When Fun­da­men­tals No Longer Apply, Review the Fundamentals

advisoranalyst.com ^ | 4/27/2012 | Eric Sprott, David Baker

[Signalman]

This may not come as a sur­prise, but we're still not see­ing it. We're not see­ing a US recovery.

Here we are, well into 2012, and the fact remains that the US hous­ing sit­u­a­tion is still a bust. There is sim­ply no hous­ing recov­ery hap­pen­ing in the United States. US New Home Sales fell for the fourth time in a row month-overmonth in March, rep­re­sent­ing a seasonally-adjusted annual rate of 328,000, down from 353,000 in Feb­ru­ary.1 Do you know what the annual rate of New Home Sales was back in 2006? About 1.21 mil­lion.2 No recov­ery there.

Same goes for US Exist­ing Home Sales, which fell unex­pect­edly by 2.6% in March to an annual rate of 4.48 mil­lion units.3 Again — would you care to know where they were in the same month back in 2006, before the finan­cial sys­tem fell apart? Approx­i­mately 6.92 mil­lion units.4 No recov­ery there either.

Then there's unem­ploy­ment. Judg­ing by all the recent earnings-release cheer­lead­ing, March's jobs num­bers seem to have been for­got­ten, but they were plainly weak. The US Labor Depart­ment showed US hir­ing slow­ing to a mere 120,000 new jobs in March, below expec­ta­tions of 200,000+.5 That's not a recov­ery. That's sim­ply weak data.

Same goes for the most recent job­less claims num­bers, which have been run­ning above 380,000 for the last two weeks, above the 375,000 thresh­old that sup­pos­edly sig­nals future unem­ploy­ment increases.6 Again — this is not pos­i­tive data, this is weak data. How high will it have to go before the econ­o­mists admit that it's weak? 400,000? 425,000? We're ask­ing — we'd like to know.

Then there are US tax receipts, which con­tinue to point in the same direc­tion. If the US is recov­er­ing so strongly, then why are employ­ment tax receipts only up 2%? ($484 bil­lion fis­cal year-to-date as of March 2012 vs. $475 bil­lion over the same period to March 2011).7 A 2% increase is explain­able by infla­tion alone, which was last reported run­ning at 2.7% accord­ing to the Bureau of Labour Stas­tics.8 Shouldn't the tax receipts be much higher than that? Wasn't unem­ploy­ment down so far this year? As the Asso­ci­ated Press plainly states, "The unem­ploy­ment rate has fallen to 8.2% in March [2012] from 9.1% in August [2011]. Part of the drop was because peo­ple gave up look­ing for work. Peo­ple who are out of work but not look­ing for jobs aren't counted among the unem­ployed."9 Oh! Sorry,… now the num­bers make more sense. There hasn't been any net new employ­ment at all. Ques­tion: if every­one "gives up" look­ing for work next week, will the US unem­ploy­ment rate go to zero? We're ask­ing — we'd like to know.

Other eco­nomic indi­ca­tors exhibit the same down­ward momen­tum that the pun­dits are loath to acknowl­edge. For exam­ple, the Eco­nomic Cycle Research Institute's (ECRI) Weekly Lead­ing Indi­ca­tor index, which had been ris­ing from its 2011 lows ear­lier this year, has resumed its down­trend in April.10 More recently, US Durable Goods Orders were revealed to have dropped 4.2% in March, rep­re­sent­ing the largest decline since Jan­u­ary 2009.11 To top it all off, China's most recent Pur­chas­ing Man­agers Index (PMI) indi­cated that China's man­u­fac­tur­ing activ­ity has now been in con­trac­tion for six months in a row.12

Mean­while, the sit­u­a­tion in Europe con­tin­ues to worsen. There's no point in minc­ing words: Spain is a com­plete dis­as­ter. This past week, the Span­ish gov­ern­ment man­aged to pull off two sep­a­rate bond auc­tions, only to have the yield on their 10-year gov­ern­ment bond shoot right back up the moment the sec­ond auc­tion closed. Everyone's ner­vous because the Span­ish bank­ing sys­tem is up to its eye­balls in approx­i­mately €143.8 bil­lion worth of delin­quent loans, and the pri­vate sec­tor is unwill­ing to lend Span­ish banks the money to weather the poten­tial write-downs.13 As we've seen before, the real cul­prit plagu­ing the Span­ish banks is cus­tomer deposit with­drawals. It is esti­mated that €65 bil­lion of deposits left Span­ish banks this past March alone.14 Peo­ple are tak­ing their money out of the Span­ish bank­ing sys­tem, and with­out the help of the gen­er­ous Euro­pean Cen­tral Bank (ECB), the Span­ish banks would likely be in a full col­lapse today (see Fig­ure 1).15 As it stands, the Span­ish banks have now bor­rowed a mas­sive €316.3 bil­lion from the ECB in order to meet the with­drawals and main­tain the illu­sion of solvency.

Per­haps it's Euro-crisis fatigue, or maybe just plain denial, but the equity mar­kets appear unwill­ing to acknowl­edge how close we are now to yet another round of Euro­zone upheaval. Spain's econ­omy is almost five times that of Greece. Spain also has over four times the amount of externally-held nom­i­nal debt out­stand­ing.16 If the bond vig­i­lantes choose to pun­ish the Span­ish 10-year bond (cur­rently trad­ing pre­car­i­ously close to a 6% yield), we could soon be back where we were this past Sep­tem­ber, only with a prob­lem four times as large.

