal economic models imply the idea that a very tiny segment of the society is fantastically rich while the bulk of society works hard, has few choices about the work they do, and tend to be poorly compensated for their efforts.

the dominant social system in medieval Europe, in which the nobility held lands from the Crown in exchange for military service, and vassals were in turn tenants of the nobles, while the peasants (villeins or serfs) were obliged to live on their lord’s land and give him homage, labor, and a share of the produce, notionally in exchange for military protection.

Welcome to the Algorithmic Economy, a future which uses machines to determine how effective you can be and how little they can pay you in the process.

There are no unions in this economy. There are no bosses to complain to. There are no people you can ask for redress. Because in this economy, the people doing the labor are considered the least important part of the machine and it’s best if they never communicate with someone living if it can be helped.

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April 25, 2017

The IMF Is Not Done Destroying Greece Yet

Austerity is over, proclaimed the IMF this week. And no doubt attributed that to the ‘successful’ period of ‘five years of belt tightening’ a.k.a. ‘gradual fiscal consolidation’ it has, along with its econo-religious ilk, imposed on many of the world’s people. Only, it’s not true of course. Austerity is not over. You can ask many of those same people about that. It’s certainly not true in Greece.

IMF Says Austerity Is Over

Austerity is over as governments across the rich world increased spending last year and plan to keep their wallets open for the foreseeable future. After five years of belt tightening, the IMF says the era of spending cuts that followed the financial crisis is now at an end. “Advanced economies eased their fiscal stance by one-fifth of 1pc of GDP in 2016, breaking a five-year trend of gradual fiscal consolidation,” said the IMF in its fiscal monitor.

In Greece, the government did not increase spending in 2016. Nor is the country’s era of spending cuts at an end. So did the IMF ‘forget’ about Greece? Or does it not count it as part of the rich world? Greece is a member of the EU, and the EU is absolutely part of the rich world, so that can’t be it. Something Freudian, wishful thinking perhaps?

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April 24, 2017

11 Facts That Prove That The U.S. Economy In 2017 Is In Far Worse Shape Than It Was In 2016

There is much debate about where the U.S. economy is ultimately heading, but what everybody should be able to agree on is that economic conditions are significantly worse this year than they were last year.  It is being projected that U.S. economic growth for the first quarter will be close to zero, thousands of retail stores are closing, factory output is falling, and restaurants and automakers have both fallen on very hard times.  As economic activity has slowed down, commercial and consumer bankruptcies are both rising at rates that we have not seen since the last financial crisis.  Everywhere you look there are echoes of 2008, and yet most people still seem to be in denial about what is happening.  The following are 11 facts that prove that the U.S. economy in 2017 is in far worse shape than it was in 2016…

#1 It is being projected that there will be more than 8,000 retail store closings in the United States in 2017, and that will far surpass the former peak of 6,163 store closings that we witnessed in 2008.

#2 The number of retailers that have filed for bankruptcy so far in 2017 has already surpassed the total for the entire year of 2016.

#3 So far in 2017, an astounding 49 million square feet of retail space has closed down in the United States.  At this pace, approximately 147 million square feet will be shut down by the end of the year, and that would absolutely shatter the all-time record of 115 million square feet that was shut down in 2001.

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April 21, 2017

The Amazon.com Effect: Retailers Say They’re Not Selling, but Consumers Report They Are Buying

One of the issues I keep reading about recently is the (alleged) divergence between “soft” and “hard” data.  For example, consumer sentiment as measured by the University of Michigan (and the Conference Board, and Gallup) has been making new highs since the Presidential election last November (according to Gallup, mainly fueled by a massive gain in optimism among Republicans). while “hard data,” chiefly industrial production but also including consumer spending, has failed to follow suit.

One problem with this thesis has been that manufacturing as measured by the industrial production index, turned up for five months in a row.  It turned down in March, and one good measure of how intellectually honest the commentator is, is whether they have been using a consistent measure for industrial production:

Production as a whole only fell in January and February because of utility production (warm winter in the eastern half of the US).  In March, production only rose because utility production rebounded sharply (March was actually colder than February in much of the East).

So a Doomer who was all over the decline in industrial production for the last two months should be touting its advance in March.  If the Doomer backs out utilities this month, take a look to see if they did the same thing last month — almost certainly not.
Another problem with the soft/nard data dichotomy is that online retail appears to have reached a tipping point where it is causing big damage to brick-and-mortar retailers, who are laying off thousands of employees and even shutting down completely.

I am concerned that the official real retail sales numbers might not be adequately picking up online retail:

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April 20, 2017

Banks Plan To Cut Oil Lending Even More This Year

Oil lending could go down even more

Even though the price of oil has nearly doubled from its lows printed at the beginning of last year, it seems that for many oil and gas companies, the downturn continues to weigh on operations.

