Recently in Economics Category

Work - wages and nations

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Willis Eschenbach is one of the more fascinating people on the web - would love to sit down to dinner with him sometime. He posted an essay about Mexican labor and really nails it. From his website:

Work Americans Won’t Do
I keep hearing that the reason that we need workers from Mexico and Central America to pick our crops is because working in the fields is “work that Americans won’t do”. I say that that sentence is chopped off in midstream.

How do I know that’s only half a sentence? Because that was the first work I ever did. I worked summers all through high school. My first job was in 1961, when I was 13 years old and weighed about 120 pounds (55 kg) soaking wet.

I just looked it up, and at the time, the Federal minimum wage in current dollars was $8.12 per hour. The California minimum wage was $9.34 per hour. Interesting, not a lot different from today.

In current money, on my first job I made two dollars and forty-four cents an hour. I worked ten hours a day, bucking hay in the fields. It was totally illegal for me to be doing the work for several reasons. First, I was too young to be working at all. Then I wasn’t being paid overtime for over eight hours per day. Plus I wasn’t making minimum wage. I thought then, and still think, that those laws were asinine. I was overjoyed to have a job. I said screw the laws, and I took every penny I earned home and gave it to my single mother.

Read the whole thing and the comments as well. Good stuff and explains a lot.

Crap - RIP Hans Rosling

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From the Beeb:

Hans Rosling: Data visionary and educator dies aged 68
Hans Rosling, a Swedish professor of global health and well-known public educator, has died aged 68, his Gapminder foundation has announced.

Mr Rosling was diagnosed with pancreatic cancer a year ago and died in Uppsala, Sweden.

He was known for lively presentations that used data and animation to explain global development in a compelling way.

His Gapminder co-founders said that they would continue to fight for "his dream of a fact-based worldview".

Here he is talking about world poverty, immigration and gumballs:

From The Times of London:

Britain has world’s top economy
Britain ended last year as the strongest of the world’s advanced economies with growth accelerating in the six months after the Brexit vote, it was revealed yesterday.

Business activity hit a 17-month high last month, meaning that the economy grew by 2.2 per cent last year — more than the six other leading nations, including the US, Germany and Japan.

Far from slowing after the referendum in June, as predicted by the Treasury and Bank of England, growth appeared to have improved. GDP grew at 0.3 per cent and 0.6 per cent in the first two quarters of last year, compared with 0.6 per cent and an estimated 0.5 per cent in the final period.

as predicted by the Treasury and Bank of England  - sounds like they need to get some new management over there. The low-level clerks are probably fine but the top-level management seems to not be able to see the forest for the trees. Someone needs to be there who doesn't live in a bubble. The data was there, they just chose to ignore it.

Time for the rest of Europe to follow and let those un-elected bureaucrats in Brussels go back to making chocolate and cheese.

More people living inside a bubble

Only this time, they are betting with (and losing) other people's money - from The Wall Street Journal:

Hedge Fund Horseman Capital Suffered Huge Loss on Trump Victory
The flagship hedge fund at Horseman Capital Management Ltd. was one of the world’s worst-performing hedge funds last year, posting a big loss in the wake of Donald Trump’s U.S. election victory.

London-based Horseman runs about $2 billion in assets. Its main $1.7 billion Global strategy fund lost 24% through Dec. 28, according to numbers sent to investors in an email and reviewed by The Wall Street Journal.

And their strategy?

Global strategy fund manager Russell Clark had been running huge bets against stocks, according to letters to investors, and was hit by the sharp rally in markets fueled by Mr. Trump’s victory.

The fund’s largest bet was against U.S. stocks, while it was also positioned for eurozone and Japanese stocks to fall, according to the fund’s latest letter to investors.

Last year’s loss, to Dec. 28, is one of the biggest in percentage terms chalked up by a hedge fund in 2016, according to data seen by the Journal. Hedge funds on average were up 2.5% last year to Dec. 29, according to data group HFR. The fund had been a top performer globally in 2015 and during the credit crisis, according to performance numbers seen by the Journal.

Horseman didn’t respond to requests for comment.

didn’t respond to requests for comment - no shit Sherlock. I would be crawling under the rug if I did not see that coming. They should have had a heads up with the Brexit vote. The people outside their boardrooms are fed up and they are making their displeasure known loudly. I wonder if anyone at the firm saw the coming Trump presidency and tried to warn the bubble-dwellers.

That was then, this is now

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The press on Trump's bringing jobs back to America - from Don Surber:

President Trump proves the press wrong again

And segueing to today:

Now the real reality check.
From the Associated Press:

Japanese electronics company Panasonic and U.S. electric car maker Tesla said Tuesday they plan to begin production of photovoltaic cells and modules at a factory in Buffalo, New York.

The two companies said they finalized an agreement calling for Tokyo-based Panasonic to pay capital costs for the manufacturing. Palo Alto, California-based Tesla made a "long-term purchase commitment" to Panasonic.

Cautionary words - the FED

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They have the power to crush our economy just in time for Donald Trump's terms in office.
From Nathan McDonald writing at Sprott Money:

Will The FED Deliberately Crash the Economy to Defeat Donald Trump?
Gold and silver have been beaten and battered with the recent FED hike rate announcement, even though it is only a pathetic 0.25% - scarcely anything that will stop the avalanche of fiat money and inflation that is plaguing the world over.

What is causing even more of a correction in precious metals is the news from Janet Yellen and her peers in the FED that states there will be three more hikes upcoming in 2017!

This is a complete reversal of the FED's past policies under President Obama, in which they have done everything possible to keep this bogus "recovery" afloat, if you can even call it that.

And the possible crash?

