Retail sales, Jobless claims, Inventories and LEIs- A less than happy New Year start

Happy New year…Data show some sputtering

As 2011 closes and we raise the curtain on 2012 economic reports have begun to post some numbers that are more disappointing than encouraging breaking a sting of encouraging reports that has spanned about three-months.

Retail Sales

Retail sales disappointed in December, rising by just 0.1%. While this is a correct characterization it is also only part of the story. The December number is preliminary and evidence is that inflation was very low making that low nominal gains worth more in real terms (or volume terms). Also November was revised to a gain of 0.4% from 0.2% initially. Moreover we has strong September October gains that were built upon and did not reveres making the accumulated gains in the Third and fourth quarters quite good. Year-over year sales are strong as well. While the December numbers disappointed we are best off in not taking that too much to heart- it’s not like December produced a devastating decline after all. Sales are still advancing and the course in the value of sales may very well have fallen through the cracks due to inadequate methodology to capture discount buying.

Jobless claims

Claims rise sharply by 24K and are up to 399k just short of the 400K mark. But in the last few years claims have also been rising early in the year. Claims are notoriously difficult to get right each and every week. We will look for some context and another weeks work of data before we take seriously the degradation in the trend.

Inventories

Inventory data from November write a slightly different story about retail sales. In November retail inventory to sales ratios reached a five year low. Obviously compared to what they were expecting this was been some very good news on sales (though Nov). Clothing and accessories as well as General merchandise retailers had ratios in the bottom 30% of their five year range. These statistics suggest that sale in November left stocks relatively lean ahead of the key December selling season.

OECD LEIs

The OECD LEIs were below 100 for most key nations but that only suggests a slowdown. As of November that Italy was the weakest relative to tis trend and that left the Italian indicator down by just 1.5% relative to trend. China’s trend retailing clung to a trend-even 100 reading. On balance the OECD report which has data though November was not making the call for any recession. In Europe for the most part reports in Europe showed some improvement in December either rising or falling by less. So the OECD still is not pulling the trigger on the recession call even though Germany’s GDP signaled a small decline in its early Q4 estimate.

Mario Draghi and the magical euro-auctions

Is the ECB’s Draghi too smart by half

…or are we too dumb by full measure?

Auction madness! Markets are breathing a sigh of relief today as Spain’s and Italy’s bond auctions went off strongly. But this is with a huge assist from the ECB. Its 3-Year loans have pumped liquidity into banks who in turn are buying their government’s bonds. So while the ECB is not buying them directly in large amounts as the ECB is prohibited from doing. Thus the ECB is building up large claims on banks whose balance sheets are being stuffed with the same assets the ECB cannot but directly. Is the ECB better off having claims on unsteady banks rather than buying the government paper directly? Who can say. But the ECB also is giving away money for all sorts of uses as well under this program. A number of banks seem to be borrowing then turning around and warehousing it on the ECB balance sheet waiting for more choice opportunities to emerge.

Is anybody really enamored of this strategy?

Who is it fooling?

The interbank market is a Japanese lunch box not a bowl of soup- One thing the large ECB deposits tell us is that banks still do not trust one another. Yet the ECB is funneling HUGE amounts of money to government bond markets by means of taking the credit of these same banks as intermediaries.

Mixed signals with a clear message- But since banks are buying Euro-govy bonds hand over fist we are led to believe (wink, wink) that the crisis is over or losing intensity! But the Euro-depositing at the ECB tells us just the opposite does it not?

Who is being played for the fool?

Typo knows best- Let me share an inside joke with you. When I wrote this the first time I found a typo. I had written that the ECB has ‘pimped’ money into the markets. Of course, I hurried to correct that. But, on second thought, that typo reflects better economic analysis than saying it pumped it. What do you think?

Euro auctions Vs US auctions which are more telling? - Indeed, contrast the Euro auctions to the US where the 10-year government note auctions, with somewhat less direct help in the US, set a new auction-yield low on a high bid-cover ratio (over three and above the average of the last ten 10-Yr auctions). Here in the US the economy is (...well until today it was) spitting out nothing but strong numbers and the investors are STILL clamoring to buy them at historic yield lows! What does that tell you about competitor markets where yields are higher and banks are getting bashed with the stick and fed with the ECB carrot-loans?

