UK In Double Dip Recession

UK GDP has contracted by 0.7% in the second quarter of 2012, thus bringing the UK into a double dip recession.

However, this figure needs to be taken with a pinch of salt, ONS figures are out of date and are invariably wrong.

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Cameron's 2020 Vision - Austerity Until 2020

It appears that the world will be mired in recession until 2020.

That at least is the view of David Cameron, who says that he now expects the crisis in the eurozone to drag on for years.

When asked by The Telegraph as to whether the austerity programme would now last a decade until 2020, the Prime Minister replied:

“I think it’s going to be...this is a period for all countries, not just in Europe but I think you will see it in America too, where we have to deal with our deficits and we have to have sustainable debts. I can’t see any time soon when…the pressure will be off. 

I don’t see a time when difficult spending choices are going to go away.”

That kind of talk will not help the economy, as consumer economies are underpinned by hope/expectations of growth and prosperity.

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The Eurozone Clusterfuck

Another day in the painfully slow demise of the Eurozone, and another round of depressing economic news.

Whilst the headlines boldly claim that the Eurozone has avoided recession by achieving zero growth (as opposed to a contraction), they ignore the fact that the Greek economy contracted by 6.2% in the first quarter of 2012 (according to the Hellenic Statistical Authority).

Five years of austerity have led to a 17% contraction of the Greek economy.

The "powerhouse" of the Eurozone is the German economy which managed to grow by 0.5%, thus pulling the rest of the Eurozone up by its boot straps. However, this merely highlights the sharp economic divide between members of the Eurozone. This economic divide is not sustainable in the long run, and something has to give.

Although Greece will repay fully a Euro450M bond that matures today (after failing to reach a deal with holdout investors), the Greek people and politicians are in no mood to continue with the terms of the bailout as they now stand.

Either the Eurozone renegotiates the bailout (which Germany will not do), or Greece will leave the Eurozone.

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Greece and France Reject Austerity

Greece and France have rejected austerity.

Unfortunately, they are still broke and the markets will now reject them!

Shares in Europe's banks are now falling, as it is clear that the Eurozone is going to become ungovernable in its present form.

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EC Fiddles Whilst Europe Burns

Eurozone unemployment has hit a record high of 10.9% (17.3M people are now looking for work), with Greece clocking in at 21.7% and Spain at 24.1%.

The EC claims that it is taking the problem seriously, and will (by the end of May) publish "country specific recommendations".

Given that the rate of unemployment rose by 169K in the last month, this means that even if the recommendations were of any use (which of course they won't be) another 169K people will be out of work by then.

The EC's only real objective is to ensure that it obtains a budget increase of 6.8%, it is fiddling whilst Europe burns!

The EC is not fit for purpose, as the people of Europe are finding out to their cost.

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Britain Back in Recession?

According to figures released by the ONS, the UK is back in recession.

However, as with all figures produced by the ONS, the data needs to be taken with a pinch of salt. ONS figures are notoriously unreliable and as with all previous figures they will be revised upwards in the coming weeks, thus taking Britain out of recession.

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Shackled To Debt

Britain (like every other significant national economy) is shackled to debt.

The UK public sector net debt has risen to £1.022 Trillion, that is the equivalent to 66% of GDP and the highest since records began.

Some are questioning how this can happen, given that the politicians have launched an austerity programme designed to cut back on on debt.

The answer is simple.

The "planned" cuts and austerity drive will never cut the actual level of debt, at best the cuts will reduce the rate of increase of debt.

We are destined to be shackled to debt for the rest of our lives!

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Oh The Irony - Panic Buying Saved Britain

In a twist of irony, it seems that the panic buying of petrol caused by the government mishandling of the tanker drivers' dispute may have helped pull Britain out of recession.

Figures from the Office for National Statistics (ONS) showed a 1.8% month-on-month increase in retail sales volumes and a 3.3% year-on-year rise. The increase was above economist forecasts, and were partly helped by a 4.9% increase in petrol purchases.

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Utter Madness - EU's Demands of Greece

In a leaked document due to be published tomorrow, the EU will tell Greece to reduce "nominal unit labour costs in the business economy by 15% in 2012-2014".

Applying severe austerity measures to an economy that is already imploding is utter madness.

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Statement of The Eurogroup - Deconstructed

I have deconstructed today's statement of the Eurogroup, my comments are in blue.