For years, the FED has weaved a net of confusion over the markets, acting bearish and then dovish in the same sentences. This, as I have highlighted many times in the past, has been purely to confuse the public and keep them in a constant state of unknowing.

Yet, perhaps this time is different? One thing that has changed is the fact that President-Elect Donald Trump will soon be taking office, despite the wishes of the financial overlords and elites.

This of course includes the FED and as I predicted all last year, the FED would not do anything with interest rates until the election results were concluded, not wanting to hurt the chances of Hillary Clinton winning, and not wanting to crash the economy on Obama's final stretch in office.

Now, they can act and use the FED as a weapon. The best, last hope that the elites have of defeating Donald Trump is to destroy his first four years in office.

If they are able to orchestrate a new crash in the markets, then they will be able to blame the forthcoming disaster on Donald Trump, even though its occurrence has nothing to do with him.

I believe that this is going to be their best plan of action, if they want to destroy the spirits of Trump's supporters and I believe this is exactly how they plan on bringing him down. Now, all that we can do is inform the public as best as we can, wait and see, prepare ourselves by investing in precious metals and seeing how the situation resolves itself.

Prepare for the worst, but hope for the best.

If this is what happens, their fingerprints will be all over it and it will not take President Trump long to prosecute those involved. A big show trial will convince the American people who it was that landed them into these straits.

From The Seattle Times:

Trump expected to pick billionaire investor Wilbur Ross as commerce chief
President-elect Donald Trump is expected to select as commerce secretary Wilbur Ross, a billionaire investor who became known as the “king of bankruptcy” for buying, restructuring and selling off steel-makers and other fading industrial companies, officials on the transition team said Thursday.

Makes a lot of sense - except for the 0.1% banksters, businesses are hurting and to get someone to turn things around will greatly help the economy. A bit more:

Ross, 78, an economic adviser to Trump’s campaign whose fortune is estimated by Forbes to be $2.9 billion, is aligned with Trump on trade. He says the United States must free itself from the “bondage” of “bad trade agreements,” and he has advocated threats of steep tariffs on Chinese goods. Ross, chairman of the private equity firm WL Ross & Co., has also pressed for cutting the corporate tax rate to 15 percent, from 35 percent, and reducing taxes and regulations on energy companies.

And this is not an unknown precident:

If confirmed by the Senate, Ross would succeed another wealthy campaign donor at the helm of an agency charged with promoting U.S. commercial interests and trade around the world. Penny Pritzker, President Barack Obama’s commerce secretary, is a billionaire entrepreneur who was an early financial backer of Obama and is an heiress to the Hyatt Hotels fortune.

Unlike Trump and Ross, Pritzker has been a leading proponent of forging new free-trade agreements. One of her top priorities was the completion of the Trans-Pacific Partnership, a 12-nation accord that Trump has promised to scrap.

Works for me - nice to return to the Laffer Curve. Cut the tax rate and watch the tax revenue soar.

Spotted today - from Zero Hedge:

Just Spotted In Front Of The New York Fed
Three months later, the shredders are back...

20160929-nyfed01.jpg

... and this time they are joined by a friend: a van belonging to a professional demolition and dismantling service, which incidentally is parked right in front of the NY Fed's master cargo door which among other places, leads to NY Fed's gold vault.

20160929-nyfed02.jpg

Things must be getting serious if just using BleachBit won't fix it.

I love the BleachBit comment - some wine flew out my nose. They are probably shredding the IOUs from all the gold they stole after 2008. Adults in the room NOW!

Readers will know that I follow the Baltic Dry Index as a good measure of our economic health. This is the cost to ship an intermodal container from Point A to Point B. It has been very low over the last eight years or so. If there is no demand for goods, there will be less goods shipped and the cost to ship goods will drop (lower demand for a resource means lower cost to consumer).

Peter Grant writes at Bayou Renaissance Man and also follows the economy including measurements like the Baltic Dry. He posted a great one today - long, lots of links and well worth reading. One of his commenters posted a link to railroad car traffic - this is just as bad. From Captain Capitalism:

What the Railroad Tells Us About the Economy
The economy ever since 2006 has been "Meh."
When historians and academics look back at Obama's economic performance, they'll say "meh."
We never left the recession as far as I'm concerned and with economic growth BARELY outpacing population growth our increases in standards of living has been "meh."

And since "meh" isn't exciting, I moved onto other things.

But then I hear whispers and rumors, sayings and speakings, and an increasing amount of them are about the economy. And the economy is no longer "meh" like it has been since 2008, but things are not looking too good. Oil prices are down (not just on supply concerns, but demand concerns). The Baltic index is down, showing a global slow down. And then a little birdy in the railroad biz I know said to look at rail car traffic. And 2016 it is very much down.

20160906-choochoo.jpg

Please note that they are jerking our chain a little bit - look at the Y Axis. It starts at 480 and not zero. Comparing December 2015 (estimated 480) with December 2014 (estimated 530) we see a drop of about 10% - significant but not earth shattering. Still, railroad traffic is taking a big hit and it is also a good proxy for our poxy economy.

About Hanjin shipping - close to home

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I posted yesterday about South Korean's Hanjin Shipping declared bankruptcy and is in a state of shutdown until the lawyers figure things out. There is one of their ships in limbo up north of here.

From Canada's CBC:

Giant container vessel stuck in Prince Rupert, company in receivership
One of the world's biggest shipping companies has filed for receivership — leaving one of its vessels stuck in Prince Rupert.

South Korea's Hanjin Shipping Co. Ltd. filed for bankruptcy protection today, causing chaos for thousands of customers around the world.

And north of here?

One of its ships, the 255-metre long Scarlet, entered the Port of Prince Rupert at 10 p.m. PT on August 30, and is now in an assigned anchorage.

