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An awful lot of question marks are floating around financial journalism these days -- an apt symbol of how much the media really know about this stuff.
The official China Federation of Logistics & Purchasing Managers’ Index eased to 52.0 from 52.9 in April, marking the slowest pace of growth in nine months.Australia Reports Biggest GDP Drop in 20 Years
The result was below the median forecast of 52.2 in a Reuters survey of economists.
Meanwhile, a separate PMI published by HSBC and compiled by U.K. group Markit, showed headline activity at 51.6, easing from 51.8 in April, the slowest pace of growth in 10 months.
Analysts at Credit Suisse said that the Federation’s PMI showed new orders declining at a faster pace than the slowdown in the overall reading, a sign that manufacturing activity may have already peaked in the current economic cycle.
“Actual economic activity may have cooled down faster than the headline suggests,” said Credit Suisse analysts.
Its economy contracted by 1.2% in the first three months of the year, compared with the previous quarter, the latest government figures showed.That temporary pothole is about to become a Grand Canyon led by declines in housing and retail spending.
The government said flooding and cyclones in resource rich states of Queensland and Western Australia had a significant impact on growth.
Australia's economy is heavily reliant on its resources sector.
"The economy has hit a temporary pothole courtesy of the natural disasters this year," said Besa Deda of St George Bank.
A Chicago-area manufacturing gauge dropped by the largest amount in nearly two-and-half years in May, in a further sign that the rise in oil prices and the Japanese earthquake have affected activity.US Consumer Confidence Declines
The Chicago PMI fell to a reading of 56.6% in May, the lowest reading since Nov. 2009, from 67.6% in April.
While that reading is still significantly above the 50-line indicating growth, the eleven-point drop is the biggest one-month deceleration since Oct. 2008 and was worst than the 60% reading that economists polled by MarketWatch anticipated.
Indexes for production, new orders and order backlogs each dropped by double digits. Inventories jumped, which in this case is more likely an indication of unplanned gains due to a lack of sales than stocking up in anticipation of better times ahead.
The nonprofit Conference Board said its consumer-confidence index fell to 60.8 in May — the lowest reading in six months — from a revised 66 in April. Economists polled by MarketWatch had forecast an increase to 67.5.In a healthy economy the index averages 95. Currently it sits at 60.8.
Most economists were surprised by the decline. Some attributed the drop to the cost of gas, a downward spiral in housing prices, recent weakness in the economy, and even to a series of tornados and floods wracking parts of the U.S.
The expectations index, which measures the view of consumers six months out, fell to 75.2 from 83.2 last month. It’s the lowest reading since last October.
The percentage of consumers who say jobs are plentiful increased to 5.6% from 5.1% in April, although the percentage who say they are hard to get also rose slightly to 43.9%.
The consumer-confidence index remains low by historical standards. In a healthy economy, the index averages about 95 points.
Look at the figure below, and then look at it again, and again, and again. It is the most telling picture about the U.S. political economy I have ever seen.While this chart is highly interesting, Bartels apparently argues in the book that the president's party affiliation is more than merely correlated with higher average income gains across all income groups:
What it shows is the difference that the President's party affiliation makes to the distribution of income during the four years of the president's term. (The distributional outcomes are shown with one year's lag.) When a Republican president is in power, people at the top of the income distribution experience much larger real income gains than those at the bottom--a difference of 1.5 percent per year going from the bottom to the top quintile in the income distribution. The situation is reversed when a Democrat is in power: those who benefit the most are the lower income groups. If you are in the bottom quintile, the difference between having a Democratic or a Republican president in office is an income gain (or loss) of more than 2 percent per year! Strikingly, compared to Republicans, Democratic presidents generate higher income gains for all income groups (although the difference is statistically significant only for lower income groups).