30 March 2012
Statement of the Eurogroup

The stability and integrity of the Economic and Monetary Union have required swift and vigorous measures that had been implemented recently, together with further qualitative moves towards a genuine Fiscal Stability Union.

This is a lie, there have been no "swift and vigorous measures".

In order to further improve market confidence and in accordance with the agreement reached at the Euro Summit on 9 December 2011 and reiterated on 2 March 2012, we have reassessed the adequacy of the overall EFSF/ESM lending ceiling of EUR 500 billion which, given EUR200 billion long term commitments of the EFSF, currently entails a 300 billion maximum lending volume for the ESM.

We agreed on the following principles:

· The paid-in capital of the ESM will be made available more quickly than initially foreseen in the ESM Treaty, in respect of national procedures. Two tranches of capital will be paid in 2012, a first one in July, a second one by October. Another two tranches will be paid in 2013 and a final tranche in the first half of 2014. In line with the ESM Treaty, the payment of the capital will be further accelerated if needed to maintain a 15% ratio between the paid-in capital and the outstanding amount of ESM issuances.

Too little too late. Oh, and by the way, there is no real funding as yet for this or the EFSF.

· The ESM will be the main instrument to finance new programmes as from July 2012. The EFSF will, as a rule, only remain active in financing programmes that have started before that date. For a transitional period until mid-2013, it may engage in new programmes in order to ensure a full fresh lending capacity of EUR 500 billion.

· The current overall ceiling for ESM/EFSF lending, as defined in the ESM Treaty, will be raised to EUR 700 billion such that the ESM and the EFSF will be able to operate, if needed, as described above. As of mid-2013, the maximum lending volume of ESM will be EUR 500 billion. The combined lending ceiling of the ESM and the EFSF will continue to be set at EUR 700 billion.

· In addition EUR 49 billion out of the EFSM and EUR 53 billion out of the bilateral Greek loan facility have already been paid out to support current programme countries. All together the euro area is mobilising an overall firewall of approximately EUR 800 billion, more than USD 1 trillion.

Using old debts to boost the "firewall", an "interesting" form of creative accounting!

· Moreover, euro area Member States have committed to provide EUR 150 billion additional bilateral contributions to the IMF.

The euro area made substantial progress over the past 18 months to address the challenges stemming from the sovereign debt crisis.

No it hasn't.

Progress was notably made with regard to fiscal consolidation and growth enhancing structural reforms in a number of countries, the successful implementation of the adjustment programmes in Ireland and Portugal, the Greek PSI operation and the agreement on a second Greek programme.

The Greek Prime Minister has today stated that the country will need a third bailout. The Greek PSI has not gone according to schedule, and foreign law bondholders are still holding out.

Important improvements were made to improve the governance of the euro area through enhancements of the Stability and Growth Pact, the new macro-economic imbalances procedure, the Euro Plus Pact and the Fiscal Compact enshrined in the new Treaty on Stability, Cooperation and Governance in the Economic and Monetary Union.

Finally, robust firewalls have been established. This comprehensive strategy has paid off and led to a significant improvement of market conditions.

There are no robust firewalls, and market conditions have not improved.

All in all this statement is bullshit!

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UK In Double Dip Recession

The Organisation for Economic Co-operation and Development (OECD) has reported that the UK economy shrank in the first three months of the year.

Between January and March economic output fell, compared to the previous quarter, at an annual rate of -0.4%.

Given that there were three months of negative growth at the end of 2011, this means that the UK is now yet again officially in recession (ie a double dipper).

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The Financial Crisis Explained

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Hussman's, ECRI's (initial) recession warnings invalidated

- by New Deal democrat

The two primary proponents of the view that a new recession is beginning have been ECRI and John Hussman. As of now, we can say that Hussman's own metric invalidates his recession call, and that ECRI's initial recession call was also inaccurate.

While I have great respect for ECRI, when they made their initial recession call in September 2011, I wondered if they had misinterpreted a transient if violent downturn in manufacturing and consumer confidence, due mainly to the debt ceiling debacle and the consequent downgrading of US bonds, for typical short term leading indicators of recession. We can now say that it indeed appears to have been the case.

ECRI issued its private recession warning to clients on or about September 23, and went public with the warning on September 30. Their statement was unequivocal, Laksham Achuthan saying that recession was "imminent," and that he was

confident that the recession either began in the third quarter, which ends today, or will begin in the fourth quarter....

"We may be in a recession today already, or it may start in the next month or two."

[CNBC video with quotation embedded here.]