Port spokesperson Michael Gurney said under normal circumstances, the ship would go directly to the terminal for unloading, but it has not been handled because of the uncertain situation.

And the cargo:

"Nothing's happening with any of the cargo, and this is all back to school merchandise, Christmas merchandise, beginning to come in now and unless the terminal is paid to unload the ship — and it needs to be paid by a carrier that's now entering bankruptcy — then the cargo's not going to get moved," he said.

There is about a six month lead time between the initial order, manufacture, shipping, distribution and retail for any given item. This is why Halloween stuff started appearing on shelves two months  ago and Christmas stuff will be showing up right after Halloween is over. Not knowing how long this impasse will last could drive up scarcity and therefore prices of anything coming in from Asia. If you are looking at purchasing a durable good (laptop, hard drive, television, clothing, appliance, vehicle, etc...) this fall, consider shopping for it now.

From the Washington Examiner:

Debt to reach highest level since 1950 this year
The national debt this year will jump to the highest level since 1950 relative to the size of the economy, the Congressional Budget Office reported Tuesday.

The agency projected that the debt held by the public will rise 3 percentage points to 77 percent of U.S. gross domestic product by the end of fiscal year 2016 in September.

Debt has not hit that ratio since 1950, when the government was still in the middle of paying down the debt it incurred paying for World War II.

The National Dept is approaching $20 Trillion Dollars and showing zero signs of slowing down. It was $10.6 Trillion when Obama took office.

Just to get a sense of scale for how large one trillion is, if you had one trillion dollars and spent $1,000 (One Thousand Dollars) each and every second, the money would last for a little over 31 years (31.709)

An observation - economic depression

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I was following some links down a chain of unrelated topics and ran into this Wikipedia article: Great Depression in Australia - it happened in 1929 and was in part triggered by worldwide downturn that triggered the USA depression of 1929.

So I am reading along  and come on the following:

... Australia, unlike the United States, did not embark on a significant Keynesian program of spending to recover from the Depression. Nevertheless, the Australian recovery began around 1932.

From depression to economic recovery in three years?

For giggles, I looked up the following: Great Depression in the United States

Here it is:

The market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation, plunging farm incomes, and lost opportunities for economic growth and personal advancement.

Emphasis mine - and the money quote:

The economy reached bottom in the winter of 1932–33; then came four years of very rapid growth until 1937, when the Recession of 1937 brought back 1934 levels of unemployment.

Australia, not implementing any Keynesian programs, was on the road to recovery by 1932. The stimulus that the USA implemented prolonged our downfall and created an economic bubble which ran from 1933 through 1937. The bubble burst (as bubbles must always) and we were back to square one in 1937. The depression did not fully end until 1941.

And people still think that John Maynard Keynes is a genius? It is old-school Austrian economics for me - that works. During a depression (or recession for that matter), the last thing we need is for the Government to spend money.

Just wonderful - municipal bonds

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I have my savings in municipal bonds through a mutual fund (they buy many bonds and spread the risk). Stocks are too volatile for my liking and local governments will always be issuing bonds for various projects. The earnings from these investments are exempt from Federal Income Tax. Now, Obama is seeking to change this.

From Forbes:

Ending Tax Breaks On Municipal Bonds Shifts Burden To The Rest Of Us
Better check that portfolio: the Obama administration is continuing to push for limits on the tax exemption of municipal bonds. The plan was tucked away in the President’s budget introduced in April but hasn’t attracted much public attention – until now, when it appears that the cap may actually happen.

Traditionally, municipal bonds have attracted investors because the interest income is tax exempt for federal income tax purposes. Depending on the investment, the interest income may also be exempt for state and local income tax purposes. There’s a reason for the exemption: municipal bonds are generally private investments in state and local government projects like schools, hospitals, water projects and roads and the federal government has an interest in encouraging those kinds of investments.

Here’s how it works. Suppose a local government needs money. Typically, it can: (1) cut spending; (2) raise taxes; or (3) borrow money. Since the first two options are often impossible or not palatable, borrowing money is generally the most appealing. But even in the pre-”too big to fail” bank era, banks don’t generally hand over giant checks to cities and towns that might already be struggling to pay bills. Instead, the city or town borrows money from the public with the promise to pay the loan back over time with interest. That loan is called a municipal bond.

Tax exempt:

The interest has traditionally been exempt from taxation – a tax break that dates more than 100 years. In Pollock v Farmers’ Loan & Trust Company, 157 US 429 (1895), the Supreme Court held that the federal government had no power under the Constitution to tax interest on municipal bonds.

They are talking about capping the rate at 28% - that is a lot of money! Here is the problem:

And I know what you’re thinking: who cares if the rich have to pay a little more? You should care. And here’s why.

Think back to what I said before about why we have municipal bonds in the first place: it’s to encourage private investment in public projects. Those funds are used to build our roads, improve our schools and fund our emergency responders; schools alone accounted for nearly one-third of state and local infrastructure expenditures financed by private investment over the last ten years. We should want to encourage that investment. If we don’t, go back to beginning of the piece: what are the options now? Cut spending (meaning, realistically, those projects don’t happen) or raise taxes (yes, on the rest of us).

A higher tax bill on municipal bonds means that affected investors – those than can afford to shop around – will necessarily seek out other options. They’ll look to find investments that pay out at a higher rate to make up for the higher bite. The result? Instead of money going to public projects – repairing bridges, fixing dams, funding schools – it will go to Apple. Or Netflix. Or Coca-Cola. Or Citi. Is that what we want? There are already plenty of incentives to invest in the private sector; we shouldn’t erase incentives to encourage private investment in the public sector.