The slippery slope to fund grandmother’s bank- We can wonder about how much the Germans like the ECB’s under the table and through the markets approach to investing in Grandmother’s bank and her sovereign bond market. It may be better than arguing dysfunctional capital markets that are short-circuiting monetary policy in order to justify large direct purchases of government bonds by the ECB. But probably not… Now the ECB has arranged a situation in which not only are there a lot more govy-bonds in the market but the ECB is entangled with more banks and banks of poor credit quality.

How can that be good?

Rules are rules; write outside the lines at your own peril…and ours - The bottom line is that Europe must get its house in order. The more it finds another end-run around rules enabling it to inject funding into places where market players left to their own devices would not go, the worse off we all are.

Draghi and his baggage- So is Draghi really that smart or is he too smart by half. Oh, he is an ivy-league US trained economist. But we have seen what a lot of those guys do and what they know. They do know ‘their stuff’ they also know the politics and have their own good-ole boy network. And Draghi seems to be working his overtime.

God bless him/God Help him…but, good God, stay way from what he is doing!

His policies are kind of a drag…hi.

The ECB and Fitch have their Deja-What? moment

ECB and Fitch have their Deja-What? moment

The ECB should buy more member debt? Really? I don’t understand the reverence for the rating agencies. I don’t even know what Fitch thinks is its mandate. But whatever it is I don’t see how today’s Fitchism makes any sense or helps to restore the shine to the reputation of credit rating agencies. If Fitch thinks it is carrying the ball for them, Oops! It just stepped out of bounds.

The ECB is a central bank that has been built on the model of the old Bundesbank. Fitch is aware that the Germans do not want the balance sheet expanded, risking the viability of the currency and the integrity of the central bank.

So why has Fitch steeped into the Euro-spat to holler for the ECB to do more?

Certainly someone in Europe needs to do more. But what not scream at the Germans or at the French or at EcoFin for not making some better arrangement? Or the member countries themselves for not using the IMF? Granted the ECB is a financial institution that could snap its fingers and do this bidding. But as Freddie Prince used to opine, ‘hey, man it’s not my job.’ And it isn’t. Not one thinks that some ECB bond buying is going to stoke inflation now but that is not the issue.

The whole opposition by the Germans to this balance sheet expansion and the opposition by those here in the US and within the Fed (and outside) to blowing up a balance sheet now, and to erode the credit quality of its holdings, is to avoid engaging central banking in fiscal policy. This action gets the politicians off the hook to do something and later embroils the central in the criticism of political meddling. Central banks should only jump into this breech when there is a clear and present danger and systemic risk.

Indeed, in the case of the ECB, it is prohibited by its charter from doing exactly what Fitch asks of it ( Duh!?). The ECB’s current buying of so much sovereign debt rests on a very thin, very tenuous assumption that the very different yields in different government bond markets reflects a distortion in the monetary transmission mechanism. RIGHT. Actually nothing could be farther from the truth. It is evidence that markets are in fact working, Investors are discriminating. What it represents is the perception and existence of greater credit risk in some government markets compared to others. So why should the ECBC go there if other sovereign governments or the IMF will not make loans and if countries will not adopt stringent enough austerity programs?

Why is Fitch urging the ECB to do something now for which it may later castigate the ECB and ratchet down its credit rating later?

It beats the heck out me, how about you?.

European revival: what Sarkozy, Merkel, Greece and others must come to terms over

Rules for European revival

When it comes to Europe’s problems there are several clear steps it can take to relieve its stress. It does not take these steps because Europe’s problems stem less from an economic misunderstanding of what it needs than from political divisions on what member states want or can agree to.

The simplest way to reform EMU would come from the usual approach to problem-solving: do not be too committed to what you have. But France is too-committed. France views the euro as Europe and as Europe’s future, thinking that if the euro fails Europe fails. It’s a view that is a bit dramatic and certainly not true. But if that view takes hold it will limit growth and restrict options for fixing Europe.