According to the most recent issue of the Haynes and Boone, Borrowing Base Redeterminations Survey, conducted last quarter, around 24% of exploration and production borrowers expect to see a decrease in their borrowing base redeterminations for spring 2017. Even though the number of responses indicating a reduction in borrowing capacity has decreased dramatically since last year (down from 41% in the fall of 2016) it is notable that many sector stakeholders believe further adjustments are ahead despite the changes that have taken place over the past 12 months.

Banks Plan To Cut Oil Lending Further

163 Borrowing Base surveys were completed for the spring 2017 issue with respondents spread across the lending, producer, services and other oil and related industries. Far more borrowers believe borrowing bases will be cut this year than lenders with 27% of borrowers predicting a cut and 20% of lenders holding the same opinion.

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April 19, 2017

Goldman Pours Cold Water On Trump's Fiscal Stimulus Plan

Goldman Sachs' Chief US Political Economist Alec Phillips writes that tax reform faces a risk of failure, but tax cuts remain likely... in 2018 and investors need to stay realistic about the impact of fiscal stimulus.

President Trump’s campaign proposals initially raised expectations of several forms of fiscal stimulus, driving investor optimism on both infrastructure spending and various elements of tax reform. However, we expect only tax cuts to have a meaningful effect on growth over the next couple of years. Three risks are behind this view: tax reform failure, fiscal constraints, and delayed enactment.

Debates, delays, distractions

First, tax reform faces a real risk of failure. If Republicans pursue revenue-neutral tax reform, they are likely to encounter the same challenges they encountered in passing their health legislation. Inclusion of controversial proposals like the border-adjusted tax (BAT) or even the repeal of corporate interest expense deductibility, for example, could sink the effort. Views on these issues do not follow traditional party lines, which could easily lead to some Republican opposition (we have already seen significant opposition to the BAT, for example). With few if any Democratic lawmakers likely to vote for the tax bill, Republicans would need nearly unanimous support from their own party. Thus, while revenue-neutral tax reform might be preferable from a policy perspective, imposing this restriction would lower the odds of enactment by next year.

In light of the challenges tax reform faces, we believe that President Trump, who did not emphasize revenue-neutrality during the campaign, is likely to eventually endorse more limited reforms that result in a net tax cut. However, the size of such a cut would be limited by fiscal constraints; centrist Republican lawmakers seem especially likely to balk at large tax cuts that would eventually require deep spending cuts to maintain fiscal sustainability. Dynamic scoring and other budget accounting strategies might provide several hundred billion dollars’ worth of room for a tax cut in 10-year budget projections, but alone would allow for only a very modest cut. Our current expectation is a tax cut of $1.75tn over ten years, taking effect in 2018.

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April 18, 2017

US Restaurant Industry Suffers Worst Collapse Since 2009

What tentative hope had emerged for a rebound for the U.S. restaurant industry at the start of the year, was doused last month when in its February Restaurant Industry Snapshot, TDn2K found that "Restaurant Sales and Traffic Tumble in February" and reported that same-store sales fell -3.7% in February, with traffic declining -5.0% . It did however leave a possibility that things may turn around as a result of the prompt disbursement of withheld tax refunds in the month, which it suggested may have adversely affected sales and traffic.

Alas, that did not happen, and restaurant struggles continued in March as sales and traffic again declined year-over-year: same-store sales were down 1.1% while traffic dropped 3.4%. March results were disappointing for an industry desperately trying to reverse performance trends; with sales now negative in 11 out of the last 12 months, the longest stretch since the financial crisis. There was a modest improvement sequentially, however, and while still negative, sales improved by 2.5% points compared to February as traffic rose marginally by 1.6%.

Explaining the sequential "improvement", Victor Fernandez, executive director of insights and knowledge for TDn2K, said “March sales were expected to be somewhat better than February due in part to the catch-up of tax refunds that were initially delayed in February. In addition, the industry likely benefited from the shift in the Easter holiday, which fell in March in 2016. For the largest segments (quick service and casual dining), this holiday represents a potential loss of sales."

However, it was not enough: “The fact that sales were still negative in March given these tailwinds highlights the challenge chains have faced since the recession. Factors like restaurant oversupply and additional competition for dining occasions continue to take their toll on chain traffic.”

As TDn2K further adds, with a same-store sales decline of 1.6%, the first quarter of 2017 was the fifth consecutive quarter of negative results. The last time the industry experienced a similar period was in 2009 and the first half of 2010, as the economy began recovery following the recession. Only this time the move is in the opposite direction. 