The author closes with:

I know that the tax cap on municipal bond interest feels like an easy bump in revenue. But it’s far from painless. Scaling back an exemption available to taxpayers for more than 100 years won’t just result in collecting more dollars. It will alter incentives for private investors to have a stake in public projects and it will make borrowing for those projects more expensive for state and local government. That isn’t bumping revenue: it’s merely shifting it around. And it affects all of us.

My investment is just a couple hundred thousand but it is the money I live on and plan to live on for the next forty years. Taxing this - potentially at 28% - would cripple my finances. I would be forced to move to the stock market and spend a lot more time managing these funds as the market shifted.

Curious happenings to our North

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The city of Churchill, Manitoba is famous for its Polar Bear tourism. I would love to visit there and may do so in the next ten years - aurora borealis viewing too. It is also the largest port city in the Canadian Arctic and that port just closed down.

From Canada's Bell News Network:

Port of Churchill’s closure stirs calls for government intervention
For the first time since the Great Depression, Canada will soon have no deepwater link to the Arctic.

As of Aug. 8, the Port of Churchill will cease operations. While the owner – Denver-based OmniTrax – has not responded to multiple requests from BNN to confirm the shutdown, the mayor of the northern Manitoba town told Commodity News Service Canada all shipments will be suspended by the start of next week.

“There was no communication from OmniTrax at all on this decision,” said Mike Spence, mayor of the community of about 750 people, where roughly one in ten residents has historically been employed at the port. Churchill resident and port employee Joe Stover posted a photo of the layoff notice he received on Twitter earlier this week.

“The Port of Churchill just laid everyone (myself included) off,” Stover wrote in an earlier post. “[They] told us there will be no grain season this year.”

And the grain season is critical:

According to the Western Grain Elevators Association, the Canadian grain harvest this year could be as high as 74 million tonnes, which would approach the 76.8-million-tonne record set in 2014. Bumper crop expectations has only served to heighten concerns over the Port of Churchill shutting down.

Thank you increased carbon dioxide gas - it is plant food after all. Of course, all that we need to do is follow the money:

Last week, Manitoba Premier Brian Pallister revealed a secret agreement between OmniTrax and the previous NDP provincial government whereby the company received more than $800,000 from the province to help cover operating costs associated with the 2015 shipping season.

Pallister said OmniTrax shut down the port in hopes of convincing the new government to renew the deal, but the premier refused, telling reporters “I don’t respond ever to threats.”

And this:

Niki Ashton, NDP Member of Parliament for Churchill-Keewatinook Aski, launched a formal petition earlier this week calling on the federal government to re-nationalize the port. Despite a three-year-old federal-provincial task force report calling for the need to “explore new directions” for the Port of Churchill “with a greater sense of urgency,” the political appetite for action has waned.

Ottawa has been subsidizing the port since 2012 when the Canadian Wheat Board’s grain marketing monopoly was shut down. The annual payment – equivalent to $9.20 per tonne of grain shipped through the port – was scheduled to expire next year.

Business as usual - glad that there has been a change of government and that the new premier (Brian Pallister) is standing firm. A business should not be able to hold a national property for ransom.

Economist Thomas Piketty rocked the socialist world in 2013 with a very detailed tome (Capital in the Twenty-First Century) on why capitalism is not a good or humane  way to run things. Unfortunately for Mr. Piketty, the numbers have not been adding up: here, here, here, here and here and lots more if you want to Google them.

Now this paper from the International Monetary Fund

Testing Piketty’s Hypothesis on the Drivers of Income Inequality : Evidence from Panel VARs with Heterogeneous Dynamics
Thomas Piketty's Capital in the Twenty-First Century puts forth a logically consistent explanation for changes in income and wealth inequality patterns. However, while rich in data, the book provides no formal empirical testing for its theoretical causal chain. In this paper, I build a set of Panel SVAR models to check if inequality and capital share in the national income move up as the r-g gap grows. Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests. Results are robust to several alternative estimates of r-g.

Somehow, I do not think that you get published through the International Monetary Fund if you are a slouch as an economist. Piketty was a great rallying point for socialists and money-redistributionists but - like I said earlier - the numbers simply do not add up. Capitalism rocks, everything else fails repeatedly (see: Venezuela, Zimbabwe, U.S.S.R. and Mao's China to start).

An economic indicator - restaurants

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Sobering look at restaurant economy from US News and World Report:

Restaurant Recession Could Signal Tough Times for U.S. Economy
Analysts are forecasting a "restaurant recession" in the U.S., which is bad news for America's food and drink establishments and potentially even worse news for the economy at large.

Paul Westra, a senior research analyst at Stifel Financial Corp., said in a research note Tuesday that he'd turned "decidedly bearish" on the restaurant industry, downgrading Stifel's stance on 11 different restaurant stocks, including Chipotle Mexican Grill, Panera Bread and Cheesecake Factory.

He and his colleagues now "confidently believe" that the weak restaurant consumer spending seen in the second quarter of the year "reflects the start of a U.S. restaurant recession."

"The catalyst for the current weak pre-recessionary restaurant spending trend is likely multifaceted – U.S. politics, terrorism, social unrest, global geopolitics, economic uncertainty," Westra said. "But, if history is a guide, we warn investors that restaurant-industry sales tend to be the 'canary that lays the recessionary egg.'"

Makes perfect sense - money gets tight and people do not eat out as often. Restaurants are a luxury expense, not a necessity. Indicators like this are fascinating to follow - I like the Baltic Dry index for manufacturing (here, here, here and here) - it was down below 300 in February of this year - a post Christmas slump. It is now at 679 but trending downward. Historically, it has "lived" around the 1,000 mark trending higher seasonally.

