Egypt Ponders Banning the Brotherhood to "Protect the State"; Court Frees Ousted President Hosni Mubarak from Prison

Court Frees Ousted President Hosni Mubarak

Violence has escalated in Egypt and a couple of new complications are in the works. Please consider Egypt Defense Chief Says Army Will Fight to Protect State.

A Cairo court ordered ousted President Hosni Mubarak freed from prison, a move that could complicate Egypt’s increasingly violent political transition, while militants in Sinai killed 26 policemen.

The Cairo criminal court’s order to free Mubarak threatens to inject new tensions in a nation convulsed by unrest that has killed almost 1,000 in the past six days. His potential release may spur arguments by the Muslim Brotherhood and others locked in a standoff with the government that the military-installed leaders want to restore the kind of police state Mubarak led.

“The fact that we’re fighting the Brotherhood doesn’t mean we’ll allow the return of the Mubarak regime, simply because both regimes are two sides of the same coin,” said Islam Hammam, a leader of the Tamarod group.

The court ruling comes at a difficult time for the government. International censure has mounted since it cleared out two pro-Mursi protest camps in the Cairo area on Aug. 14, touching off a cycle of violence from which the country has yet to emerge. About 900 civilians and 100 policemen have died since the camps were stormed.

In Sinai today, militants armed with rocket-propelled grenades killed 25 policemen near the border with the Gaza Strip. The Interior Ministry, in an e-mailed statement, described the incident as a “continuation of the terrorist crimes in Sinai.”

Hours earlier, at least 36 Muslim Brotherhood members were reported killed during what the Interior Ministry said was an attempt to escape from custody while en route to prison. The cabinet said in a statement that security forces responded after prisoners took a police officer hostage. There was no way to reconcile the reports.

Brotherhood Ban Considered

The government is currently considering banning the Brotherhood. Hundreds of its members have been detained. Imams who criticize the army or state institutions in their sermons may be suspended, Ahram Gate reported, citing a statement from the ministry of religious endowments.

Powder Keg Setup

• Inflation is rampant
• The Muslim Brotherhood wants back in power
• Mubarak wants back in power
• The Brotherhood and Mubarak hate each other and both dislike the military
• Criticizing the state is illegal
• Civil war is underway

Prepare for the civil war to escalate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Government Spending as Percentage of GDP; Federal Deficit as Percentage of Revenue

Here are a few charts from reader Tim Wallace on spending, the deficit, and GDP.

Federal Spending as a Percentage of GDP



Spending and GDP in U.S. Dollars



Deficit Compared to Revenue



Wallace writes ...

Hello Mish

1. In the past 48 years we have averaged about 19.3% of GDP in federal spending. Since 2009, federal spending has averaged 22.7% of GDP.

2. The second chart shows 4th quarter GDP numbers along with the federal spending numbers. Note the huge surge in 2009 which has never been pulled back.

3. The last chart shows deficits as a percentage of revenue. Historically, the average is 17.5%. Since 2009 however, 52.7% of spending has been deficit spending. 57 cents of of every dollar spent was borrowed.

My contention is that there has not been an economic recovery, just deficit spending by government to cover up failed economic policies.

Tim

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Celebrating Life; Greetings From Prague

Greetings from Prague, the capital and largest city of the Czech Republic. Actually, I am now back in the states, having returned from a fantastic European trip with Liz, on a delayed honeymoon following our June wedding.

Here are some images from Prague that I would like to share. Click on any image for larger, sharper view.

Prague Old Town Historic Square



Prague Old Town Historic Square



Charles Bridge and Pražský Hrad (Prague Castle)



Fireworks Over Charles Bridge



Stained Glass Windows in St. Vitus Cathedral



Liz in front of St. Vitus Cathedral



Nightime Scene from Charles Bridge



Liz and Mish Dining at Hotel U Zlatého Stromu



On a 12-day European trip, we also traveled to Munich and Rothenburg ob der Tauber in Germany. I will post some images from Germany shortly.

Celebrating Life

I met Liz through Selective Search as noted in my June post Celebrating Life: I Got Married on Friday.

Please click on the previous link for more on our story, how we met, and images from some trips we took in June shortly before we were married.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Official Denials Run Rampant in India; "No Question" of Economic Crisis; Rupee Plunges to Record Low; Gold Coin Imports Banned

When news came last week that India tightened capital controls and banned gold imports, I pinged Pater Tenebrarum at Acting Man with a pair of comments.

1. Looks like India is about ready to blow up
2. Looks good for gold

He agreed on both counts.

