New Week New Hope: from Greece to GDP

With the Greek bail-out restructuring going through the ‘i’-dotting and the “t’-crossing stages some attention has switched to the community action clause (CAC) and to the reality of bonds issued under different legal jurisdictions. Our comment last week addressed some issues regarding bonds issued under differing legal jurisdictions.it turns out that there is a group of Greek bonds that were issued under English law instead of local Greek law; they are trading at a much higher value than Greek-law bonds. Still getting paid may take some time.

The point that is most relevant there is that local jurisdiction bonds simply do not afford the same protections as those issued under the usual international domains. That so many bonds were issued in this way and got bought just the same is another example of how poorly thought out the euro-Zone framework really was.  And that many other EMU members have a lot of local jurisdiction bonds trading in markets represents further systemic risk.  What Greece has done, others can do… Other countries could pursue novel schemes to redress their debt issues once this Greek ‘thing’ is settled. The European debt situation is far from over and Greek has just gotten a short term fix, not a long term solution.  It’s not Re-hab; it’s a fix.

ooo

European GDP data continue to show yr/yr growth rates are decelerating across the board. But the US GDP growth is on a different pattern; it is accelerating.

The next two weeks are filled with key reports and will put the hypothesis of an accelerating US economy to a strong test.

This week offers up the first revision to the GDP released (called the preliminary GDP estimate). Several MFG surveys are on tap, the ISM the Chicago and Dallas Fed surveys. Durable goods orders, and consumer confidence from the Conference Board, round things out.   And there are important gauge on personal income, the personal spending report, and the PCE that the Fed now dual-mandate assesses. The DMA for the PCE-deflator is 2% Yr/yr. We are going to have to watch and see how the Fed handles its own shift of emphasis to the headline PCE. 

So the week sets up some interesting metrics on income consumer spending manufacturing and construction. We are impressed that a wide variety of indicators continue to show progress. We expect it will continue in …the week ahead.

Attention in this week will shift to the US after the carping dies down about the lack of progress among finance ministers this past weekend.

Get me to the Greek..maybe not

Beware of Greeks Buried by 'Gifts'
I don't know about you, but Greece is getting to me.


50 ways to leave your lover- so why stay like this?
I can't imagine how so many countries and international institutions can get together to put together a deal that is so expensive and yet...achieves so little.

Why can't we live together?
Anyone who is doing any analysis of this program speaks about how much more is going to have to be done even given the optimism of the current baseline is for the plan. Greece's future remains highly suspect. This looks more like the beginning of an exit plan than a real effort at relief.

The Arrow Smith Clause: Dream on
The main mission of the plan is to see that Greece will service its debt in the future. The debt in this deal will be senior to any other debt that Greece might take on while this plan is in force.  That provision will make it easy for Greece to raise any new funds from the private sector, won't it?

Eve of Destruction...what Greece must do
Greece as to have funds set aside for three-months of debt payments. 

Greece will have an oversight board. 

Greece will install a system to track funds' sources and uses...it doesn't have that now? 

My favorite things...What Greece gets
Note all the positive factors to help Greece on this list. Note the development money that is streaming in from Germany and from the European Development Bank. Note the funds for retraining workers. Note the currency depreciation that will make Greece more competitive. Note the tax breaks for capital investment in Greece. Note that everything I have said in this paragraph is MISSING from the real plan.

Border Song
This is not a plan for Greece. This is a plan to try and make sure that the banks are repaid. And before you say well-gosh- those banks took big debt mark-downs, note (note for real) that the Greek government bonds were only marked somewhere close to market value.  The bonds are much better marked relative to mark-to-market value after this deal than they were before mark to Euro Can't-Default-Sovereign debt standards (eCDS).

Borderline
AND now everyone is talking about Portugal.

If you don't know me by now...
For anyone in Portugal that is hoping to get half the deal that Greece got just look at the destruction that was wreaked upon Greece before it was offered what is still barely a modicum of help. The lesson here is that you will pay dearly for any benefits for the Germans are intent on eradicating 'moral hazard'. Unfortunately, that also means imbuing each participating country with morale hazard.


Get me to the Greek..deal? I don't think so: STAY AWAY! 
 