About those tech jobs - Seagate

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More and more jobs are being outsourced to foreign shops or to immegrants coming here and working for lower wages - the H-1B visa.

Case in point - Segate - from Zero Hedge:

Seagate Fires 6,500, Or 14% Of Workforce, Stock Soars
Moments ago computer-memory specialist Seagate, in a preliminary financial report, announced that its Q4 revenue would be $2.65 billion, beating expectations of $2.34 billion, and up from the $2.3 billion guidance given previously. The company also reported gross margin of 25% and non-GAAP gross margin of approximately 25.8% for the fiscal fourth quarter 2016, up from the previous 23% forecast.

Good news, and the stock is up 12% after hours as a result.

The only problem is that when companies preannounce good news up front, there is usually some not so good news hidden toward the back. And sure enough, for a company which is guiding higher, the narrative promptly fell apart when we read that for STX management the future is so bright that it just had to lay off 14% of it workforce, or some 6,500 people. This too was a "beat" to expectations: in late June, the company announced it planned to cut "only" 1,600 jobs as a cost-saving measure.

And yet, Obama says the economy is improving - over what? Venezuela?

Socialism works again - France

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The idea is a popular one with the innumerate but it has never worked - from the UK Independent:

'France is totally bankrupt': French jobs minister Michel Sapin embarrasses Francois Hollande with shocking statement on state of the country's economy
France’s employment minister Michel Sapin has admitted the country is “totally bankrupt”.

The unexpected news came during a radio interview yesterday and is thought to have sent the country’s business leaders into a state of shock.

“There is a state but it is a totally bankrupt state,” Mr Sapin said. “That is why we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective.”

Mr Sapin’s “totally bankrupt” statement is likely to cause huge embarrassment for President Francois Hollande, who will be left to undo the potential damage to his socialist government’s reputation.

It also calls into further question Hollande’s controversial “tax and spend” policies that have seen numerous entrepreneurs and high profile celebrities leave the country.

Never works as planned. The makers either leave or go Galt and the takers max out the safety nets and then turn around and demand even more.

From Bloomberg:

World’s 400 Richest People Lose $127 Billion on Brexit
The world’s 400 richest people lost $127.4 billion Friday as global equity markets reeled from the news that British voters elected to leave the European Union. The billionaires lost 3.2 percent of their total net worth, bringing the combined sum to $3.9 trillion, according to the Bloomberg Billionaires Index. The biggest decline belonged to Europe’s richest person, Amancio Ortega, who lost more than $6 billion, while nine others dropped more than $1 billion, including Bill Gates, Jeff Bezos and Gerald Cavendish Grosvenor, the wealthiest person in the U.K.

I am reminded of this wonderful diagram from the folks at Neuter the Debt:

20160620-debt.jpg

We need to keep things in perspective...

The Baltic Dry index

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I have long been a fan of the Baltic Dry index when looking at the worlds economic health. It is the cost to ship bulk goods from one place to another. The better the economy, the more goods get shipped so it serves as a good proxy. Some of my posts: here, here, here and here.

Now this from The New Yorker:

THE SURPRISING RELEVANCE OF THE BALTIC DRY INDEX
On January 11th of this year, online financial circles lit up with dire news. “Commerce between Europe and North America has literally come to a halt,” one blogger wrote. “For the first time in known history, not one cargo ship is in-transit in the North Atlantic between Europe and North America. . . . It is a horrific economic sign; proof that commerce is literally stopped.” Although the Web site that first broadcast this information is prone to hysteria—there are, in fact, many cargo ships on the world’s oceans, in plain sight—more pessimistic market experts, such as Zero Hedge and the Dollar Vigilante, eagerly quoted it for their millions of readers. The story fit neatly into a narrative: the global economy, despite outward signs that it has clawed its way back from recession, is a small step away from an enormous crash.

But if sober-minded, mainstream economists were tempted to dismiss this ostensible trade calamity outright, they found that they couldn’t. The index that inspired these warnings, known as the Baltic Dry Index, was until recently viewed as a credible, if obscure, source—one that has accurately signalled prior systemic failures, and one that economists of all stripes have routinely consulted as a trusted proxy for trade activity. Based in London, this gauge reflects the rates that freight carriers charge to haul basic, solid raw materials, such as iron ore, coal, cement, and grain. As a daily composite of the tonnage fees on popular seagoing routes, the B.D.I. essentially mirrors supply and demand at the most elementary level. A decrease usually means that shipping prices and commodities sales are dropping (the latter because shippers are competing over fewer consignments). Shipping is a direct indicator of whether people want goods, and softness in shipping prices is therefore a sign of weakness in manufacturing and construction.

In January, when the B.D.I. surfaced as a heated topic in certain geeky economic corners of the Internet, it had fallen to a record low of 429, an eighty-per-cent decline from December, 2013, and far below its record high, in May, 2008, of 11,793. It continued to plunge for another month, hitting a nadir of 291 on February 12th. The index has rebounded a little since then, but not enough to dampen some concerns raised by its descent. While the catastrophic scenarios offered by the pessimists aren’t quite plausible, the B.D.I.’s dramatic plunge does appear to have indicated a genuinely alarming economic trend about the strength of global trade, with implications for jobs and corporate profits, that many economists had overlooked. Which raises the question: Why did economists color their judgment by discounting the B.D.I. in the first place?

A well-written article - lots more at the site.

Eat the Rich - the correct way

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Two years old but spot on - from Neuter the Debt:

20160620-debt.jpg

Inflation in Venezuela

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When you try to print yourself out of a financial crisis, inflation will happen - always.

Venezuela is running around 700% at the present time. This image is a stack of 100 Bolivar notes and is the maximum you can withdraw from an ATM each day.