Achuthan also made it clear that he was relying not on GDP, but rather on the traditional NBER standards for determining a recession: industrial production, payrolls, real retail sales, and real personal income.

Well, the 4th quarter data is in, and here's where those four metrics stand:



All four finished 2011 at post recession highs. While certainly revisions to data are frequent, it will take some serious revising to cause enough of this data to turn negative to claim that a recession did begin by the end of last year. While subsequently ECRI backtracked and has revised the call to say a recession will begin by the end of June, their initial call must be regarded as busted.

Now let's turn to John Hussman. On August 8, 2011, John Hussman officially issued his "recession warning," saying that

the composite of economic and financial evidence we presently observe has always and only been associated with ongoing or immediately impending recessions. This is not an opinion or a viewpoint, but a fact of the data. "Always and only" is the Bayesian equivalent of "certainty"

The evidence he cited is the following composite, which he had set forth one week earlier, on August 1, 2011. The composite -- updated with my comments in italics -- is as follows:

1: Widening credit spreads: An increase over the past 6 months in either the spread between commercial paper and 3-month Treasury yields, or between the Dow Corporate Bond Index yield and 10-year Treasury yields.

NDD comment: this component is still in effect, as credit spreads have not significantly improved since falling in August, but this condition may be violated in about six weeks if there is no further deterioration.

2: Falling stock prices: S&P 500 below its level of 6 months earlier. This is not terribly unusual by itself, which is why people say that market declines have called 11 of the past 6 recessions, but falling stock prices are very important as part of the broader syndrome.

NDD comment: This condition has been violated as of one week ago. The S&P 500 is higher now than it was 6 months ago, and yesterday came within a hair of a 6 month high.

3: Weak ISM Purchasing Managers Index: PMI below 50, or,

3: (alternate): Moderating ISM and employment growth: PMI below 54, coupled with slowing employment growth: either total nonfarm employment growth below 1.3% over the preceding year (this is a figure that Marty Zweig noted in a Barron's piece many years ago), or an unemployment rate up 0.4% or more from its 12-month low.

NDD comment: This condition has also been violated as of the January ISM report of 54.1. If January nonfarm payrolls exceed 122,000, there will be a second violation as payroll growth will be more than 1.3% YoY. The unemployment rate has fallen by 1/2% in the last half year.

4: Moderate or flat yield curve: 10-year Treasury yield no more than 2.5% above 3-month Treasury yields if condition 3 is in effect, or any difference of less than 3.1% if 3(alternate) is in effect (again, this criterion doesn't create a strong risk of recession in and of itself).

NDD comment: This condition is still in effect. Of course, it was also in effect during most of the 1930's 10% YoY New Deal expansion, the entire 1940's, and the start of the 1950's -- coinciding with the strongest growth of the last 100 years.

Now, it's possible that there are differing levels for these 4 metrics signaling "recovery" for Hussman vs. their "recession" signals as claimed above, but if so Hussman should explain what those different recovery levels are. Otherwise, as of now, two of the four necessary metrics metrics making up his composite based on which he predicted an "imminent recesson" 6 months ago have been violated. Thus the original basis for his recession warning is also no longer valid.

As for the immediate future, the simple question is: can you really have a recession when housing (permits close to 3 year highs) and cars (sales at 3 1/2 year highs) won't play along? On a related note, this morning's initial jobless claims number of 367,000 was the first week not affected by seasonality, and tells us that the recent drop was very real. If the relationship between initial jobless claims numbers and payrolls for this recovery continues to hold, then we should expect January's payrolls report tomorrow to be similar to December's number -- generally, somewhere in the vicinity of +200,000.

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The Dangers of Skyscrapers

Forget charts, chicken entrails and other passe means of trying to predict economic downturns; instead look towards the sky, and the skyscrapers being built.

That at least is the conclusion drawn by Barclays Capital, which has concluded that the construction of skyscrapers heralds financial collapse.

To justify their theory, Barclays note that New York's Equitable Life building, was finished in 1873 during a 5 year recession and that the Empire State Building coincided with the Great Depression.

Chicago's Willis Tower built in 1974, heralded the oil shock. Malaysia's Petronas Towers were completed in 1997 at the time of the Asian financial crisis, whilst the Burj Khalifa in Dubai was finished at the time the Dubai property market fell over.

Barclays now warn that China, currently building 53% of the world's skyscrapers, may face economic problems as could India (currently building 14).

Closer to home, we have The Shard in London!

