Guest post by Azizonomics.
Americans are either celebrating or damning the Supreme Court’s 5-4 ruling that the individual mandate is constitutional.
I find it hard to believe that anyone believed that the Supreme Court would rule any other way. Precedent dictates that the Commerce Clause, and Federal powers of taxation are unimpeachable, and have been so since the New Deal. That’s the state of reality, and I found it puzzling that the individual mandate to purchase healthcare might be deemed unconstitutional when the collective mandate to collect taxes to purchase next-to-everything (including both healthcare and broccoli) has been considered constitutional for the best part of a century.
If America wants to overturn current legal norms America needs to elect different politicians. But with a greater and greater welfare-bound population, it seems inevitable that more and more Americans will vote themselves greater and greater quantities of free stuff.
Yet there is a bigger point to all of this, and it’s nothing to do with broccoli.
If Congress can constitutionally create a mandate for individuals to purchase healthcare, then Congress can create a mandate for individuals to purchase financial securities. Which — given the fiscal cliff that we are about to run off, and the reality that more and more sovereigns are dumping dollars and treasuries — could well be a useful weapon in keeping the Treasury’s borrowing costs low and the bread and circuses flowing.
Bill Gross on “safe” yields, Uncle Sam’s debt and the return of your money.
Tomorrow we’ll get the Third Estimate for Q1 GDP from the Bureau of Economic Analysis. Meanwhile, the Wall Street Journal’s June survey of economists was posted a couple of weeks ago, and the Federal Reserve weighed in with its GDP estimates last week. Let’s see what their various crystal balls and tea leaves are telling them about the future (download the WSJ Excel File).
First, some context: The BEA’s Second Estimate for Q1 GDP came in at 1.9 percent, a decline from Preliminary Estimate of 2.2 percent. The average GDP since the inception of quarterly GDP reporting in the late 1940s is 3.3 percent, which is nearly double the 1.7 percent 10-year moving average of GDP through the end of 2011 (illustrated here).
Of course, many of us are eager to know what the Third Estimate will be. The Briefing.com consensus is for 1.9 percent, no change. And the June WSJ survey considers Q1 history. The latest questionnaire skipped Q1 and asked about the remaining quarters of 2012 and the annual forecasts for 2012 through 2014.
Many leading indicators are pointing lower. Further on the subject of leading indicators, the mighty QE and the overvalued markets. By Hussman Funds.
In recent months, our measures of leading economic pressures have indicated the likelihood of an oncoming U.S. recession. Our view is based on the analysis of leading/coincident/lagging indicators (see Leading Indicators and the Risk of a Blindside Recession) as well as more statistical signal processing methods that extract “unobserved components” from noisy data (see the note on extracting economic signals in Do I Feel Lucky?). As Lakshman Achuthan at the ECRIhas noted on the basis of different but related evidence, the verdict has been in for a while. The interim has been little more than waiting for the coincident data to catch up to the leading evidence that is already in place.
This wait is by no means over. As Achuthan has observed, economic data such as GDP and employment data are heavily revised over time. Very often, the first real-time negative GDP print occurs about two quarters after the recession actually begins. It is only later that the data are revised to show an earlier downturn. For that reason, it’s important to pay attention to the joint action of numerous economic data points, rather than selecting any specific indicator as an “acid test.” The joint evidence suggests that the U.S. economy has entered a recession that will later be marked as having started here and now.
The following chart shows the most leading economic component (blue) that we infer from a broad composite of economic indicators. This component has a lead of several months, relative to broadly observed economic data. Importantly, even the observable data has now predictably turned down, as evidenced for example by the “surprising” weakness in the Philly Fed data last week. We expect further weakening in employment data, coupled with an abrupt dropoff in industrial production and new orders.
Guest post by Lance Roberts of Streettalk Live.
We wrote in our newsletter this past weekend that “While the market could certainly move lower in the short term, as there is currently no catalyst present to reverse the decline, it is very likely that some event will occur in the next week or two with regard to the Eurozone that will spark a rally in the markets. It will be short lived”.