20160525-bolivar.jpg

Hat tip to Tyler Durdin from Zero Hedge.

Oh yeah - you are looking at about $25 worth of money...

From Investor's Business Daily:

Wendy’s Serves Up Big Kiosk Expansion As Wage Hikes Hit Fast Food
Wendy’s said that self-service ordering kiosks will be made available across its 6,000-plus restaurants in the second half of the year as minimum wage hikes and a tight labor market push up wages.

All actions have consequences - think before you leap...

From Fred Reed - need I say more...

Capitalism and the Minimum Wage: “I Got Mine, Screw You.”
To understand the arguments of capitalists against the minimum wage, follow the money. In all the thickets of pious reasoning about the merits of capitalism and the market, and of freedom of contract, and of allowing this marvelous mechanism to work its magic, and of what Adam Smith said, the key is the dollar. The rest is fraud. Carefully ignored is the question that will be crucial in coming decades: What to do about an ever-increasing number of people for whom there is no work.

There is of course much hypocrisy in the theoretical edifice. For example, businessmen argue that the minimum wage constitutes intolerable interference by the government in the conduct of business—meanwhile sending armies of lobbyists to Washington to make the government interfere in the conduct of business. In fact capitalists have no objection to federal meddling. They just want it to be such meddling as puts more money in their pockets. Nothing more. Ever.

In like fashion they say that they want to protect the worker’s freedom—yes, his freedom, such is the capitalist’s benevolence, the worker’s freedom–to sell his labor at a mutually agreed price. Curiously, in practice this means the employer’s freedom to push wages as close to starvation as he can get away with. This miraculous congruence of high principle with low profit is among the wonders of the universe.

A capitalist will similarly object to zoning on grounds of protecting property rights–it’s his land, and he can do with it as he likes—but if you buy the lot next to his house and build a hog-rendering plant, he will shriek for…zoning.

In every case, without exception, his high principles will lead to more in his pocket. He will be against a minimum wage because, he says, it prevents young blacks from entering the job market and learning its ways. You can just tell he is deeply concerned about young blacks. He probably wakes up in the middle of the night, worrying about them. He doesn’t, however, hire any. Purely incidentally, not having a minimum wage saves him…money. And if he were truly concerned about young blacks, might he not express this concern by—paying them a living wage?

Nah.

Fred nails it - go and read the rest. He is one of the better writers out there.

Tip of the hat to Bayou Renaissance Man for the link.

The free market - automobiles

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Works in Germany - from Road and Track:

Why European Carmakers Should Take the Mustang's Huge Popularity in Germany Seriously
Achtung, baby! There's a new sporting-coupe king in Germany, and it's named after the mighty P-51 fighter that cleared the skies over Bavaria some 73 years ago. In March, the Ford Mustang outsold the Porsche 911, the Porsche Cayman, the Porsche Boxster, and the Audi TT. It's not a matter of Germans having a nose for a bargain, either; a plain-Jane five-liter GT costs about 50 grand overseas compared to the $32,395 base price in the States. It appears that Mustang ownership justifies premium pricing in the land of the Nurburging and the autobahn. What's going on?

Offer what people want and it will sell. Simple as that.

Ted Cruz's tax plan

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Really wonderful - looks like someone has studied their economics:

A perfect example of why we need to level the playing field for all businesses. From USA Today:

27 giant profitable companies paid no taxes
Death and taxes are supposed to be two certainties of life. But a few companies have at least escaped the taxes part.

There are 27 companies in the Standard & Poor's 500, including telecom firm Level 3 Communications (LVLT), airline United Continental (UAL) and automaker General Motors (GM), that reported paying no income tax expense in 2015 despite reporting pre-tax profits, according to a USA TODAY analysis of data from S&P Global Market Intelligence.

We have the highest corporate tax rate of any nation - we need to cut this down to 10% and strip out all the loopholes and exemptions. Federal revenues would skyrocket (Laffer Curve) and businesses would flourish.

Our nation is in the best of hands

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From CNS News:

U.S. Has Record 10th Straight Year Without 3% Growth in GDP
The United States has now gone a record 10 straight years without 3 percent growth in real Gross Domestic Product, according to data released by the Bureau of Economic Analysis.

The BEA has calculated GDP for each year going back to 1929 and it has calculated the inflation-adjusted annual change in GDP (in constant 2009 dollars) from 1930 forward.

In the 85 years for which BEA has calculated the annual change in real GDP there is only one ten-year stretch—2006 through 2015—when the annual growth in real GDP never hit 3 percent. During the last ten years, real annual growth in GDP peaked in 2006 at 2.7 percent. It has never been that high again, according to the BEA.

And of course:

The longest consecutive stretch of years in which the United State saw real GDP grow by 3.0 percent or better was the seven year period from 1983-1989, during the presidency of Ronald Reagan.

These facts are well recorded but nobody seems to want to recreate the Reagan years. It was a time of incredible prosperity for everyone. And then, the Bush dynasty thought it was their turn to run things for a while...

About that minimum wage in Seattle

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Chickens coming home to roost - from Mark Perry at American Enterprise Institute:

New evidence suggests that Seattle’s ‘radical experiment’ might be a model for the rest of the nation not to follow
Seattle’s city council made history in June 2014 by unanimously passing legislation that will eventually bring the city’s minimum wage up to $15 an hour, the highest in the nation. Washington State already had the distinction at that time of having the highest state minimum wage in the country at $9.32 an hour. The first increase to $10 an hour for some Seattle businesses and $11 for others took place on April 1, 2015. Additional increases to $12.00, $12.50 or $13 an hour took effect for most employers on January 1, 2016. Further increases will continue until the city’s minimum wage reaches the full $15 an hour, which will happen on the first of the year in either 2017, 2018 or 2019 for most employers and as late as January 2021 for some small businesses with fewer than 500 employees.