"No Question" of Economic Crisis

On Saturday came an "official denial" in an amusing way. Please consider "No Question" of India Economic Crisis.

There is "no question" of India going back to an economic crisis experienced in 1991, as its rupee currency is now linked to the market and foreign exchange reserves are adequate, Prime Minister Manmohan Singh said on Saturday.

"There is no question of going back to 1991," Singh said in a Press Trust of India report published by the Economic Times newspaper on its website, making reference to a balance of payments crisis the country suffered that year.

"At that time foreign exchange in India was a fixed rate. Now it is linked to market. We only correct the volatility of the rupee."

The news agency report said Singh acknowledged India's ballooning current account deficit, which he blamed on large imports of gold as a contributing factor.

"We seem to be investing a lot in unproductive assets," Singh said.

India is trying to curb its citizens' apparently insatiable demand for gold, through measures such as hiking import duties, banning the import of coins and medallions and making domestic buyers pay cash.

The government wants to hold bullion imports this year to "well below" last year's figure of 845 metric tons.

Complete Agreement

I agree there is "No Question" of Economic Crisis. When a country implements capital controls and bans gold imports, the country is clearly in a state of economic crisis, no question about it.

There is one difference between 1991 and now, because the rupee is no longer pegged. This means that instead of attempting to defend a rate with interest rates hikes or gold outflows, India "only" has to "correct the volatility of the rupee".

Only? That's all? So why doesn't India do it?

Don't Worry - Capital Controls are Not Capital Controls

Last Wednesday the Reserve Bank of India denied capital controls were capital controls with promises stable policy environment.

The finance ministry has said it will take all measures to provide a stable policy environment to stem the volatility in rupee and clarified that measures announced by the Reserve Bank of India (RBI) on Wednesday should not be seen as capital controls.

"There is no question of us putting any restriction on outflows... There is no control of outflows of dividends, profits, royalties, or on any kind of commercial outflows which happen in the normal course...," Department of Economic Affairs Secretary Arvind Mayaram told reporters on Friday.

Official Denials Run Rampant in India

The denial is rather amusing given "The RBI announced lowering of the limit on outward remittances by resident Indians to 75,000 dollars from 200,000 dollars a year and reduced the overseas investment limit for domestic companies under the automatic route to 100% of net worth from 400% of net worth earlier."

Here is another humorous statement ""Gold, silver, platinum are what we believe as non-essentials. We have put curbs on that. I don't think we need any more curbs," he said. Another finance ministry official said the measures taken by the RBI cannot be termed as capital controls as they were aimed at ensuring prudent borrowings by corporates."

Don't Worry, It's Not Capital Controls ...

• If the measures are aimed at "prudent borrowing" (as determined by the state of course)
• If the restrictions limit outward remittances on individuals to $75,000 from $200,000
• If the restrictions the overseas investment limit for corporations
• If it pertains to gold, silver, and platinum

Anything else that's not capital controls? Not yet, but I expect more "non-capital controls" to be implemented next week.

Food Inflation

On Wednesday, the Wall Street Journal reported India Inflation Accelerates in July.

India's inflation moved out of the central bank's comfort zone in July, as food prices rose and a weak local currency increased the cost of imports.

The wholesale price index, India's main inflation gauge, rose 5.79% from a year earlier, compared with 4.86% in June and at its fastest pace since February, data from the Ministry of Commerce and Industry showed Wednesday. That exceeded the median estimate of 5.00% in a poll of 13 economists. According to the Reserve Bank of India, inflation above 5.00% hurts the economy's growth prospects.

The latest data will increase the pressure on the central bank which is caught between rising prices and a slowing economy, and pose policy challenges to Raghuram Rajan, who takes over as central bank governor in early September. Though the wholesale inflation has eased from around 10% a couple of years ago, inflation at the retail level is still near double digits.

Food prices increased 11.91% from a year earlier in the past month, compared with 9.74% in June. Vegetable prices rose a staggering 46.59% in July, after a 16.47% increase in June.

Onion Prices Up 144%

Onions, a primary staple in the India diet are up a mere 144% according to Live Mint.

The latest wholesale price index (WPI) numbers released on Wednesday show that onion prices rose 144% in July over the year-ago period, after a similar increase in the previous month. Since January, onion price levels have been nearly double what they were a year ago.

The persistent increase seems to be finally ringing alarm bells, with state governments across the country fighting to bring down prices. Higher onion prices have not only added to high food price inflation, but also rattled governments over the years, for example contributing to the defeat of the Bharatiya Janata Party (BJP) in state elections in Delhi in 1998. Hence the alarm!