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April 17, 2017

World's Biggest Aluminum Producer Faces Default, Warns Of "Dramatic Social Unrest" Without A Beijing Bailout

Step aside China Huishan Dairy Holdings - China's largest dairy producer which cratered last month after a negative Muddy Waters research report brought attention to a company we knew for one year was collateralizing its cows to fund stock buybacks - and make way for what may be the next Chinese megafraud.

While China Hongqiao Group may be best known for being the world's largest aluminum producer, it has in recent months featured just as prominently among short-seller reports who have accused the company of being a fraud. As the WSJ's Scott Patterson writes, questions about China Hongqiao’s finances first emerged in November, when an anonymous short seller wrote on a website called Hongqiao Exposed that the company’s profits are “too good to be true.” China Hongqiao in the March 31 statement called the report “untrue and unfounded.”

A subsequent 46-page report on Feb. 28 by Emerson Analytics, a trading firm focused on Chinese stock-market fraud, disclosed more allegations of fraud involving the Chinese commodity giant.

Emerson accused China Hongqiao of “abnormally high” profits generated by underreporting production costs and disclosing electricity expenses—one of the biggest costs for aluminum producers—as much as 40% below their true cost. Emerson said it investigated Chinese electricity costs, spoke to former China Hongqiao employees and compared the company’s costs and profits with other comparable companies.

Additionally, China Hongqiao has been more profitable than some Chinese competitors. For instance, China Hongqiao earned an average operating profit margin of 27% in the past five years, compared with minus-1.7% for state-owned Aluminum Corp. of China , known as Chalco, and 5.9% for Alcoa, according to FactSet. “People were always skeptical about how they managed to be more profitable than their peers,” said Sandra Chow, a credit analyst at CreditSights.

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April 14, 2017

Big US Banks Make Laughable Excuses for Preserving Failed Universal Bank Model

In today’s lead story at the Financial Times, Big US banks defy calls that they should be broken up, American megabanks make clear that they don’t think much of the financial savvy of investors or the business press. In quarterly earning calls, bank analysts were pressing executives on the news reports that former Goldman exec, now director of the National Economic Council Gary Cohn told senators last week told a group of senators that he was in favor of Glass-Steagall break-up-the-banks style legislation.

Our comments:

Wake me up when this gets serious. Cohn made it clear that he supported a breakup bill. While Trump has also said he wanted to revive Glass-Steagall, he didn’t say that very often on the campaign trail and there are many things he did say often and pretty consistently, like questioning why the US is carrying so much of the cost of NATO, he’s either reversed himself or is now backing a weak-tea version that his base regards as a sellout, such as Trump’s promises about NAFTA. Plus any Glass-Steagall type bill gets passed only over rabid anti-regulation House Financial Services committee chairman Jeb Hensarling’s dead body.

Don’t buy Jamie Dimon’s Brooklyn Bridge. Big complicated banks are not good for investors, no matter how much banks put their hands on their hearts and try to convince you otherwise. Here was the argument, per the pink paper:

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April 13, 2017

Tech Stocks Experience Their Longest Losing Streak In 5 Years As Panic Begins To Grip The Market

S&P 500 tech stocks have now fallen for 9 days in a row.  The last time tech stocks declined for so many days in a row was in 2012, and that was the only other time in history when we have seen such a long losing streak.  As I have stated before, the post-election “Trump rally” is officially done, and the market is starting to roll over as investors begin to realize that all of the buying momentum has completely evaporated.  Tech stocks tend to be particularly volatile, and so the fact that they are starting to lead the way down should definitely be alarming to many in the investing community.

Of course it isn’t just tech stocks that are falling.  The Dow was down another 59 points on Wednesday, and the S&P 500 has closed beneath its 50 day moving average for the very first time since the election.  For those that have been waiting for a key technical signal before getting out of the market, there is one for you.

The price of gold was up again, and that is definitely not surprising in this geopolitical environment.  The closer we get to war the higher gold and silver prices will go, and if we actually get into a major conflict we will see them blast into the stratosphere.

Another key indicator that I am watching very closely is the VIX.  On Wednesday it shot up above 16 for the very first time since the day after Trump’s election victory, and many believe that it could soon go much higher.  The following is an excerpt from a CNBC report

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April 12, 2017

IMF Blames Fall of Middle Class on Globalization and Technology

This sort of orthodoxy-reinforing narrative is deeply frustrating, particularly since the research side of the IMF, unlike the program side, often does very good work.