 

Dispersion in Confidence as a separate indicator

The economic data of the past week were not decisive in any way. It was a week of mostly minor reports compared to the week before that put so much at stake and showed such unexpected clarity about the economic condition in the US. Still the U of M Consumer sentiment index for Feb (prelim) did move lower in both its outlook and current components last week. But the weekly Bloomberg Consumer comfort survey continues to press to higher readings. The U of M set back simply took some of the punch away from the previous month’s large gain. The Feb sentiment reading is still the highest U of M sentiment reading since May 2011, excepting of course the January level from which it just dropped. But, obviously, the gain on the books is smaller now with this month’s drop in the index to 72.5 from 75.0. The weekly reading on comfort suggests that we may be seeing some uncertainty about the pace of the improvement of consumer attitudes more than a new unexpected set back.

The U of M report also tells us that by region some large gaps have developed in sentiment. The Midwest showed a pop in sentiment in February and finds sentiment is still low in the 29^th percentile of its historic queue (weaker than this only 29% of the time). And that is similar to the North East which stands in the 26^th percentile. But the South and the West stand in their 11^th percentile and 13^th percentile, respectively.  This is a new development and is worth watching. The Midwest has tended toward the strongest relative readings and the West and South have tended toward the weakest as the expansion has progressed. Still, this month’s gap is extreme. Interestingly if we go back to the 2007 rankings the West and South were typically as much stronger than the Midwest at that time as much as they are laggards now.  Regional disparities are not new but this one is interesting as two parts of the country do seem to be advancing faster than two others.  

There is one other aspect of consumer sentiment that is very interesting. That is that in recessions all age cohorts seem to feel the same relative pain but in expansion periods the confidence as experienced by the three age cohorts in the U of M survey varies quite widely as a rule. Used as a diagnostic, this economic regularity suggests that the recovery period is truly transitioning into something more normal. (See graph below)

The chart above clearly identifies by its low readings periods of recession. And used as a diagnostic the increased variability among age cohorts as this recovery ages is suggesting that the economy is getting back toward normal. We are not there yet but we are making strides.

Let me describe this measure in more detail. The U of M sentiment report offers consumer sentiment readings for three age cohorts 18-34, 35-54 and 55+. Call them A, B and C. we take data back to 1978 and rank each cohort as a percentile standing in its rank expressed in February as the 26^th percentile for 18-34, the 22.8^th percentile for 35-54 and the 24.1 percentile for 55+ cohort.  To create our measure of confidence disparity/similarity we calculate the three squares of the ranking differences (a-b)^2, (b-c)^2, and (a-c)^2 and sum them. The chart plots the four-month moving average of this measure over time. The chart is not about the rankings being high or low but about the being similar or dissimilar.

In non-recessions and as recoveries transit to a period of normalcy, various age groups experience different relative confidence levels. But in recessions and in early recoveries or poor recoveries, age groups tend to see their confidence levels relatively the same- that means as poor. Because of this regularity this measure of confidence dispersion can serve as an indicator of economic normalcy. Right now the measure seems to imply that the economy is getting to a more normal period of activity as age cohorts are beginning to experience different relative levels of confidence. 

Not yet kicking into that higher gear?

The NFIB survey ticked up in January and it did move up by about the breadth of a tic.

The index has recovered from its swoon that began early last year but now as it gets back near its past cycle peak it is losing momentum.

The chart tells the sad story all too well.

NFIB respondents are seeing evidence of an economic recovery and expect it to continue. That's the Good news. The 'expect the economy to improve' response surged ahead by a net of five points. Still that reading is in the bottom 30% of its high/low range since 1987. It is not an impressive level even though the reading is moving in the right direction.

Retail sales are in this same boat. Sales rose in January but were not impressive. Still, sales rose more strongly in 'the control' format that uses only the data that will be source data for the PCE report and for GDP. That means excluding some big items such as gasoline station sales, vehicle sales and building materials sales. What happens to these categories remains important but the retail sales report is not the source document for them.

Still auto sales were not as strong as expected but non-auto sales did look a lot better. Since autos are still stronger than overall sales on a Yr/Yr basis, maybe we had some issues with seasonal factors or fleet sales in this report. But in context auto sales still look pretty good.