Enormous Property Bubble

I have commented several times on India's property bubble. For example, please consider

May 10, 2013: Huge Bubble in India Home Prices Ready to Burst

August 1, 2013: India Housing Bubble Still Expanding

Explaining the bubble is easy enough. Inflation is rampant and investors are willing to chase assets rather than hold on to declining Rupees.

Rupee Hits Record Low of 62/Dollar

Reuters reports Rupee hits record low of 62/dollar, foreign investors baulk.

Finance minister Chidambaram tried to talk up the rupee on Friday after it plumbed another record low on concerns the Reserve Bank of India's (RBI) latest measures to defend the currency could be a step towards outright capital controls.

Traders said the RBI was forced to step in to prop up the rupee as measures from the central bank late on Wednesday restricting how much Indian citizens and companies can invest abroad were seen as yet another roll of the dice that is undermining investor confidence.

Concerns that policymakers were losing control over the currency spread to the stock market, which dropped 4 percent, its biggest one-day decline in nearly two years.

Indian policymakers have cobbled together a slew of steps over the past month in a bid to halt the rupee's slide, including the central bank's extraordinary steps on July 15 to drain cash from the system and raise short-term interest rates in an economy already growing at a decade low.

Yet none of the steps or the rhetoric so far have convinced investors that India can attract overseas investments, which is seen as essential in narrowing a record high current account deficit that is the biggest source of the rupee weakness.

Rupee Plunges 40% in Two Years



The above chart explains the nature of the crisis: Rampant credit and monetary growth that has fueled inflation, capital flight, and a desire to hold gold.

Currency Stress Hits India

On June 24, I wrote Currency Stress Hits India: Rupee Near Record Low, Emerging Nations Face Capital Flight; Global Currency Crisis Awaits. Here is the pertinent snip.

Defending the Rupee

Just like Brazil defending the real,  India now feels compelled to defend the rupee. Good luck with that idea if capital flight takes off in a major way (and I suspect it will).

India does have currency reserves, but those can vanish in a hurry if things get out of hand. And if India does use currency reserves to defend the rupee, I rather doubt the India bond markets will take all that kindly to it.

Thus defending the rupee against further declines is easier said than done if the markets  have indeed soured on the country, and that is precisely how it looks now.

Global Currency Crisis Awaits

A global currency crisis awaits. I do not know what country triggers first. It could easily be Japan, China, Brazil, India, Australia, Canada, the UK, or any of many countries in the eurozone (as well as numerous countries not on anyone's radar).

This sad state of affairs is courtesy of mad central bank monetary policies coupled with inane can-kicking fiscal policies everywhere you look.

Just Your Imagination

But hey, don't worry. There is "No Question" of economic crisis, not in India, nor anywhere else. It's all a figment of your imagination. So move along, and whatever you do, don't buy gold.

To help prevent its citizens from doing such a foolish thing, India banned gold coin imports.

What country is next to ban gold imports?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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3D-Printing Spare Human Parts; Ears and Jaws Already, Livers Coming Up ; Need an Organ? Just Print It

Science marches on at a blistering pace. The star-trek "replicator" that seemed preposterously far-fetched is now here.

For example: Accidentally cut your ear off? Just 3D print a new one

This week, researchers at Hangzhou Dianzi University in China unveiled their Regenovo 3D printer. Unlike more familiar 3D printers, which work with plastic or metal dust, Regenovo prints living tissue – such as these little ears.

The Hangzhou team aren't the only ones 3D-printing spare parts for people. Earlier this year, a team at Cornell University in Ithaca, New York, also demonstrated an ear printer, and Organovo in San Diego, California, are on the way to building fresh human livers

3D Printer Provides Woman with a Brand New Jaw

Last year, New Scientist reported 3D Printer Provides Woman with a Brand New Jaw

An 83-year-old Belgian woman is able to chew, speak and breathe normally again after a machine printed her a new jawbone. Made from a fine titanium powder sculpted by a precision laser beam, her replacement jaw has proven as functional as her own used to be before a potent infection, called osteomyelitis, all but destroyed it.

The medics behind the feat say it is a first. "This is a world premiere, the first time a patient‐specific implant has replaced the entire lower jaw," says Jules Poukens, the researcher who led the operation at Biomed, the biomedical research department of the University of Hasselt, in Belgium. "It's a cautious, but firm step."