And a drum-roll please (ripping open the magic envelope)

Early evidence from the Bureau of Labor Statistics (BLS) on Seattle’s monthly employment, the number of unemployed workers, and the city’s unemployment rate through December 2015 suggest that since last April when the first minimum wage hike took effect: a) the city’s employment has fallen by more than 11,000, b) the number of unemployed workers has risen by nearly 5,000, and c) the city’s jobless rate has increased by more than 1 percentage point (all based on BLS’s “not seasonally adjusted basis”). Those figures are based on employment data for the city of Seattle only (not the Seattle MSA or MD), and are available from the BLS website here (data are “not seasonally adjusted”).

Not surprised one bit - that extra money has to come from somewhere and it will either be staffing reductions or an increase in prices leading to a decrease in sales.

The minimum wage was never meant to be a sustainable wage - it was to get you started as you worked on improving yourself and making yourself more valuable to your employer. Once you do this, you can request a higher wage and get it.

Much more at the site.

The Baltic Dry index

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I had written about it one month ago - January 15th, 2016 - when it dropped below 400

This is the cost to ship a volume of dry goods. Since these are generally the components for a finished product, it is a good measure of the demand for new goods. A good pulse of the world economy.

20160215-baltic.jpg

It has now dropped below 300 - there is more here, and here. Interesting how everyone says the world's economy is fine but the underlying numbers do not show it.

The Rahn Curve and Pizza slices

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A two-fer:

First - I posted a chart from Dan Michell's website earlier today and have been poking around and liking what I see.

Here is Dan explaining the Rahn Curve - similar to the Laffer Curve but looking at government spending v/s GDP instead of taxation:

 

Good stuff!

Second - from Dan's website. This explains what happens when the rich are taxed and the money redistributed to the poor:

20160215-pizza.jpg

About those 1%

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Many people are saying that the rich are to blame for the ills of civilization.

I prefer to look at free market capitalism versus crony capitalism.

This chart from Dan Mitchell sums it up perfectly:

20160215-enemy.png

Shipping news

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One measure of the economy is how much it costs to ship something from Point A to Point B - this is known as the Baltic Dry Index.

I had written about this back in November, 2015 - the index was then at an all-time low of 650. Things have not gotten better.

From gCaptain:

Hope Fades for Dry Bulk Recovery as Baltic Index Crashes Below 400 Points
The Baltic Exchange’s main sea freight index, tracking rates for ships carrying industrial commodities, slumped to an all-time low on Wednesday as gloom over global demand and too many ships for hire continued to batter prospects.

The overall index, which gauges the cost of shipping dry bulk cargoes including iron ore, cement, grain, coal and fertiliser, was down 8 points, or 1.99 percent, at 394 points – below 400 points for the first time – and the lowest level in records that date back to January 1985.

“Dry bulk shipping is in the throws of a generational recession,” said Ben Nolan of brokerage and investment bank Stifel. “The recovery in demand no longer appears to be a 2016 event and even 2017 is in question.”

Here is the chart from Bloomberg:

20160115-bdi.jpg

Running out of oil in 2011

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All long-range predictions fail - especially those dealing with climate and resources.

Here is just one from Jimmy Carter:

Holy crap - this is just plain crazy

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From the Investor's Business Daily:

Fannie Mae Rolls Out Easy Mortgage, Catering To High-Risk Immigrants
Subprime 2.0: The White House is rolling out a new low-income mortgage program that for the first time lets lenders qualify borrowers by counting income from nonborrowers living in the household. What could go wrong?

The HomeReady program is offered through Fannie Mae, which is now controlled by Obama's old Congressional Black Caucus pal Mel Watt. It replaces the bankrupted mortgage giant's notorious old subprime program, MyCommunityMortgage.

In case renaming the subprime product fails to fool anybody, the affordable-housing geniuses in the administration have re-termed "subprime," a dirty word since the mortgage bust, "alternative."

So HomeReady isn't a subprime mortgage program, you see, it's an "alternative" mortgage program.

After the catastrophe of 2007, I hope they will be a bit more careful in issuing these loans:

At least before the crisis, your income had to be your own. But now, as a renter, you can get a conventional home loan backed by Fannie by claiming other people's income. That's right: You can use your apartment roommate's paycheck to augment your qualifying income. Or your abuela.

You can even claim the earnings of people who are not occupants, such as your parents, under this program.

And:

You don't need good credit either. You can qualify with a FICO credit score as low as 620, which is subprime. And you can put as little as 3% down.

And of course:

Fannie and its regulators say, don't worry — this new program won't introduce any undue risk into the mortgage-finance system.

And this:

Most troubling, Wells Fargo and other big mortgage lenders have already signed on. More will soon follow as the program rolls out in a big way through Fannie's automated underwriting system later this year.

The stupid - it burns! It was just this kind of idiocy that caused the financial meltdown of 2007 and 2008 - the one we are just starting to recover from. Now they want us to go through it again?

A hit to Midwest businesses

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The storm that caused so much damage in Texas is still wreaking havoc in the Midwest - causing flooding in the major rivers. These rivers are instrumental in bringing product to port cities so exports are stuck.

From gCaptain:

Floods Choking Everything From Oil to Wheat in U.S. Midwest
The worst flooding across the U.S. Midwest in four years is disrupting everything from oil to agriculture, forcing pipelines, terminals and grain elevators to close and killing off thousands of pigs.

Fifty miles (80 kilometers) of the Illinois River have been closed, according to the U.S. Coast Guard, as well as 81 miles of the Mississippi River in two segments.