Over the weekend this is precisely what happened as Spain received EU support of a financial assistance package of €100 Billion. This de facto bailout is roughly equivalent to 10% of Spain’s current GDP as compared to the $700 billion bailout in the U.S. which was 5% of GDP at that time. This was no small measure. The question remains whether this solves any longer term issues or if it simply postpones the inevitable conclusion for a while longer?
According to the de Guindos press conference, the bailout cash will go to the Fund for Orderly Bank Restructuring which is a fund set up specifically to fund insolvent banks. For Spain this means that it will be completely absorbed by the massive levels of failing real estate loans. Since the “bailout” will be a loan with better terms than the market, 3% or roughly half of the Spanish GGB’s, it will still result in a material increase in Spain’s total debt (National and European) to GDP pushing it well past 140%. Of course, therein is the real story. The bailout, in the eyes of sovereign creditors, just made the country a materially worse bet as Spain’s debt increases by up to 17% and the structure of the loan subordinates existing creditors. This is why we saw Spanish bond yields push higher after the bailout announcement was made.
So where is the money coming from. The EU announced that the sole source of cash would be the ESM (European Stability Mechanism) or the EFSF (European Financial Stability Fund). This is interesting when you consider that the ESM has yet to be ratified by Germany whose parliament has been steadfast against allowing the ESM to fund a direct bank bailout like that being done in Spain. Without German ratification of the ESM, which is highly doubtful in this case, and without having to give ESM Bonds “preferred creditor status”, the bailout will fall onto the EFSF which currently only retains about €200 billion in liquidity. However, the dilemma is that Spain’s obligation to the EFSF is about €93 Billion which is now unlikely to be contributed thereby leaving the EFSF with only about €7 Billion after the bailout is complete.
Spain is falling further into the abyss. As we have been arguing for the past months, the bail out of Spain should be the point of focus for now, not Greece. In order to understand the Spanish economy, one must understand the Spanish mentality, and this can’t be derived from financial researcher and their excel sheets. The Spanish bubble has burst, but still the country lives in great denial. This is the single most important factor prolonging the crisis. Meanwhile, the corruption is reaching new dimension, where the “clean” corruption of stealing money has evolved into a situation where the law is twisted. One of the better pieces on the great denial of the imploding Spanish economy, by El Pais.
Four years into the ever-darkening tunnel of recession, growing numbers of Spaniards are losing whatever faith they may have had in their political parties and the country’s institutions. A new survey by pollsters Metroscopia shows that for 90 percent of people, the economic crisis is far and away their most pressing concern; the same percentage also believe that they have been abandoned by politicians of all stripes, accusing them of acting out of self-interest. In just seven months, since October 2011 to May, the number of people who believe that the current political system, with all its faults, is the best that the country has known has fallen from 72 percent to 56 percent.
Multi-billion-euro bailouts to the banks who caused the mess we’re in, along with myriad recent corruption cases and an ever-worsening unemployment rate, have robbed the country’s politicians of what little credibility they may have enjoyed until the crisis kicked in in 2008, since when unemployment has risen to one in four of the workforce, and millions of families have seen their living standards fall sharply, and tens of thousands more have been made homeless. According to the International Monetary Fund, Spain is living through a lost decade, and will not recover the GDP levels of 2008 until 2018. Who is to blame, if not our politicians?