In this operation, a 3D printed titanium scaffold was steeped in stem cells and allowed to grow biocompatible tissue inside the abdomen of the recipient. Then, in 2009, researchers reported successfully printing copies of whole thumb bones - opening the way for the replacement of smashed digits using information from MRI scans.

By using an MRI scan of their patient's ailing jawbone to get the shape right, they fed it to a laser sintering 3D printer which fused tiny titanium particles layer by layer until the shape of her jawbone was recreated. It was then coated in a biocompatible ceramic layer. No detail was spared: it even had dimples and cavities that promoted muscle attachment, and sleeves that allowed mandibular nerves to pass through - plus support structures for dental implants the patient might need in future.

The team were astonished at the success of the four-hour jaw implant operation, which took place in June 2011 but which has only just been revealed.

Need an Organ? Just Print It

Please consider Scientists 3-D Print With Human Embryonic Stem Cells

3-D printers can produce gun parts, aircraft wings, food and a lot more, but this new 3-D printed product may be the craziest thing yet: human embryonic stem cells.

Using stem cells as the “ink” in a 3-D printer, researchers in Scotland hope to eventually build 3-D printed organs and tissues. A team at Heriot-Watt University used a specially designed valve-based technique to deposit whole, live cells onto a surface in a specific pattern.



The cells were floating in a “bio-ink,” to use the terminology of the researchers who developed this technique. They were able to squeeze out tiny droplets, containing five cells or fewer per droplet, in a variety of shapes and sizes. To produce clumps of cells, the team printed out cells first and then overlaid those with cell-free bio-ink, resulting in larger droplets or spheroids of cells. The cells would group together inside these spheroids. Spheroid size is key, because stem cells need certain conditions to work properly. This is why very precisely controlled 3-D printing could be so valuable for stem cell research.

After being squeezed out of a thin valve, the cells were still alive and viable, and able to transform into any other cell in the body, the researchers say. It’s the first time anyone has printed human embyronic stem cells, said lead researcher Will Wenmiao Shu, a professor at Heriot-Watt.

The words fascinating and remarkable do not remotely describe this technology. Unbelievable comes close, yet  here we are. I cannot imagine advancements in the next 20 years let alone 100 years from now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Egyptian Stocks Sink, CDS Show Egypt in Top-10 Riskiest Countries; EU Ponders Suspending Aid; McCain, Rand Paul Issue Statement; Civil War?

The violence in Egypt following the military overthrow of former president Mohamed Morsi continues to escalate. Over 800 are dead according to official reports, thousands dead according to other reports.

The stock market, bond market and credit markets have all responded. Credit Default Swaps (CDS) soared to 810, placing Egypt in the top-10 of countries likely to default on sovereign bonds.

Please consider Egyptian Stocks Fall Most Since June as Violence Sparks Protests

Egyptian shares fell the most in two months as Islamists called for more protests following a government crackdown that has left at least 800 people dead. Borrowing costs rose for the first time in seven weeks at an auction today.

The benchmark EGX 30 Index slumped 3.9 percent, the most since June 12, to 5,334.55 at the 1:30 p.m. close in Cairo.

Stocks slid as concerns of an escalation of violence grew following calls by supporters of former Islamist President Mohamed Mursi to continue demonstrations demanding his reinstatement. At least 173 people died in weekend clashes that followed the violent breakup of pro-Mursi protest camps on Aug. 14. The stock market closed Aug. 15 in the first unscheduled shutdown since January 2011, when it suspended trading for almost two months.

Yields Rise

Egypt sold 5.5 billion pounds at an auction of treasury bills today, with the yield on three-month notes rising 18 basis points from last week to 11.44 percent, according to central bank data on Bloomberg. The yield on nine-month bills advanced three basis points to 12.41 percent. Yields on both maturities had plunged 311 and 260 basis points, respectively, since the military deposed Mursi July 3. A 6.5 billion-pound auction, canceled Aug. 15 amid the unrest, will be held tomorrow, according to central bank data on Bloomberg.

Five-year credit default swaps, contracts which insure the country’s debt against default, climbed to 810 basis points, according to CMA data, ranking Egypt among the 10-riskiest credits in the world.

EU Considers Suspension of €5bn in Aid

The Financial Times reports EU to consider suspension of €5bn in Aid to Egypt

Brussels said it will “urgently review” relations with Egypt following an escalation in violence over the past week that has left EU leaders increasingly worried about the future of peace and stability in the Arab world.