We maintain that until the name ‘euro’ stands for EUROPE instead of for the name of a currency (the ‘euro’), Europe cannot win. No country should make subservient its goals to the preservation of a currency. That is backwards. The currency or currency zone needs to serve the needs of those who use it, not the other way around.

For Europe it is a simple problem to fix the currency Zone that was an experiment that wound up with a lot of failures if Europe learned from them. In that case it can move to fix those problems and go on. But some of these failings are not completely understood or accepted by those who are members.

We think that the easiest way to fix this thing is to START OVER. Sometimes a policy is so poorly designed that it is better to start over. This is sometimes true in business too. For example, a piece of software may have thousands of lines of code and a business may want to keep all that work that has been put into it. But if the application does not work or is buggy it may be best just to start from scratch rather than to debug and rearrange things. I compare Europe to a flawed piece of software that needs to start from square one. But Europe is not there yet…

What are some of the antecedents of e-Zone failure? Solutions? Prospects?

1. Europe’s fiscal rules were lax; Europe’s fiscal rules were not enforced

2. When members were clearly drifting from their original currency parities (in real terms as some members ran persistently higher inflation) no country or institution in the Zone did anything about it.

3. Euro economies were too insulated from one-another.

4. Labor markets were too inflexible (Spain’s unemployment rate is over 20% while Germany is experiencing a post reunification low rate of unemployment!)

5. Given the huge social policy and productivity differences there almost has to be some supranational fiscal policy to bridge differences.

6. Euro.1.0 suffered from ‘the Japanese lunch box effect’. The Zone was not run as a whole but as an amalgam of independent regions with a common currency and central bank. Yet the needs and operations of all economies mix together in a currency zone and no country can ignore problems in a fellow member.

7. IF…IF… Europe want to go ahead and ignore problem #6 (Germany’s stance more or less) then it will need VERY strict fiscal rules to make each nation accountable and to make deviations in inflation, productivity, growth and fiscal policy actionable to bring trends back into common alignment.

8. On the other hand, with a supranational fiscal authority a stick AND carrot approach could be used when members’ paths began to diverge.

9. Europe needs to decide if it wants to be ‘European first’ or not.

10. IF it wants to be European first it then has to decide if it can get to that result in the context of one Zone or if it need to split up to let some of its more challenged members join together in a separate pool and try to make the changes that will eventually make them acceptable in a single zone.

11. IF countries cannot drop their national demands the Zone will break apart and these decisions will be taken from the members and made by the markets. While some Euro countries are critical that outsiders do not understand the insiders’ commitments to the Zone, what the insiders do not understand is that by being insiders they are too close to the issues and that they have too much of a personal view that they think they can convince others to accept. The Zone needs rules all members can abide: not France’s rules or Germany’s rules. There is some flexibility, here but there are some clear needs for a Zone to succeed. There is too little attention in the e-Zone on those matters that a Zone must have to survive and too much emphasis on what the large countries insist upon.

12. Europe may not be one nation, one vote. But without a clear vision a common vision shared by all members, every single one, it will not survive.

The list above is about suggesting the sorts of things that the e-Zone got wrong, that it needs to do and places where it needs to weigh and balance in order to survive.

In the end the e-Zone is a system. And like any system there is action and reaction. The Zone must resilient for a wide variety of repercussions. The Zone may need to break apart in order to stay together. If a few countries leave the euro is there still a Euro? If counties are allowed to leave with the option to mend some their flaws then be readmitted is that a bad development? Does letting one country leave damage the Zone forever because it sets the precedent that country can leave? That is a possibility. But if the Euro adopts a strong internal fiscal rule with vigilance and actionable oversight the trick will be to keep members in the middle of the fairway so that speculation about getting off track will not build. That is the way to deal with moral hazard if the Zone is allowed to break up.

For those who are worried about the Zone breaking up because of the current rules and their implications, take warning! Let’s remember that there are all sorts of rules that explain why a country will not leave EMU because it then can’t be in EU and to be in EU it must be committed to EMU (with two exceptions, Denmark and the UK). But take one step back! If EMU decided to divide, it would likely change these rules! Never bet against the person that can re-write the rules of the game while it is still in progress!

Wholessale inventories slow faster than sales is that good?