Bartels shows in his book that this difference is not a statistical artifact or a fluke. It is not the result of Democrats coming to power during better economic times, or of Republicans reining in the unsustainable excesses of Democratic administrations they replace. (It turns out that the same pattern prevails even when a Republican president is succeeded by another Republican.) These numbers are real and they are the outcome of partisan differences in policy. So if you are one of those who have bought the story that income distribution is the result of pure market forces and technological changes, with politics playing no role--think again.Obviously I haven't read the book or seen Bartels' full methodology, but I'm still not convinced. Presidents don't immediately implement all their policies upon taking office. Rodrik indicates that Bartels solves this by having the distributional outcomes lag one year. But I don't think lagging the results one year is nearly enough. It's true that presidents' agendas generally get passed at the beginning of their terms, but when a piece of legislation is enacted, many of the substantive provisions that will have the greatest effects -- administrative regulations -- are still unwritten. Congress increasingly delegates significant legislative authority to the federal agencies, so the substantive impact of the policies embodied in the legislation won't be felt until after the rulemaking process has been completed. The rulemaking process is a long and drawn-out give-and-take between agencies and (usually) the industry being regulated. Only when all the administrative regulations have come into force do the President's policies truly begin to have an effect.
Rather than handing out more government subsidies, we should inject more competition into markets by allowing people to buy health-insurance policies across state lines. This would give the uninsured a broader menu of affordable options and allow companies to market national plans.Repeat after me: Forcing private health insurers to compete with a government-run single-payer option increases the level of competition. If private health insurance is truly better than a government-run single-payer option, then you should have nothing to worry about. No one will buy into the government-run option, the private health insurance market will prevail, and you can congratulate yourselves with a big round of "I told you so."
Terrence Keeley, senior managing principal at Sovereign Trends LLC and a Bloomberg Television contributing editor, discusses the outlook for additional aid to Greece from the European Union. EU officials will decide on more aid by the end of June and have ruled out a “total restructuring” of the nation’s debt, said Jean-Claude Juncker, head of the group of euro-area finance ministers. Keeley speaks with Erik Schatzker on Bloomberg Television's "InsideTrack."Key Quotes
[Bush and UK Prime Minister Gordon Brown] are setting up a joint working group which will develop plans to monitor and regulate the banking system.Basically, their plan is to set up a committee to come up with a plan. Of course, any plan that this "joint working group" would come up with would be subject to state approval. And keep in mind that this "joint working group" is only a proposal.
Mark Hulbert says that investors in U.S. treasury bonds are betting on deflation:
"The Treasury market [is huge] and its collective judgment cannot be dismissed lightly.
***
The bond market is betting that the [consumer price index] will average less than 1 percent annually over the next decade....Economists at the Cleveland Fed have devised an econometric model that estimates [how much treasury bonds are] skewed downward by . . . liquidity considerations. That model recently calculated this bias to be around 0.5 percentage point, suggesting that the true message of the bond market right now is that inflation would average around 1.4% year over the next decade.
***
The bond market is betting on deflation.
This puts into perspective the federal government's efforts in recent months to pour huge amounts of money into the financial arena. That would otherwise be quite inflationary.But not if the forces of deflation are as large as the bond market is evidently assuming them to be.And judging by the recent performance of both the bond and gold markets, it would appear as though deflation still has the upper hand."
There are good arguments for stagflation - instead of deflation.
But if the big boys are betting on deflation with their own money, that's important information.
The Chinese government has stepped up censorship of local television in a sign of the broadening of a political crackdown that has landed many dissidents in jail.Reserve Currency Requirements
China has severely clamped down on activists since February when an anonymous online appeal called for demonstrations along the lines of the “jasmine revolution” sweeping north Africa and the Middle East.
Authorities have detained scores of human rights lawyers, activists, and writers. They have also arrested Ai Weiwei, the contemporary artist.
"British or German taxpayers cannot finance the failures of others," German Economy Minister Rainer Bruederle said at the World Economic Forum in Davos, Switzerland, according to the Associated Press. "Solidarity also means everybody adheres to common rules."
France is not working with Germany or other countries on a support package for Greece which is managing to handle its problems on its own, a French government source said on Thursday. "I am not aware of a support plan. There is not a plan. We're not discussing one (with Germany or others)," the source told Reuters. "They are managing themselves. They are finding financing support on the market. There is no plan for a support plan. We are not working on one. Le Monde newspaper said earlier that euro zone countries were studying ways of helping Greece resolve its budget problems."