It may well be that skyscrapers herald economic problems. However, it is not the skyscraper itself that causes the problems but the hubris and egos that cause them to be built.

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The Abyss

Starting the week as it will most surely go on, the OECD has given an urgent warning that Europe, and by definition the global economy, is standing on the edge of the abyss.

The OECD stated that the failure of EU leaders to stem the crisis could "massively escalate economic disruption" and end in "highly devastating outcomes".

"The euro area crisis represents the key risk to the world economy at present."

Needless to say, the Eurozone seems determined to dig its (and the global economy's) own grave, and continues to sow the seeds of confusion and despair.

Die Welt reports that Germany is considering issuing joint 'elite bonds' with five fellow AAA nations. That of course means the creation of a two speed Eurozone. Needless to say the German government has issued a hasty denial of the plan.

Which, given that France may well lose its AAA rating, is doubtless welcome news for the French (assuming that is, the Germans are being truthful in their denial).

Meanwhile in Washington, Barack Obama will today meet European Council president Herman Van Rompuy and European Commission president José Manuel Barroso at the annual EU-US summit.

Good luck with that then!

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Eurozone Descends Into Chaos

Yesterday I wrote that Sunday's EU Summit to save the Euro had been cancelled.

The Eurozone "heavyweights" (Germany and France) claim that is not true.

A statement released by the Elysee Palace said that Nicolas Sarkozy and Angela Merkel will meet to discuss their "ambitious and comprehensive response" to the crisis ahead of the European Council summit on Sunday.

So it's not been cancelled then?

Ahem, actually it has been postponed to (apparently) Wednesday, the statement added that resolutions would be "finally adopted" at a "second meeting no later than Wednesday".

In other words the meeting on Sunday is to save face, and to talk about a future meeting (the exact date of which is not yet known).

This is not "leadership", this is not "a plan".

Learn this:

- There is no plan
- There never was a plan
- There never will be a plan

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Is This a Plan?

According to Robert Peston:

"The European Banking Authority is proposing that eurozone banks should hold capital equivalent to between 9% and 10% of their risk-weighted assets, on a Basel 2.5 basis, with sovereign debt in trading books and banking books marked down to market prices."

He estimates that this will cost around £200BN. However, both France and Germany appear to be behind the "plan".

The question is, given the amount of lies and rumours spread by the Eurozone "leaders" in order to push up the markets, is this a plan or not?

That all depends on whether there is genuine agreement between France and Germany over this, and what they then actually do to implement it.

For instance, were they to allow banks to achieve the improved capital ratios by reducing the size of their balance sheets then this would have disastrous consequences for lending just at a time when Europe needs to haul itself out of recession.

In essence, if it really is a plan it may not be a very good one.

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An Honest Man - Alessio Rastani

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Dark Clouds

Despite the announcement by the Fed of Operation Twist, where it will buy $400BN in 6-year to 30-year Treasurys by June 2012 and over the same period sell $400BN of Treasurys maturing in 3 years or less, markets are in free fall.

For why?

The inclusion of more 30-year bonds than expected means that the Fed wants to keep very long-term rates lower for a long period. This means that the Fed views America's economic problems as being long term (they rubbed salt into the wounds by stating that the economy has "significant downside risks").

Aside from American economic woes, the shambles that is the Eurozone continues to sap the global economy.

Chris Williamson, chief economist at PMI compiler Markit, summed up the reality:

"The recovery has finished, we are now contracting. 

The forward looking indicators suggest that things will deteriorate further in the coming months."

Meanwhile, has anyone seen the Greek Prime Minister George Papandreou since he abruptly turned his plane around mid air and aborted his trip to the USA?

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Trouble Ahead

The Telegraph reports that central banks and official bodies have "parked" record sums of dollars at the US Federal Reserve for safe-keeping.

For why?

It seems that they have lost confidence in the commercial banks.

Reserve funds from "official foreign accounts" have doubled since the start of 2011, with a dramatic surge since the end of July when the eurozone debt crisis spread to Italy and Spain. 

 

Whilst the amounts are (in relation to the global economy) small ($100BN), the increase serves as an indicator of problems that resemble what happened in late 2008.

To add to the indicators of problems ahead, talks between Greece and a visiting troika of international inspectors (IMF, the European Union, and the European Central Bank) were suspended today.

The talks ended abruptly this morning, as there is some disagreement over Greece's ability to meet its deficit targets.

The troika is expected to return in 10 days time.

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