Inventories slow in November

Inventories rose by just 0.1% in November after soaring by 1.2% in October. The sharp slowdown is reassuring. As of November over the last three months inventories are growing faster than sales in 40% of the wholesale sectors that implies that in 60% of them we have the more healthy situation of sales growth matching or exceeding inventory growth. That is good news as far as it goes. But sales are still slowing over 70% of the sectors. The aggregate durables less autos category has ratcheted down its pace of sales to a -2.5% growth rate over three months compared to a +8% rate over 6-months But on the nondurable goods side of the ledger, nondurable goods sales excluding petroleum are up at a 12.3% pace over three-months compared to -6.7% over six months. .

All of nondurables have accelerated and sharply over three-months a phenomenon that seems likely to be more related to inflation developments and their knock-on effects. Durable goods major categories have seen no sales accelerations over 3-mos compared to six months but before despairing that result vehicle sales are up at a 17% pace over 3-months, still strong but slowing as the bump up from the Japanese tsunami effects unwinds.

On balance the inventory build-up that saw a 1.2% gain in Oct against sales of 0.8% for wholesalers has been stopped. But since the pace of sales is slowing and since inventory to sales ratio patterns across sectors are sporadic it is not a good time to be too complacent about inventory trends.

A lot of what happens will be determined by end of the year spending patterns and these patterns so far are mixed.

For retailing, a report for which we are still waiting, chain store sales seem to be evaluated as ‘strong’ the overall retail sales gains expected for December are still modest month-to-month and the auto sales while having recovered from weaker levels earlier in the year retreated of slightly month to month.

As a result of these trends we remain cautious about the assessment of inventories. Our own anecdotal experience with post-Christmas shopping was that in the aftermath of Christmas stores still carried an awful lot of merchandise. The usual cat and mouse consumer-retailer game of full price Vs discount makes it look like the best prices were available before Christmas in many stores. So while, to me, (in my personal unscientific, narrow New York observation of trends) inventories did not seen to have been made lean by bulging Christmas sales, yet the post-holiday sales period did not show any evidence of retailers having stress over having too much stock on hand.

So we remain cautious on inventory evaluation.

EMU hope or false promise..again? The case of France

Bank of France Biz indicator shows some hope

The Bank of France has reported an increase in its industry sentiment index for December. This goes hand in hand with an unexpected rise, separately reported, in French industrial output, the later a gain of 1.1% for the month of November.

After months of EMU economic reports going from good to bad, the year-end has brought a certain respite especially to reports from France and Germany. The December readings for the MFG PMIs in the e-Zone have displayed a slight improvement in those readings across nearly all reporting EMU countries. Even so the MFG PMIs remain below the level of ‘50’ for all the observations in December, indicating only that the decline has slowed its pace and not that there is any real revival in progress since values below 50 tell of continuing slippage. Similarly, the EMU PMIs for services showed some bounce in December with only EMU members France and Germany having readings above 50, readings that indicate some growth in the services sector.

Still the Zone is beset with economic pressures and while there has been some revival in markets today and a bounce in banks shares for several key European banking institutions, the fact remains that austerity rules the euro-roost still, tilting EMU to weakness. The only really ‘pro-growth’ development of the past moth has been the continuing slide of the euro which has enhanced competitiveness among the members versus countries outside the zone and that is a silver lining a darkening euro-cloud.

Zone developments per se remain guarded with only a few slightly positive remarks coming from leaders who have been engaged in negotiations. Leading members continue to pressure Greece, a nation that already is under so much pressure that its real surprise is that it has not yet exploded.

France’s revival is depicted in its December PMI data the December bank of France pick-up and an outsized November jump in industrial output.

The BoF report, while showing month to month gains, still leaves the index at a weak position standing only in the 23.7 percentile of its historic queue of values (in other words the index is stronger 76% of the time). Industry orders stand in the bottom 12 percent of their historic rank. Overall demand is put in the 44^th percentile, closer to neutral, but foreign demand stands in the lower 14 percentile of its historic queue. While the latest production result is still in the lower 21.9% of its queue, the outlook is just as weak in the bottom 21.6% of its queue. On balance there may be some stirring of economic data at year end but there is no real confirmation of any significant revival. Given the way data are, especially at year end, it is not clear that these machinations are anything more than statistical noise.