European officials on Friday sought to quell rumors of a pending bailout for Greece, insisting that the financially troubled nation could still manage to avoid a debt crisis on its own. The effort to allay market speculation came as investor confidence in Greek bonds fell this week to levels not seen in a decade, amid concern over the government's ability to close its gaping budget deficit and maintain financial stability.
A top European Union official said on Friday there was no risk that Greece would default or leave the euro zone and the country's finance minister said he was not aware of any bailout talks. "No, Greece will not default. Please. In the euro area, the default does not exist because with a single currency the possibility to get funding in your own currency is much bigger," Monetary Affairs Commissioner Joaquin Almunia told Bloomberg TV. "There is no bailout problems."
Asked if its problems could force Greece out of the euro zone, Almunia said: "no chance. Because it is crazy to try to solve the problems the Greek economy has outside the euro zone," he said. Almunia said euro zone ministers had prepared fiscal recommendations for Greece and other countries, to be discussed at a regular meeting at European Commission level next week, but denied there was any special EU plan to rescue Greece. "It is a normal analytical document that is written every month," he said. "We have no plan B. Plan A is on the table. It is fiscal adjustment."
The European Union will tell Greece next week to take extra measures by May 15 to shore up its finances and cut a spiralling deficit, Greek newspaper Ta Nea said Saturday, citing a draft of the recommendations. The European Commission's recommendations, due to be made public on February 3, include cutting nominal wages in the public sector and setting a ceiling for high pensions, Ta Nea said.
Under the headline "Urgent measures to be taken by 15 May 2010," the EU document will tell Greece to "cut average nominal wages, including in central government, local governments, state agencies and other public institutions." The EU will also urge Greece to introduce advance tax payments for the self-employed and possibly a tax on luxury goods, according to the document, excerpts of which were printed by Ta Nea. Most other recommendations, as reported in the paper, are already part of the Greek plan.
"The IMF stands ready to support Greece in any way we can," Mr Lipsky said. "It is a matter for the Greek authorities to decide, in collaboration with the European Union, but we are here to help if we are wanted."
I understand that in many of the conversations Mr Papandreou had [last week in Davos] with very senior, respected economists this week, he was directly advised to go to the IMF, which would be the 'cleanest solution'..... But an IMF intervention would have potentially to be channelled through European authorities, since Greece is a member of the euro.
"Moral hazard considerations suggest that the ECB will never openly support a bailout, but we doubt that Greece will be left on its own if the situation were to become critical," UniCredit analysts said. They referred to the danger that a rescue could reinforce ill-considered fiscal practices that have caused serious problems for Greece and others.
At the same time, a bail-out by the eurozone as a whole would create a monstrous moral hazard for politicians. It would only be possible if the eurozone subsequently exercised a degree of direct control over the fiscal decisions of member states. It would, in short, be the fastest route to the political union that many initially believed was a necessary condition for success.
European retail sales contracted in May to the lowest level since October 2010, driven by a “sharp drop” in Italy, Markit Economics said.Eurozone retail sales fell in May
A gauge of euro-area retail sales fell to 48.8 from 52.2 in April, London-based Markit Economics said today in a statement. The index is based on a survey of more than 1,000 executives and a reading above 50 indicates month-on-month expansion.
Italian retail sales declined at the fastest pace in 11 months in May, while monthly increases in Germany and France, the euro area’s largest economies, were the weakest in seven and three months, respectively, Markit said.
Retail sales in the Eurozone fell for the first time in three months in May, according to Markit’s latest PMI (Purchasing Managers' Index) survey. Moreover, sales were only marginally higher than one year earlier, and retailers cut both staff levels and purchasing during the month. Of the three largest euro economies covered, Italy remained the main source of weakness, while France and Germany both registered slower growth.Retail Sales by Country
Across the Eurozone as a whole, retail sales were up only slightly on a year earlier in May. This was in contrast to the trend seen in April, when retail sales grew at the fastest annual pace in nearly three years (although this partly reflected the timing of Easter in 2011 compared to 2010).