Still... we are no longer seeing more good news piled on top of more good news. and if the economy is going to kick into that higher gear we will need to see some of that.
 

Selected Recent Video Clips on Key Issues and more

Links  to several recent live appearances on TV are below

TOPICS- The US economy the jobs report, Greece

On CNBC Squawk Box live for the ( Joe, Becky and Andrew) Release of the January employment report

http://video.cnbc.com/gallery/?video=3000071268

ABC World News with Dianne Sawyer also on the January jobs report
 http://abcnews.go.com/WNT/video/jobs-gained-january-lowers-unemployment-rate-increased-hiring-america-business-15510119


Bloomberg on New Fed policy/ Pimm Fox, Taking Stock
http://www.bloomberg.com/video/84910600/

Bloomberg on Europe's debt crisis / Pimm Fox with Jens Norrdvig I'm in the second part of this clip.
http://www.bloomberg.com/video/82962474/


As my opinions reflect in the above clips, I am very constructive on the US outlook See the CNBC and ABC clips for that. The job report is a report that is more real than distorted as some claim. I am wary of the new Fed policy statement, But I am somewhat more encouraged that former Fed Chairman Volcker has taken such a positive view of it. For this see the first Bloomberg clip above.

More
You can find my articles on labor force participation rates on the Web site  Seeking Alpha at the link below. It is recommended reading to put the recent employment report in context.
. 
  http://seekingalpha.com/article/355341-a-closer-look-at-labor-participation-rates-part-1

 http://seekingalpha.com/article/355461-a-closer-look-at-labor-participation-rates-part-2

Beware of Greeks bearing grudges...

As we peruse the news this fine day, we see the same old, same old, stories about Greece. They are demonstrating again in Greece. Am I missing something? Does this mean they are welcoming the new deal with the Troika? Or am I confusing it with the parade in lower Manhattan for the World Champion NY Giants football team? Is there more difference here than just the lack of confetti in Greece?

We read that the parties are 'coming to an agreement,' any day now, any hour, or any minute...or not. Regardless of this action, if the people are so opposed to this deal, will they eventually shut up go home and conform? Will they believe their politicians when they say that things would be worse without a deal? We should not simply sign on for this deal and expect it to go-ahead on automatic pilot. ‘Signing a deal’- if it comes to that, will not be the end of it-and everyone knows that.

The ‘Greeks’ (as in, ‘Greek people’) are not on board for this. And while everyone is making noises like oh we (the Greeks) could leave and like some EU commissioners are saying that Greece’s leaving EMU is not like man overboard… the fact is that all that talk is all posturing. Posturing is meant to make the other side see the grim reality of their bluff. But in this case, it is not a bluff by Greece but the clear rejection of the Troika’s stance by the Greek people that is most worrisome. If the three Greek political parties each agree to drink from the Troika’s poisoned chalice and if the Troika gets a piece of paper saying Greece will be compliant with the ‘bail-out terms’ and if they get a time table, too, what if the Greek people do not go along?

Beware of Greeks bearing grudges.

This is what worries me. Greece’s political parties have been cowed into Troika submission, they have been co-opted. They no longer represent the Greek people except in the most meaningless way. They cannot bargain except agree to the Troika’s terms and to try and get some scraps of dignity in return. You would think that of all people the German’s would know better having gone through the demands for unaffordable reparations after WWI. So in what way will their agreement be binding on the people who they clearly no longer represent?

And after Greece settles (or not) what then? What about other EMU members? What will they want?

Let me go back to the economic data which also have been rather fickle at year end. These data are about to go face to face with a very severe weather system in Europe. The economies in Europe, apart from weather, also have to find a way to survive amid all this austerity. Everyone in Europe has yet to explain how ‘less’ will be ‘more.’  Perhaps we should call this the German loaves and fishes miracle of austerity?

As in the US, Europe needs something that is not even being put on the table. It needs short term stimulus in return for credible clear and significant longer-term reform. You will not get it in Greece because it is so clear- so very clear- that the negotiating parties there do not rust one-another. Without trust there is no basis for a lasting deal. So Greece and the Troika might cut some ‘wink, wink’ deal and it might last for ‘a while.’ But the prospects for any real deal in Europe are undercut by the lack of trust and undermined by the lack of growth amid the pursuit of German-inspired austerity that will make things worse and maybe make them so bad, that the prospect of an eventual ‘better’ will not be credible.