The zone remains under pressure and France is likely bracing to lose its AAA rating. These reports and survey results taken broadly rather than confirming that the Zone is bottoming, clearly bear too many hallmarks of a euro-disease spread to France. At these low levels of economic standing in the BoF survey and other surveys we are wise not to make much of them until they show some real trend and until those trends show some staying power. So far we have only one observation, not nearly enough. Markets often refer to one-off data reversals as ‘a dead cat bounce.’ So is this cat alive or not?

Europe..again the trade-offs

Europe: Irresistible farce meets the immoveable subjective

As we look at the assessments these are the polar opposite arguments. One group argues that Europe cannot come apart. The other holds that Europe must come apart. The euro-unity camp argues that it is nothing short of the future of Europe that is at stake (they are right but for all the wrong reason). The EMU-breakers argue several facts ranging from the high and different debt levels, cultural differences, differences in work ethic, the inability to make austerity work and the severe loss of competitiveness that has been suffered within the Zone.

As we look at these two cases and consider some of the arguments about how painful a break up would be, we need to look only at the Greek episode to see how little thinking has gone into the e-Zone analysis. There are many more than two possible cases here.

In the recent case of Greece, it negotiated a default that was not a default and did not trigger credit default swaps to pay. Granted Greece is now back at it, asking for an even larger haircut, but that is a separate issue (as well as part of the main issue, of course). The point is that when push comes to shove the rules change. It’s like the final seconds of a basketball game when the referees all but swallow their whistles (and with the NBA is set to play again we may get to witness more of that). Suddenly, you are playing under different rules. We should have no misconception that if the Zone is under stress and needs to blow out a few members that it will be done under existing rules without any changes. That, in fact, seems the least likely result to me.

What we may need to consider is a break up that keeps Europe together. That is a novel concept.

First of all if a nation goes bankrupt it is not certain that it would have to leave the Zone. But in a number of countries the problem is not only debt, it is competiveness. Let them declare bankruptcy and write down their debt and they are still uncompetitive. I see a lot of proposals for EMU-bonds and other financing devices but these are putting the cart before the horse. Greece has lost some 25% in competitiveness to Germany, Spain has lost about the same. Portugal has lost a bit less. Italy has lost about 10%- all since EMU has been formed and the outlet of currency depreciation has been removed.

These are competitiveness losses that would be hard to make up if the Zone stays together. If it breaks up, then countries could form a second block and try to regroup within that framework and to maintain a link to the rest of the zone depreciate their currency and restore their competitiveness.. They might even get assistance since they could all remain in the same EU mechanism and thereby have a split that is in currency terms only.

The countries that left the Zone would then be able to regroup, try to reestablish their competiveness under a new currency basis and possibly reenter the Zone at a later date. Greece and Spain and Italy and Portugal could issue a new common currency or each could to retreat to its own former unit.

It is important is to realize that all these arguments that are made about the Zone are less than resourceful – some are made by ideologues rather than argued from the facts. It is highly likely that once faced with the eventuality of break up that the Zone rules would change to allow the dead weight to leave on modified terms. It is also likely that the countries that left would get some aid and would leave on ‘good terms’ with either an option or a mandate to return to the fold in due time.

Ironically, a break-up may simply be the best vehicle for Europe to stay together.

It may not be too tidy and it would cause some trouble and legal issues. Imagine contracts written in terms of euros in a country that adopts its own and former unit. What are the grounds for altering that contract or not? Magnify that thousands of times. You might not be able to keep the contract in euros but neither could you redenominate it ‘as is’ since a local currency did not previously exist and one could not assume that two parties would have agreed to the same deal on different currency terms. For example, one assumes that there would be more inflation, at least initially, under a new unit as debt problems were inflated away and as the new unit sunk to a point that reflected the true parity for the new currency relative to the euro (since we are assuming here that the least competitive countries leave EMU).

So yes break up has a lot of technical issues that will become clearer if Europe goes down that path. If it does not, maybe it is not the end of the world either, despite all those arguments to the contrary.

