Deflation in Europe

Eurozone falls into deflation as M3 money supply shrinks.

It appears price levels are falling in Europe and M3 money supply is down 3.7% in May. I wonder how long this deflation will last. This is not a good sign for the European economy.

So what does the future hold? Deflation? Inflation? Hyperinflation? More to come on this tomorrow...Stay Tuned...

Insane Government Spending

Total government (state, local, federal) spending will be about 45% of total GDP this year. This means that government spending represents nearly half of the total U.S. economy. And to think some people still do not think government is doing enough. I created the graph below from data from usgovernmentspending.com.


Notice total government spending as a percentage of GDP never rose above 10% (except briefly during the Civil War) until after 1913. I wonder why that is...
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A Potential Crisis In the UK Pound Sterling

According to Niall Ferguson, a financial historian, the chances of a UK currency crisis are one in three as the UK's public finances are in the worse shape of any peacetime period in British history.

According to Bloomberg,

Ferguson’s concern stems from the deterioration in the U.K.’s public finances, which prompted Standard & Poor’s to warn on May 21 that the country could lose its AAA debt rating. The firm estimated the cost of propping up Britain’s banks at 100 billion pounds ($166 billion) to 145 billion pounds and said government debts could double to almost 100 percent of gross domestic product by 2013.

Chancellor of the Exchequer Alistair Darling said on April 22 that this year’s government deficit would hit 12.4 percent of GDP. Alan Clarke, a London-based economist at BNP Paribas SA, expects it to reach 17 percent of GDP in 2010.

Read full story here.

Bottom line: Steer clear of investing in the UK for the time being.

George Soros Warns of Higher Inflation

According to billionaire investor George Soros we are heading for higher inflation and interest rates that could potentially stop an economic recovery further down the road.

He says,

As markets revive, fear of inflation will drive up interest rates, which will choke off recovery.

Read the whole story here.

Bankruptcies Surge in SoCal

Personal bankruptcies are surging in Southern California. They are up 75% so far this year over the same time period last year.

Read about it here in the LA Times.

Market Manipulation?

Watch Video below. At 2:20 a floor trader talks about market manipulation by the government. Interesting...



Beware of investing in U.S. government bonds.

Marc Faber: Gloom, Doom, and Boom

A must see video from Bloomberg. Well known financial analyst Marc Faber Doesn't See New Stock Market Lows; Favors Gold.

U.S. Economic Growth Past and Future

Since at least 1870, the United States real GDP growth rate per capita has been about 2% per year. If this trend continues in the 21st century, the real average income per capita in the United States will be 7.24 times higher in 100 years. Currently, the United States has an estimated GDP per capita of $48,000. This means that by 2108 the GDP per capita of the United States will over, $300,000, adjusting for inflation. It is difficult to imagine a world where the average person makes over $300,000 per year.

Will the 2% real GDP per capita growth rate continue in the future? I guess only time will till..It is a possibility I would love to see happen.

China Recovery?

I have been largely positive on a Chinese economy recovery and the Chinese economy in general. However, evidence is coming in that is contradicting my China bullishness. Two days ago there was an article in Forbes very negative on China. Today a piece came out in the Telegraph by Ambrose Evans-Pritchard also very negative on the Chinese economy.

According to Evans-Pritchard,
"China's banks are veering out of control. The half-reformed economy of the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump."

The article goes on to lay out some of the troubles Chinese economy (and for that matter the global economy) may be in for. It is a very interesting read.

Anyone investing in China should be aware of this information; this information has made me reevaluate my very bullish position on the Chinese economy. I am now a tiped bull on China for the time being. However, it may be time to take some profits in Chinese stocks, after all the Shanghai composite index is up 70% since November. Having said that I think there are many great opportunities to invest in China, just exercise some prudent caution. Stay Tuned...

The Insane Waxman-Markey Climate Bill

Yesterday, unfortunately, the House passed the Waxman-Markey climate bill, 219 votes to 212. If this bill becomes law it will cost trillions of dollars to the economy over time and have almost NO impact on global warming.

Britain has a similar cap and trade law that has been in effect only a few years and is already costing the average household $1,300 per year. Despite all the Waxman-Markey bill will cost the economy, it will only reduce global temperature in 2050 by a mere 0.05°C according to Chip Knappenberger, administrator of the World Climate Report. This bill does so little that even some environmental groups such as Greenpeace did not endorse it.

The most costly and onerous regulations of this bill do not even go into effect till after 2020. This is a brilliant political move on the part of Obama and the congressional Democrats because they will be long gone from political office by the time the must austere measures of the bill go into effect. It is also likely that some of the more conservative Democrats were offered billions in spending projects for their districts if they voted for the bill so they could “bribe” their constituents into reelecting them even after voting for this detestable legislation.