China has warned its banks of rampant illicit borrowing by steel companies, a development that underscores the financial dangers for the country as the government mulls a new stimulus effort to support the slowing economy. Some Chinese steel trading companies have borrowed excessively from banks and then used the funds to speculate on property and stocks, the bank regulator said in a directive that was seen by the Financial Times. The regulator added that banks must be more vigilant in lending to the companies. http://www.ft.com/intl/cms/s/0/12763b2c-ae29-11e1-b842-00144feabdc0.html#axzz1wnSfNRli
The Reserve Bank of India has “elbow room” to cut interest rates to boost the country’s waning growth, said Subir Gokarn, deputy central bank governor. His comments came days after India became the latest emerging market to see its once buoyant growth suffer a sharp slowdown, sparking fears that the country could face an economic crisis. The slowdown and rising inflation had lead many analysts to believe there was little room for manoeuvre from the RBI. http://www.ft.com/intl/cms/s/0/8179a5ce-ae1d-11e1-94a7-00144feabdc0.html#axzz1wnSfNRli
The Portuguese government will inject €6.6bn into three of the country’s largest banks, becoming the latest eurozone country to tap international bailout funding for an undercapitalised financial sector. Vítor Gaspar, Portuguese finance minister, said the funds would ensure that Banco Commercial Portugues, Banco BPI and state-owned Caixa Geral de Depósitos met tough new capital requirements set by the European Banking Authority. http://www.ft.com/intl/cms/s/0/a24af554-ae37-11e1-94a7-00144feabdc0.html#axzz1wnSfNRli
Asian markets edged forward on Tuesday as the heavy sell-off abated in the absence of fresh negative news, allowing investors to look ahead to forthcoming key policy meetings. A cluster of Group of Seven finance ministers and central bankers will hold a teleconference on Tuesday to discuss developments in the euro-zone, with Spain expected to be a focus of discussion. The softening in the yen helped Japan’s Nikkei, which was up 0.5% early on Tuesday. Both South Korea’s Kospi and Hong Kong’s Hang Seng Index climbed 0.8%, the China Shanghai Composite gained 0.2%, and Singapore’s Straits Times was 0.8% higher. http://online.wsj.com/article/SB10001424052702303830204577447163702975088.html?mod=WSJEurope_hpp_LEFTTopStories
Guest post by Azizonomics.
George W. Bush is back. And he’s got a plan!
From the NYT:
Two months from now, he plans to publish a book outlining strategies for economic growth. And on Tuesday, he made a rare return to Washington to promote freedom overseas.
Freedom overseas? Yes — it would be nice to be free of George W. Bush’s destructive and costly neocon agenda (and I know many people overseas agree) but sadly the current White House occupant seems to be following the same authoritarian script; Bush hit Iraq and Afghanistan, and Obama seems intent to continue expanding the wars into Pakistan and Yemen.
On the economy, let’s judge him on his record:
The Trader has written extensive articles on the problems Spain is facing. We have covered the imploding property sector, the hidden regional debt, the ever increasing unemployment and much more. In order to provide our readers objectivity, here is the latest presentation on Spain’s path toward stability, via Ministerio de Economia. The main points “responsible” for the build up of imbalances are;
Macro talk with Biderman and Schnapp.
CB: First question I have, in real time, how is the economy doing now?
MS: Our real-time data shows that economic growth is pretty flat. I would characterize it as sluggish, not going upward, but sideways. Depending on what inflation is, real growth is probably less than that. According to the government, inflation is coming down. But we think otherwise.
CB: So you’re saying despite all the money spent on stimulating this econonomy, the economy is barely growing?
MS: Yes. All of the stimulus money isn’t dealing with the problem of mal-investments. The economy needs to clear those mal investments in order for economic growth to go forward.
CB: Looking at the historic data, it seems that QE2 did actually create some inventory restocking. We did see a significant pickup in wages, salaries and activity in the first quarter of 2011. We didn’t really see much of an economic boom in terms of government numbers. We haven’t seen any real pickup as a result of Operation Twist. Is that correct?
MS: Yes. The only thing that Operation Twist has done is it seems to have depressed long-term interest rates. But despite the depression of long-term interest rates, the goal being to stimulate some sort of economic housing, hasn’t been successful. What has been successful is we did see an uptick in the stock market – in equities and in prices until about March of this year. And true to form, in the same sort of way that happened last year, once market participants realized there’s no QE. At least that’s what Chairman Bernanke was stating, then the market has turned south. Of course, current economic events in Europe are exacerbating the problem.