Maybe the lost competitiveness in the South is not an issue because they simply will have industries that will not compete with Germany, the low cost EMU member. Maybe the Zone will come to specialize more. The US, after all, does not have the same industries uniformly spread across the nation. We have farming states, natural resource states and industrial states and all sorts of specialization. We also have high-cost states and low-cost states. If Europe is willing to reorganize itself along those lines maybe ‘not coming apart’ can work.

But I do not see how Europeans stay together and pretend that the lost competitiveness regions are going to catch up. Economics rules out miracles.

If Europe becomes more of a single economic unit we will not have to worry about the structural trade and current account imbalances that have developed within the Zone. Italy Spain, Portugal and Greece are running persistent balance of payments deficits; that will not be an issue when/if EMU finances are blended with the countries that run chronic surpluses. In this view Europe will move to a model of regional specialization instead of a model of free-standing countries sharing a currency but with independent financial issues each trying to run a balanced economy.

It should be clear that the choices Europe is about to make will have far reaching consequences.

This is why having a new treaty with voting makes sense. Most euro-leaders do not want to do it because there are factions at home that want to claw-back rights from ‘Brussels.’ But Angela Merkel has pushed for a new treaty vote for good reason. As the above discussion demonstrates, what is being contemplated- whatever road Europe takes- has far reaching consequences. It is important that all members are truly on board. It would be a really bad choice if the ‘euro-leaders’ were to gin together some deal that would bridge the financing issues without coming eyeball to eyeball with the broader socio-economic issues which lie at the bottom of the Euro-imbroglio.

Let me emphasize that coming up with a check to fund Europe near term, as difficult as that has proved to be, is a much easier thing than having Europe come face to face with what its identity will become. Pretending that you can stretch out financing and not dealing with what that time will buy is absolute nonsense. And that is why the German position has been so hardline. Germans want their money to buy results: a harder reality.

The Germans are the most solvent of the European nations and Germany has the most solid bond market. Germans are in the euro-cat-bird seat. But they are not out of danger. And that is why they shoot down one harebrained scheme to finance things after another. The Germans want financing to lead to a stable end game. And most of the financial schemes do not do that because many of them take a lot of the pain out of the process and without pain there will not be the kind of enduring progress that is needed.

I think this is a much more productive way to think about Europe, than heads it’s unified, tails it’s busted up. Europe needs to decide its identity that is the issue.

It is not about financing. It is about Europe deciding what it will be when it grows up. Heck people get divorced and then remarry! What can’t the Zone break-up over currencies and keep other common elements and plan to relink under better-understood circumstances in the future? What is so sacred about keeping the currencies fixed when it is so clear that the fix has gone bad? Who is looking at this and thinking about what it means to stay fixed in one zone instead of being flexible in one union?

In a piece on the future of the euro-Zone written by Niall Ferguson, the British historian, he, interestingly, has the UK pulling out of the EU and being joined by Ireland. He has Greece staying in. Then, years on, Greeks would still be undergoing high unemployment and still muddling through with huge transfer payments to support their lifestyle underwritten by Germans! Science fiction is one thing, but Greek political fiction is something else.

It’s not a result that I can see happening (sorry Niall); but it is consistent with what could happen if the Zone is kept together without a clear view of what that means for everyone. Would the Germans give in and support high unemployment in an uncompetitive Greece? Or would they force a long, long, period of austerity on Greece? And if that were done, would Greece have the staying power to stick it out within the Zone or would it choose to leave? This is why a treaty vote is so crucial and why those who would change the game must also change the vision so people know the consequences of their vote.

But Europe is also a place where leaders are used to leading their people by herding them into certain situations. Some it seems would prefer to kick the can down the road in a certain way to make the eventuality of a certain decision more likely. This is contrivance and manipulation. I am opposed to this path for Europe. Horse first. Cart second. It should not do it the other way around. The choice and its implication should be made clear.

Those are the thoughts that lurk behind any analysis of where the Europe is going. Europe must decide first what it wants, then arrange to finance that identity. It should not finance staying together for a while longer while they all try to figure it out. That time has passed.

Euro-procrastination makes no sense to me. It’s not buying time, or renting time; it is squandering it. Time to step up and pick your future.