As I wrote
in the last installment regarding the situation in Europe, matters are
progressing there much more quickly now as the continent sways back and forth
between financial oblivion and a nervous peace brought about by paper
promises (yes, paper promises) by central banks around the world. The purpose
of this article is not to focus on the behind the scenes of these actions
– we’ve already done that, but to examine some of the other
outlying issues that are rarely mentioned.
Here in
America, we are truly whistling past the graveyard. The financial press
cannot stumble over itself enough to constantly remind us how extravagantly
we spent money during this past week. The American shopper is back. Really? I
still point at various consumer confidence polls, personal income numbers,
and general indebtedness and wonder where the juice is coming from for all this consumer spending.
Manufactured
Metrics?
One thing
that has finally begun to see the light of day is the fact that many of our
economic metrics have been and are being manipulated for the sake of public
opinion. I’ve covered retail sales, labor market statistics, and GDP ad
nauseum in these pages. Well, yesterday zerohedge made a posting showing three more important
metrics – and the chicanery becomes even more obvious. In each case
(ADP Employment Report, Chicago PMI, and Pending Home Sales), the reported
number came in at a minimum of 4 standard deviations above the consensus.
What does this mean?
Various
media outlets, like Bloomberg, solicit predictions from economists and
economic research firms on various economic data series. They take all the
estimates and come up with a consensus forecast, which is essentially the
average of the estimates they receive. They show the consensus and the range.
Then when the actual number is reported, they show that as well. So in the
series listed above economists were either off by 4SD or else something is
seriously wrong. I think we all understand that the forecasts are never going
to be precise on any regular basis, but to miss by 4SD? You could almost
blindfold the forecasters and have them throw darts at a wall and get closer
than this.
To drive
home the significance of these events, occurrences that are 4 standard
deviations from the mean are generally considered ‘outliers’.
They are spurious type events that really have no basis in the underlying
process. Many times such observations are thrown out depending on the type of
study being done. So to have three of them occur
within a relatively short time window is a rather big deal. Big enough of a
deal that it should at least be a page 2 type news event since there is
something obviously wrong with either the forecasting methodology, the
reporting methodology – or both
The
obvious conclusion here – and zerohedge
pointed this out very eloquently – is that we’re being fed a line
of baloney and that these ‘positive’ numbers are being reported
to keep up the illusion that the economy is recovering when in fact it is
not. So, all this said, what about the cyber Monday blitz? I can tell you
this much. I have contacts at both UPS and Fedex
and they are seeing very high shipping volume right now. People are in fact
spending an awful lot of money. At this point, it appears as though a much
smaller proportion of the country is doing the majority of the spending.
We’ll see how much of this was on credit in the months to come.
It certainly doesn’t appear as though most people are even bothered by
what is going on in the Eurozone even though it affects us directly. They
seem either less bothered or less willing to admit that the movie now playing
in Europe is coming to their neighborhood theater – and sooner than
they’d like.
The Great
Liquidity Pump – Take 12
One of the
most important issues of all with regard to the Eurozone and its systemic
crisis is the prognosis for economic growth. One might wonder why that even
matters at this point since the Euro is on the ropes, banks from Paris to
Rome to Budapest are in trouble, and nobody seems to have answers. Make no
mistake about this – the Eurozone cannot be bailed out; at least not
without causing a dislocation of equal magnitude somewhere else. There have
been several mainstream economists making the TV circuit asserting that the
US could bailout Europe. Really? Many of these same people will use the
IMF/World Bank model to make the case for the bailout of the EU. Not going to
happen. Not without dislocations. What did take place is that the USFed (among others) stepped in and said it would provide
what are essentially unlimited ‘loans’ to European banks to stave
off the crisis.
Now we’re back to the coup situation I discussed last time. Is it
becoming more clear how this all works? By virtually
ignoring the prospects for economic growth in the Eurozone, the central
bankers are going to foist a tab on the people of those countries that they
will be hard pressed to get out from under for generations – if ever.
Economic growth is the one way that a country can pay off its debts. Growth,
coupled with sound fiscal behavior, creates surpluses and those surpluses can
be used to pay down debt. No economic growth means no paying down debt. The
IMF is forecasting that the Eurozone will re-enter recession in 2012. I will
assert here that the EU never left the recession that started back in late
2007. I’ve showed the data for the US; and the EU has clearly followed
suit.
Much of
the way the crisis is being handled in Europe is along the same lines as what
was done here in America back in 2008. Focus was placed largely on saving
banks whose bets had gone terribly wrong. Only cursory attention was given to
the macroeconomic picture and you can easily see what happened here. We now
have fat banks, bursting with ‘profits’ thanks to bailouts and
accounting rule changes (FASB Rule 157, etc) while
we have an economy that is still churning out foreclosed homes faster than a
broken widget machine. Trading revenue is up at the big wire houses while our
kids are paying over 10% on student loans and Mr. and Mrs. America are
shelling out an average of 14% on credit card debt. This is precisely what is
going to happen in Europe. And to make matters worse, the people of those
countries are going to be on the hook for the bill, much in the same way we
are on the hook for 2008.
And oddly
enough, the same pledges were made back on September 16 of this year. Quoting
a Bloomberg News article:
“The Bank
of England joined the US Federal Reserve, the European Central
Bank, the Swiss National Bank and the Bank of Japan on Thursday to announce
that they would flood money markets with dollars over the coming months.
The move,
on the third anniversary of the collapse of the US investment
bank Lehman Brothers, sent shares soaring in banks heavily exposed to
debt default by Greece and the other struggling members of the
17-nation Eurozone. The euro, which had been falling in recent days,
rebounded, rising roughly 1% in European trading on Thursday.
Speaking
in Washington, Christine Lagarde, the president of
the International Monetary Fund, said: “They [the banks] are getting
together and acting together. To me, that is the most important
message.”
Perhaps
the biggest untold byline of yesterday’s aberrant policy decision by
central bankers was to point out that first it was illegal for our fed to do
what it did. It has two mandates: price stability and maximum employment.
Printing untold trillions to bail out banks in the Eurozone hardly seems like
a recipe to ensure price stability to me. And they haven’t exactly done
a banner job on the employment side either. So when government figures and
policy analysts say that no taxpayer monies are being used, they are only
partially correct. In fact it is much worse than if they had simply given
over a year’s tax receipts to the ECB for the purposes of stemming the
tide.
It is not
so much your money that has been pledged to this completely unworthy
endeavor, rather it is your future labor. You will work harder, longer, and
enjoy less fruits of that labor all in the name of preserving the status quo
of a financial system that will only be back for another round of feeding
once the shock from these events has worn off.
Until Next Time,
Andrew W. Sutton, MBA
Chief Market Strategist
Sutton & Associates,
LLC
Interested in what is going on in the markets and
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