The flooding is the worst since May 2011, when rising water on the Mississippi and its tributaries deluged cities, slowed barge traffic and threatened refinery and chemical operations. The current situation increases stockpiles of crude oil and may extend this year’s price slide.

Hog producers in southern Illinois are calling other farmers, hoping to find extra barn space to relocate their pigs, said Jennifer Tirey, executive director of the Illinois Pork Producers Association. Processors are sending additional trucks out to retrieve market-ready pigs, she said. In one case, an overflowing creek took out electricity and made roads impassable, causing 2,000 pigs to drown.

Much more at the site. Like they said, this is not a unique phenomenon, it happened four years ago but still, this will cause a bump in grain prices and a drop in gasoline prices.

This is really not good for the USA

The other shoe dropped - from the BEEB:

China's yuan set for IMF reserve status
The International Monetary Fund (IMF) is expected to announce on Monday that China's currency, the yuan, will join the fund's group of international reserve currencies.

Just the US dollar, the euro, Japan's yen and the British pound are currently part of this select band.

Earlier this month, IMF head Christine Lagarde backed the yuan's inclusion.

If the decision is made, the yuan is likely to join the basket next year, experts said.

The article does make passing mention of why this would be a bad idea:

Concerns about Beijing keeping the yuan artificially low to help exporters is one reason why the currency has previously failed to meet the criteria for reserve currencies set out by the IMF.

Actually, the "value" of the yuan is completely controlled by Beijing and has no connection with China's real economic status. They are in the middle of a couple of bubbles right now (Google ghost cities for one) and when these pop, their economy will be in dire straits. The fact that they are holding most of our national debt will make this bad for us if the Yuan is allowed to devalue (inflate) as it will increase the amount that we owe them.

The slowing economy - it is worldwide

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This is something that is not covered in the major media but there is one interesting metric that shows that the world economy is slowing down... A lot...

Shipping.

The less stuff people buy, the less call there is for shipping a container from point A to point B. One measure of shipping activity is the Baltic Dry Index formed, like most maritime endeavors, in a London Coffeehouse - the Virginia and Baltick (Maritime insurance company Lloyds of London was formed at Edward Lloyds' Coffeehouse). Here is a chart of the Baltic Dry Index from Bloomberg:

20151104-baltic.jpg

Next, we have these cheery words from Tyler Durdin at Zero Hedge:

Global Trade In Freefall: China Container Freight At Record Low; Rail Traffic Tumbles, Trucking Slows Down
Over the past year we have regularly contended that a far greater threat to the global economy than either corporate earnings, currency devaluations, rate cuts (or hikes), reserve outflow, or even the stock market, is the sudden, global trade crunch which has been deteriorating rapidly since late 2014 and has seen an even more dramatic drop off as 2015 is winding down. Actually, that is incorrect: global trade is merely a manifestation of the true state of the above listed items.

First, there was ships
Back in March, we reported that "Global Trade Volume Tumbles Most Since 2011; Biggest Value Plunge Since Lehman."

Then in August when we first pointed out a dramatic slowdown in the Baltic Dry index which had peaked just a few weeks earlier and we said that "should the dead cat bounce in shipping rates indeed be over, and if the accelerate slide continues at the current pace, not only will shippers mothball key transit lanes, but the biggest concern for global economy, the unprecedented slowdown in world trade volumes, which we flagged a week ago, will be not only confirmed but is likely to unleash yet another global recession."

Three weeks later, we got confirmation that the BDIY has indeed become a lagging indicator to actual demand, when Reuters reported in its latest weekly update using data from the Shanghai Containerized Freight Index, that key shipping freight rates for transporting containers from ports in Asia to Northern Europe fell by 26.7 percent to $469 per 20-foot container (TEU) in the week ended on Friday.The collapse in rates is nothing short of a bloodbath: "it was the third consecutive week of falling freight rates on the world’s busiest route and rates are now nearly 60 percent lower than three weeks ago.

Fast forward to the latest update from the China Containerized Freight Index which as of October 30 has fallen about as far as it ever has in history: at 744.44 it was the lowest on record which suggests that beyond the headline propaganda of some nascent recovery, global trade has literally fallen of a cliff.

Much more at the site with link to the data. Finally, this news item from gCaptain:

Maersk Decision to Lay-Up a Triple-E is ‘A Wake-Up Call’, Says Drewry
Maersk Line’s decision last week to lay-up one of its 18,000 teu flagships is “good news for the industry”, Drewry Maritime Advisors said earlier this week.

TEU is a TLA for twenty-foot equivalent unit - a standard 20 foot long by 8 foot square shipping container

Other ocean carriers are likely to follow the market leader and mothball more surplus ships.

The move to idle the Triple-E vessel followed a profit warning from the Maersk group which lowered its full-year profit forecast for the container division by $600m to “around $1.6bn. It blamed freight rates which “significantly deteriorated”, especially on its main Asia-Europe route in the latter part of September and into October.

The dramatic turnaround from the Danish carrier was confirmation that, despite its ability in recent years to outperform it peers in terms of operating margins, it is not immune to the toxic mix of too much capacity chasing dwindling cargo demand.

Maersk is also laying off 4,000 employees as noted at The Loadstar

Fun times ahead - time to invest locally and develop marketable 'real' skills - brewing, carpentry, plumbing, farming, machining, etc... Brushing up on STEAM (not STEM) skills will not hurt either.

Economic indicators are pointing to a second recession (the second of the double-dip) starting in 10... 9... 8...

Ghostbusters and the EPA

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A look at the EPA and it's effect on business through the lens of Ghostbusters:

From EconStories - lots more great stuff at the link.

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