In line with the pattern for month-on-month sales trends, Germany and France registered slower annual growth of retail sales in May while Italy posted a steep fall.
In a further sign that the retail sector was contracting, the value of goods purchased by retailers fell during the month. This was the first drop in purchasing activity for seven months.
Moreover, it occurred despite a further sharp rise in average wholesale prices, suggesting a steep fall in the volume of new items bought for resale. Purchase price inflation eased slightly since April, but remained relatively sharp.
Reflecting intense cost pressures and declining sales values, retailers suffered the worst drop in gross margins for a year in May. This contributed to a decline in headcounts in the sector, the first since last November.
An article by McClatchy includes two must-read quotes on the bailout:
"I could say I told you so," said Rep. Joe Barton, R-Texas, who helped lead a revolt against GOP leaders and sunk the $700 billion plan on its first pass. "It was so open-ended and we put so little accountability into it, they can basically do whatever they want to with the money."
***John Coffee, a law professor at Columbia University in New York and adviser to Wall Street regulators, said the government missed an opportunity by taking equity stakes in banks without attaching requirements that they use the bailout funds for new loans to spur the economy.
"If we could do this all over again . . . you could have conditioned the loan (plan) on how the proceeds could be used," he said. "Some banks are still hoarding the money . . . and others simply are not interested in lending in areas where they classically lent, like construction lending, because they see a major recession coming. . . .
"Before this is over that we're going to have casinos in Las Vegas reconstituting themselves as bank holding companies" and applying for government loans, Coffee warned.
It has come to this. A year after rescuing Greece from default, Europe is staring into the abyss. The bailout has proved insufficient. Greece needs more money, and it can't borrow from private markets where it faces interest rates as high as 25 percent. There is no easy escape."Markets Failed" Says Desmond Lachman
What's called a "debt crisis" is increasingly a political and social crisis. Already, unemployment is 14.1 percent in Greece, 14.7 percent in Ireland, 11.1 percent in Portugal and 20.7 percent in Spain.
Some causes of Europe's plight are well-known: the harsh recession following the 2008-2009 financial crisis; aging populations coupled with costly welfare states. But there's also another less recognized culprit: the euro, the single currency now used by 17 countries.
Launched in 1999, it aimed to foster economic and political unity. For a while, it seemed to succeed. In the euro's first decade, jobs in countries using the common currency increased by 16 million.
It was a mirage. For starters, the euro fostered a credit bubble that led to booms in housing, borrowing and consumer spending. But one policy didn't fit all: Interest rates suited to Germany and France were too low for "periphery" countries (Greece, Ireland, Portugal and Spain).
Money poured into the periphery countries. There was a huge compression of interest rates. In 1997, rates on 10-year Greek government bonds averaged 9.8 percent compared to 5.7 percent for similar German bonds. By 2003, Greek bonds fetched 4.3 percent, just above the 4.1 percent of German bonds.
"The markets failed. All this would not have occurred if banks in Germany and France had not lent so much," says economist Desmond Lachman of the American Enterprise Institute. "It was like the U.S. housing market." Both American and European banks went overboard in relaxing credit standards.
The economic arguments that, on balance, Britain will be better off inside the currency union than outside are persuasive. The discipline of a permanently fixed exchange rate would significantly reduce the risk of a return to high inflation and create greater certainty for companies and investors. There would also be lower transaction costs. There is no doubt that a successful single currency would strengthen Europe's position on the global economic stage.Points of Failure Predicted In Advance
The opponents of the single currency do not agree. They argue that the experience of the ERM and events since Black Wednesday show that to be locked into a single currency is damaging. Exchange rates, they point out, can act as important "shock absorbers" in times of unexpected crisis. These are powerful arguments. They are most powerful when applied to some EU members - notably Spain, Portugal and Greece - whose less developed economies would make the exigencies of a single currency regime punishing, unpopular and potentially disastrous.
But this is not the condition of Britain today. In 1992 the needs of the British economy were at odds with the priorities of the Bundesbank. They were trying to control inflation, we needed to get out of recession. By contrast, in 1999 six or seven countries will find themselves at the same stage in the cycle, with very similar economic priorities. So things are likely to be different.