One of the big problem of reports like this is they never consider the question that income distribution is a function of political and social arrangements, and in particular, the rights of capital versus labor. It is hardly an accident that labor stopped sharing in the benefits of productivity gains in the mid 1970s, well before globalization and technology would have played much of a role. The big culprit was loss of labor bargaining power, which become official policy due to Volcker committing the Fed to creating more labor slack to keep inflation as close to his preferred target of zero as possible, and the Reagan/Thatcher “free market” fetish.

Now in fairness, some of the problems with a report like this are the difficulty of unpacking critical issues. For instance, as we’ve discussed regularly, the amount of offshoring of jobs that took place was considerably more than was justified by profit concerns. Direct factory labor is a small percentage of wholesale product cost; savings there are offset by greater managerial, finance, and transport costs, plus higher risks. In others words, offshoring and outsourcing are often, if not mainly, a transfer from low level workers to management rather than a bona-fide plus to the business. So while it is narrowly correct to say that globalization has been a big driver of middle class losses, analyses like that are misleading because they focus on proximate causes, not ultimate causes.

This report also misses another increasingly recognized driver of inequality, which is the lack of anti-trust enforcement which in turns leads to monopoly and oligopoly rent extraction. And it ignores a huge transfer from ordinary citizens to the capital-owning classes via subsidies. The banking industry is a huge example, where as we’ve written repeatedly, its operations are purely extractive (the cost of periodic crises greatly exceeds the value of the enterprises) and it enjoys such large subsidies that it should not be regarded as private enterprise. Banks should be regulated as utilities.

Similarly, an op ed in Links today describes the magnitude of subsidies extracted by WalMart: roughly $50 per American household per year. That is equivalent to 1/4 of its 2014 pre-tax profits, and an even higher percentage of its US pretax profits.

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April 11, 2017

Rent Control Makes For Good Politics And Bad Economics

One needn’t read very much about public policy before coming across some statement to the effect that “bad economics makes good politics.” This statement is clearly untrue when good politics is defined as furthering mutually beneficial arrangements, as good economics is central to that task. But the statement is often true when good politics is defined as attracting 50%-plus-one votes on some issue or candidate, which is a much different standard, leaving plenty of room for government-imposed harms to be imposed on citizens.

Few issues reflect this divergence between “good” politics and bad economics more clearly than rent control. One of the most universally accepted propositions among economists is that rent control produces a host of adverse social consequences with its large involuntary redistribution of wealth and suppression of market prices as communicators of information and incentives. Despite that, it has been adopted as policy in many places and times — and now is a good time to revisit these issues, as efforts are currently underway in several states (including California, Oregon, Washington, and Illinois) to repeal existing statewide restrictions on rent control.

How Rent Control Destroys Value 

Rent control takes a large portion of the value of residential properties from landlords. It does so by removing owners’ rights to accept offers willingly made by potential renters. And the value of the rights involved are large. For example, after Toronto imposed rent control in 1975, affected building values fell by 40% over five years, and a decade ago, such losses were estimated at $120 million annually in Santa Monica. A law like rent control, which can take half or more of each apartment’s value from the landlord, harms them just as much taking away half of their apart­ments, even though the latter is recognized as theft. Those stripped property values are given to current tenants, whose resulting bonanzas are shown by the fact that those under strict rent control almost never leave.

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April 10, 2017

The Debt Crisis Of 2017: Once Their Vacation Ends, Congress Will Have 4 Days To Avoid A Government Shutdown On April 29

April 2017 could turn out to be one of the most important months in U.S. history that we have seen in a very long time.  On April 6th, Donald Trump attacked Syria on the 100th anniversary of the day that the U.S. officially entered World War I, and now at the end of this month we could be facing an unprecedented political crisis in Washington.  On Friday, members of Congress left town for their two week “Easter vacation”, and they won’t resume work until April 25th.  What this means is that Congress will have precisely four days when they get back to pass a bill to fund government operations or there will be a government shutdown starting on April 29th.

Up to this point, there has been very little urgency by either party to move a spending bill forward.  It is almost as if everyone is already resigned to the fact that a government shutdown will happen.  The Democrats will greatly benefit from a government shutdown because they can just blame the entire mess on the Republicans.  But for the GOP, this is essentially the equivalent of political malpractice.

To me, there is simply no way that Congress is going to be able to agree on a bill that funds the entire government in just four days.  And it turns out that this upcoming deadline comes exactly on the 100th day of Trump’s presidency

The U.S. government is poised to shut down on Day 100 of Donald Trump’s presidency, unless Congress can pass a new spending bill or a continuing resolution before the current one expires on April 28.

Since Congress is currently on a two-week recess, there will be a sense of urgency to get a new bill passed once they reconvene on April 25. Leaders in both chambers would have four days to craft a new proposal that each side can agree on and get it on the president’s desk for Trump to sign.

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