Despite all the politicking and behind the scenes dealing, this is a bill that all good liberals (and I would add conservatives and libertarians) should oppose. It does practically nothing to solve the global warming problem, yet it will cost trillions, not to mention the fact that this bill will be a huge regressive tax on the poor and middle classes.

We need real solutions; this bill is not a solution but insanity. The United States consumes a gargantuan amount of energy, mainly from fossil fuels. The truth is it will take a huge technological breakthrough to replace fossil fuels. It is time for Congress to get real and face the truth!

Cap and Trade Bill Passes the House

Cap and Trade Bill Passes the House 219-212. This isn't good. More to come tomorrow got to run today...

Bearish News For U.S. Government Bonds

Dresdner Kleinwort Securities has withdrawn from being a primary U.S. government securities dealer. Primary dealers deal directly with the Federal Reserve in buying U.S. government debt. They then can sell the securities to clients or hold it themselves.

They are REQUIRED to bid on U.S. government debt during treasury auctions. This seems to me to be a bearish sign for U.S. treasuries. However Jefferies & Co joined as a primary dealer last week. This somewhat mitigates the bearish news today.

I'll kept an eye on the situation to see if more primary dealers leave.
I found this information at MarketWatch. More to come on U.S. treasuries....

Chinese Economic News

1) In an interesting article in Forbes today. Gordon Chang is skeptical about an economic recovery in China. If Gordon Chang is right this is not good news for the global economy.

According to Chang,

"So, as big as all of Beijing's spending programs are--they could end up being about 18% of GDP and the largest in the world on a percentage basis--they are not enough to stop the country's accelerating decline for more than a few quarters. China was once in a supercycle upward. Now it has turned a corner and is in a supercycle in the other direction. At some point, this will become evident, even to the World Bank. "

Yikes but I'm sure Jim Rogers would disagree with this analysis. It will be interesting to see who ends up being right.

2) China is buying record amounts of iron ore. Read about it here.

3) The US dollar falls as China calls for a global currency. Read about it here.

4) China is trying to hedge against its dollar holdings. Very smart move I say because there are budgets deficits in the United States as far as the eye can see. One way they are hedging is by buying gold.

Beware British Banks Are Vulnerable

According to the Telegraph:

"In a warning to bankers and consumers after months that have seen large jumps in share prices and hopes that the banking system is recovering, the Bank used its Financial Stability Report to emphasise that the UK remains highly vulnerable to potential shocks."

"the shortfall between what banks have in deposits and what they lend out to customers – has further widened in the past year to more than £800bn."

Bottom line: Use extreme caution if you are thinking of investing in British banks.

European Central Bank Pumps Massive Amount of Money Into Economy

Yesterday the European Central Bank poured a colossal amount of money into the European economy. They poured in €442.2 billion or $614.8 billion; that makes it the largest single amount the ECB (European Central Bank) has done in its history. This could spur high inflation in Europe if the ECB does not act quickly enough to mop up the excess liquidity when the economy picks up again. Mopping up the excess liquidity may kill an economic recovery in the future. The ECB may one day have to chose to raise interest rates and kill an economic recovery or live with high rates of inflation. Either way it is not a fun time to be a central banker in the United States or Europe.

Read about it here. It is perhaps the biggest story today. It may also be one of the reasons why the Dow Jones average was up 172 points today.

How High Will the Unemployment Rate Go?

Definitely over 10% and must likely over 11%. The current “official” unemployment rate stands at 9.4%. This is quite high and will go higher for quite some time. Initial jobless claims rose by 15,000 to 627,000 in the week ended June 20, from a revised 612,000 the week before. This was higher than expected. With recently graduated college and high schools students not finding jobs, the unemployment rate should take another large jump in June probably to 9.8% or higher. Unemployment has been trending higher since Jan 2007 (see figure below).

This recession we are currently in will likely be the worst of the post-WWII era in the United States. The worst economic downturn of the post-WWII era before this one was the recession of the late-1970s and early 1980s when the Federal Reserve drastically increased interest rates to stop the double-digit inflation. I thought it would be interesting to compare unemployment trends of this recession to the recession of the early 1980s (see figure below).

During the early 1980s recession the unemployment rate peaked at 10.8%. I have a feeling the peak unemployment rate will be higher than the peak of the early 1980s recession. Call it an educated guess.

Links:

Today’s Initial Jobless Claims Number:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2FSfQKl0pnQ

Department of Labor Unemployment Statistics:
http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=LNS14000000

College Grads Not Finding Jobs:
http://wcco.com/consumer/College.Graduates.Face.2.1039686.html

U.S. News and World Report on Obama Stimulus:
http://www.usnews.com/blogs/peter-roff/2009/06/08/unemployment-numbers-show-obamas-stimulus-is-sinking-with-the-economy.html