The potential benefits of European monetary union are questionable, the potential costs could be very serious. A successful monetary union requires that the economies joining it are broadly the same, especially in regard to their response to external and internal inflation shocks. This is not the case in Europe. Take two examples: oil and housing.Failure of the "One Size Fits Germany Policy"
The effect of a sustained, steep rise in the oil price will be very different in Germany, which is highly dependent on imported oil and gas; in France, where nuclear power is used to generate a high proportion of energy needs; and in the UK, where the North Sea sector of the economy would actually benefit. Imagine trying to set an appropriate, anti-inflationary interest rate policy for a monetary union including these three economies should the oil price double.
The housing sectors of European economies also differ, with the UK's high level of home ownership financed by variable rate mortgages not being found elsewhere. It is easy to envisage a situation where the interest rate policy of a European monetary union was entirely inappropriate for the housing sector of the UK economy.
These and other structural differences between European economies will not disappear over the next four years, nor at any time in the foreseeable future. Until they do, the economic argument against European monetary union is powerful, and far more clear cut than the political arguments for or against.
Yours faithfully,
Tony Dolphin
Chief Economist
AMP Asset Management
Thousands of demonstrators Sunday took to the streets of Casablanca, the country's largest city, in an antigovernment protest police struggled to disperse, driving into the crowd on motorcycles, armed with clubs.Protesters in Casablanca
A similar protest in the capital's twin city of Sale on Sunday also was violently disrupted, as was a demonstration in front of the Moroccan parliament Saturday.
Pressure is building on Kuwait's embattled Prime Minister Sheikh Nasser Mohammad Ahmad Sabah, who has come under fire for refusing to be questioned in parliament for allegedly misusing public funds, among other accusations.Much of the world is simmering from high unemployment, corruption, rising food prices, and austerity programs.
Around 2,000 people took to the streets of the oil-rich gulf country's capital amid tight security, chanting, "The people want to topple the head [of government]," in reference to Sheikh Nasser, according to [news agency] Agence-France Presse.
The 71-year-old Sheikh Nasser's five years as premier have been marked by turbulence and he has come under constant fire by the opposition. He has resigned six times, and he formed his seventh Cabinet a couple of weeks ago.
Kuwaiti protesters are reportedly staging new rallies next Friday that they have dubbed "Day of Departure."
In fact Spanish gross domestic product fell 0.4 percent quarter on quarter in the third quarter following a 1.1 percent drop between April and June , according to the Bank of Spain monthly bulletin. Spain's GDP also contracted 4.1 percent year on year in the quarter, after a contraction of 4.2 percent in the second three months.
'This is the least pronounced contraction since the beginning of the recession ... and this improvement is linked to state-backed measures with a temporary effect,' the bank said.
To this government stimulus effect, I would also add the net trade effect which is being felt as a result of the strong fall in imports, and the consequent closing of the current account deficit. With imports falling faster than exports (on an annual basis) the net impact is positive growth in the headline GDP number, and the Spanish CA deficit was closing very rapidly indeed in the third quarter (see chart below).
The impact of the stimulus package can also be seen in the seasonally adjusted unemployment numbers supplied to Eurostat by the Spanish Statistics Office (INE). Unemployment (which hit 19.3% in September - see chart below) has been rising continuously since mid 2007, but the sharpest increases were registered during the fourth quarter of 2008 and the first quarter of 2009. 
It is very hard to see any real difference in the trend rate of increase between the second and third quarters of 2009, and we should expect this trend job attrition rate to continue until it once more accelerates under the impact of either the government being unable to continue funding the stimulus, or the banking sector having a financial crisis (possibly induced by someone being forced into trying to sell some of the housing units they are accumulating only to discover that there are no buyers, since the market is effectively dead).
Life, Unfortunately For Spain, Is Elsewhere
But for all our preoccupations growth in 2009 is now no longer the issue. All eyes are gradually moving towards the outlook for 2010, and it is here that those little red lights have suddenly started flashing over at the European Central Bank.