The rest of Europe isn't look­ing so hot either. Italy's bond mar­ket is in a sim­i­lar sit­u­a­tion to that of Spain, with the Ital­ian 10-year bond trad­ing per­ilously close to the 6%-yield thresh­old. Recent data showed the Euro­pean Pur­chas­ing Man­agers Index (PMI) falling to 47.4 in March, well below the 50 mark which sig­nals growth in indus­trial activ­ity.17 Ger­man PMI recently con­firmed this move with its April release of 46.3, down from 48.4 in March, rep­re­sent­ing the fastest rate of con­trac­tion since July 2009.18 These declines in eco­nomic activ­ity, com­bined with the aus­ter­ity mea­sures most Euro coun­tries are cur­rently attempt­ing to impose, almost guar­an­tee more printed money will be pumped into the Euro­pean bond mar­kets before the year is over. It's sim­ply a mat­ter of time.

As expected, the pow­ers that be are busy parad­ing around in prepa­ra­tion for the next round of Euro­zone panic, with the IMF using the renewed con­cerns as an oppor­tu­nity to re-establish its rel­e­vance as a fire­wall provider. The IMF most recently secured $430 bil­lion worth of new "pledges" from var­i­ous G20 mem­ber coun­tries to increase its poten­tial lend­ing capac­ity to $700 bil­lion in the event of fur­ther prob­lems in the Euro­zone.19 Not unsur­pris­ingly, the BRICS coun­tries have expressed irri­ta­tion at the dis­pro­por­tion­ate vot­ing power held by West­ern pow­ers within the IMF at the expense of them­selves and the other devel­op­ing nations. In pre­pared remarks at an IMF press con­fer­ence, Brazil's finance min­is­ter crit­i­cized the skewed quo­tas that dic­tate vot­ing power, stat­ing that, "The cal­cu­lated quota share of Lux­em­bourg is larger than the one of Argentina or South Africa… The quota share of Bel­gium is larger than that of Indone­sia and roughly three times that of Nige­ria. And the quota of Spain, amaz­ing as it may seem, is larger than the sum total of the quo­tas of all 44 sub-Saharan African coun­tries."20 This unbal­ance used to make sense when the IMF was designed to help fund ail­ing third world and devel­op­ing coun­tries through eco­nomic cri­sis. But that is clearly no longer the IMF's main purpose.

It must be dif­fi­cult for the BRICS coun­tries today. On one hand, they con­tinue to jockey for respect among the West­ern pow­ers, insist­ing on par­tic­i­pat­ing in quasi-European bailout funds like the IMF. On the other hand, they are also clearly aware of the West­ern nations' con­tin­u­ing efforts to sur­rep­ti­tiously devalue their domes­tic cur­ren­cies, and the per­ni­cious effect that has had on them as exporters and as lenders of cap­i­tal. In that vein, it was inter­est­ing to note that dur­ing the lat­est BRICS Sum­mit held this past March in New Delhi, the main topic of dis­cus­sion cen­tered on the cre­ation of the group's first offi­cial insti­tu­tion, a so-called "BRICS Bank" that would fund devel­op­ment projects and infra­struc­ture in devel­op­ing nations. Although not openly dis­cussed, reports sug­gest what they were really talk­ing about was cre­at­ing a type of BRICS cen­tral bank — an insti­tu­tion that could facil­i­tate their abil­ity to "do more busi­ness with each other in their local cur­ren­cies, to help insu­late from U.S. dol­lar fluc­tu­a­tions…"21 Given the incred­i­ble scale of west­ern cen­tral bank inter­ven­tion over the past six months, the BRICS' increas­ing frus­tra­tion with their print­ing efforts should be a given by now. The real ques­tion is what they're doing about it, and what assets they're accu­mu­lat­ing to pro­tect them­selves from the inevitable, which brings us to gold.

Although the paper gold price has been range-bound over the past month, the phys­i­cal gold mar­ket has been under­go­ing stag­ger­ing change. Ear­lier this month it was revealed that Hong Kong gold imports into China totaled nearly 40 tonnes in the month of Feb­ru­ary, rep­re­sent­ing a 13-fold increase over the same month last year (see Fig­ure 2).22 40 tonnes annu­al­ized equates to 480 tonnes per year — a mas­sive num­ber in a mar­ket that only pro­duced 2,810 tonnes of mine sup­ply in 2011.23

[jonose]

You know it is going to be bad when tax cheat Tim takes the position that the depression in Europe won’t impact on US companies. When companies like p&g are hurting, you know things aren’t going so well.

[Popman]

I just tonight put all my stock holding on the market to sell tomorrow....

I think it going to get real ugly real quick....

I lost a bunch in the 2008 crash.... I am not losing a bunch in the coming crash....when Europe starts to unravel ....

Tomorrow I move my 401 K holdings into the bond market ...

[DaxtonBrown]

I have a webpage of unfudged economic numbers, most directly from the Federal Reserve. When you cut out the Gov doublespeak, things don’t look good.
http://www.futurnamics.com/slfed.php

[RetiredTexasVet]

Probably a good time to sell. Prices are artificially pumped up at the end of the month to raise valuations for managed funds and thusly, the management fees for the operators.

[RedMDer]

Click the link. The Republic you save may be your own.