Such concerns linger over the European debt negotiations. And while I guess it is true that there is no fighting like infighting among family there is something extremely bitter about this episode with Greece and there are too many others sitting in the wings watching to see how it plays out for me to jump on the feel-good bandwagon.      

I don’t think this is a Lehman moment because Greece will go its own way and create its own ripples. So stop comparing and start thinking.

History is a great teacher but it teaches us lessons and they are that history’s ‘repeats’ are not exact and that to learn from history by avoiding something that looks like a repeat will only lead to a new bit of distress and more lessons for future generations to learn from us.  The real lesson to learn is to realize you must solve the problem. Don’t paper it over. Don’t pretend it’s not there. Don’t think you can put a load on the back of a people who cannot bear it (WWI reparations?). Sometimes losses are loses and bygones are bygones. Maybe Greece needs debt forgiveness and if that seems too much like it creates ‘moral hazard,’ then look for the remedy for future behavior to play out among those who have lent and will take the loss. If the borrower will not learn discipline, then the lender must. Maybe that it where the emphasis should be because there is no use crying over spilled milk, or bad debt. There is no crying in baseball or banking, just score-keeping.  

Bankers believe in Zombies. They believe that you can take those being crushed by debt and bring them to life and make them pay. As long as a banker can stretch out the period of underpayment he can find a way to bear the loss and write it off against another stream of income he can earn. But a write off that is too big, and too sudden is too unmanageable. So understand that this (all this) is really more about coaxing banks through a difficult time and trying to keep alive the rhetoric of ‘moral hazard’ so the banks can take the moral high ground. But in truth bankers that over-lent to Greece and countries that sold to Greece military goods it did not need and arranged financing for it (Germany) are who (or whose banks) we are trying to save are just as guilty as Greece.. Greece cannot be saved. Its people know the debt load will kill it and price of reform sought will undercut their lifestyle to a point that they find it unacceptable.

Better deep in the red than dead?

But for the Greeks it is their lifestyle that is dead. They probably need to start over and to figure out what to do to make their country self-sufficient. That will not happen if they roll over for the Troika and rollover over their debt even at this great discount. There is a plan to try to fit Greece’s expenditures inside a restricted budget but there are no plans to rejuvenate Greece. The plans are supposed to achieve a shrinking of government so that there are enough revenues left to service the new lower level of debt…it’s all about banks

In the end that’s why this will fail and why Greece leaving EMU may be the best solution. It may be initially more painful, but it will allow a market system to spring up and for Greece to find its way back to being competitive. And this time I suspect Greece’s lenders will watch what they are doing and will watch one-another even more closely. Because if banks are honest about it, they have seen the enemy and he is them, even more than Greece.

ADP points to solid job growth

The ADP report  in January has yielded a private non-farm estimate of 170K. That estimate ranks as 25th highest ADP projection  in the last 99 months.    If we get a non farm employment number that has a similar rank over this same span of time the non-farm gains will be about  173K, making the ADP estimate for the month a very close estimate of the non-farm number of the same rank. This closeness is evidence that the distributions of gains in the ADP framework and in the non-farm private data are roughly similar even though there have been rather well-known monthly misses. 


As we look to the possibility for job growth this month we are faced with reasons to be optimistic. We have still-declining levels for weekly jobless claims, a phenomenon that points to improved jobs ahead. We also have mixed signals on the consumer as the U of M report has shown some strong improvement while the Conference Board barometer has backtracked. 


The MFG ISM has risen in the month and its employment metric has declined slightly (by one half of one point) yet it continues to give a very strong signal. 


ADP is a flawed report. It is less than perfect, but the ADP data have been correct is signalling a pick up in job growth this time around even if they have missed the mark on the point estimate. 

This month ADP report shows a discernible slowing in growth across all its size classes of firms in both goods and services  This would suggests a slowdown in non-farm private sector growth compared to last month. Since last months reading was +212K a point estimate of about 170K would be consistent with that. 

With some give back to compensate for the overshoot in the ADP last month we look for private jobs gains in the range of 130K to 150K this month.