And the problem is a real and growing one, since according to a series of reports which have been published during the last week, while activity in the export dependent German economy remained very fragile, the French one has really starting to hum. The first sign of this came on Tuesday, with the initial reading for the October Purchasing Manager Index which showed that while the Eurozone economy in general entered the fourth quarter on a strong note, with growth accelerating in both manufacturing and services sectors, the private sector in France started to earn alpha grades by clocking up a third successive month of accelerating growth, leaving us with the impression that France is now seeing its steepest output expansion in nearly three years.
Then on Wednesday the ECB presented its monthly bank lending data, which showed that lending to the euro area private sector shrank by an annualised 0.3 percent in September, the first such contraction since the series began in 1992. But looking a little more closely at a lending activity on a country by country basis, we find that while lending continues to contract in Spain, in France the credit cycle has turned, and indeed lending to households is now once more rising steadily (see chart below), indeed it never fell below an annual 4% rate of increase and the annualised quarterly growth rate in lending has been rising since the end of the first quarter.
That is to say, credit is once more starting to flow freely round the French economy, while here in Spain banks continue to accumulate reserves, lending generously to the government, while money for struggling small companies and for young people looking to buy homes is hard to find. What is more, if we look at the chart below (which was prepared by Dominique Barbet and Martine Borde for PNB Paribas) we will see that the stock of unsold new homes – which was in any event never very high in France, maybe 100,000 in the spring – is down by 20% as sales steadily pick up again, while here in Spain we continue to play a guessing game to decide just how many (more than a million surely) such properties there are here, and the number is growing, not declining, since real new sales to private individuals (as opposed to newly completed properties contracted two years or so ago, or exchanges between developers and banks) are almost non existent at this point. Everyone knows prices will fall further, and are waiting for them to go down.
Then on Friday we had the key piece of information, which confirmed what many of us already suspected, since Markit PMI data for October retail sales made plain the presence of very divergent trends across the Eurozone, with ever more robust growth in France contrasting with falling sales in Germany and Italy. As Jack Kennedy, economist at survey organisers Markit Economics said “While the sense of growing optimism should be treated with some caution – it appears the increase in sales was also supported by widespread discounting and the continuation of the government’s car scrappage scheme – the outperformance of France relative to Germany and Italy offers further evidence that it is France that is leading the Eurozone recovery.”
And here, with this very outperformance comes the problem, since the ECB policy rate will be set to target average eurozone inflation, which will certainly be lower than inflation in France, and possibly significantly lower. Which means the ECB policy rate will be below the one which the French economy will, in reality, need.
Between 2000 and 2008 the structural dynamics of the Eurosystem were different from now. Spain was the "exceptional student", with above-average growth, and inflation which was consistently over the Eurozone average, and for long periods above the ECB policy rate. This had the consequence, of course, that French inflation was nearly always below the average. Now things have changed. We are coming out of recession with a eurozone divided into three groups. French growth is becoming robust, while Germany and Italy are dependent on exports and just keeping their head above water. Spain, on the other hand, fails to recover and continues to contract. This is what makes the current situation critical, since starting in 2010 France will have an inflation rate over the EU average, and in all probability over the ECB interest rate. Which means that if something isn't done, and soon, to force the situation in Spain, and produce a recovery, France will have negative interest real rates during a sharp economic rebound, with all the risks that that implies.
Only last Wednesday Norway became the first western European country to raise interest rates since the start of the financial crisis after its central bank reported finding “signs of renewed growth” in the global economy. Central bankers from across the global, from Washington, to Sydney, to Delhi and to Oslo are all now busily telling us they are going to take increasing account of future accelerations in asset prices in an attempt to avoid repeating policy mistakes that are presumed to have inflated two speculative bubbles in a decade – and left the entire Spanish economy in a lamentable state. If France had its own monetary policy I have no doubt La Banque de France would be itching to follow the Norges Bank and raise rates, but there is one small problem, La Banque de France has no capacity to decide on monetary policy in this way, and herein lies the heart of what is now Europe and the ECB’s greatest dilemma.
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Economics reading © 2011 - October 2011