EU officials said that the review was likely to recommend a suspension of various forms of aid and loans in total worth €5bn, which had been earmarked to help Egypt in its transition towards democracy following the popular revolution that ended the military regime of Hosni Mubarak two years ago. Suspension would require the backing of EU member states.

The EU together with its 28 member states in November promised Egypt a total of €5bn in grants and loans for a series of initiatives and projects on the condition that democratic reforms were implemented. There was no timescale for disbursement of the funds.

EU officials said that it was too early to identify exactly which parts of the EU-Egypt relationship would be affected by the review but they added that the blocking of funds was “very much on the table”.

McCain, Lindsey Graham Finally Stand with Rand on Egypt Aid

In the US, Breitbart reports McCain, Lindsey Graham Finally Stand with Rand on Egypt Aid

Sens. John McCain (R-AZ) and Lindsey Graham (R-SC) have finally come around to joining Sen. Rand Paul (R-KY) in believing that the U.S. should cut off aid to Egypt amid the deteriorating conditions in that country.

In a joint Friday afternoon statement, McCain and Graham called for the $1.5 billion of annual U.S. aid to Egypt to be cut off until conditions improve there.

“The massacre of civilians this week in Egypt has brought our longstanding relationship with that country to a fork in the road,” McCain and Graham said. “The interim civilian government and security forces – backed up, unfortunately, by the military – are taking Egypt down a dark path, one that the United States cannot and should not travel with them.”

Both Graham and McCain opposed an amendment Paul offered in late July that would have redirected the $1.5 billion per year the U.S. spends on Egypt to help rebuilding the interior of the United States. “All I can see is the billions of American tax dollars that he chooses to send overseas,” Paul said on the Senate floor during that battle, according to Politico. “The president sends billions of dollars to Egypt in the form of advanced fighter planes and tanks while Detroit crumbles.

“In our hour of need in our country, why are you sending money to people that hate us?” Paul added.

When McCain opposed Paul’s amendment cutting off aid to Egypt, he argued that such a move would hurt Israel. “This is a question of whether the senator from Kentucky knows what’s better for Israel, or if Israel knows what’s better for Israel,” McCain said.

Graham made the same argument. “I have a letter here from AIPAC [American Israel Public Affairs Committee] I asked them to comment," Graham said, according to Foreign Policy magazine. Graham then cited the AIPAC letter: “We do not support cutting off all assistance to Egypt at this time.”

Clearly Rand Paul had this correct from the start.

Civil War Possibilities

Pater Tenebrarun at the Acting Man blog comments on the chaos, asking Could a Civil War Break Out?

As most of our readers know, we have followed the events in Egypt off and on ever since the so-called 'Arab Spring' led to the deposition of former strongman Hosni Mubarak.

Here is a list of the most recent articles, which have followed the brief stint of Mohammed Morsi as president.

• Egypt – From Spring to Winter in One Step
• Arab Winter in Full Swing
• More Turmoil in Egypt
• How the Arab Winter Could Become Spring

Initially we pointed out that the 'new boss was the same as the old one'. He had simply adopted the state's apparatus of coercion for his own purposes. We then pointed out that he had failed in the most important task of his presidency: namely that of improving the economy. It is very difficult to do so, given the vested interests in Egypt. It is for instance estimated, that the army controls roughly 40% of the economy. Thus any reform attempt that may result in reducing the army's influence on economic life is probably doomed from the outset. Our friend Raj reports regularly from Egypt, and he too stated very early on that unless Morsi managed to right the economy, he was going to be doomed.

Let us not forget, it was probably mainly a surge in food prices that ultimately led to the downfall of Mubarak. What Egypt needs more urgently than anything else is free market capitalism.

Following the bloody confrontation between the army and the supporters of Mohammed Morsi – who, it must be pointed out once again, won the election fair and square and was deposed in a coup – one must fear that the chaos will worsen and could eventually morph into a civil war type situation. In  that case, we would expect the military to install a junta and attempt to rule the country under emergency regulations.

In the 'Egyptian street' people are convinced that Morsi was only deposed after the US secretly gave its placet to the coup, and very likely this interpretation is correct. After all, the Egyptian military relies heavily on US aid, therefore it probably wouldn't take such a step without first getting the nod from the puppet masters holding the purse strings.

Mubarak's reign has shown that it is in principle possible to oppress the population of Egypt for a long time. The army is no doubt counting on its superior firepower to enable it to do the same thing again. It has already arrested the most important leaders of the Brotherhood, thereby 'decapitating' its main enemy.

The main problem is actually not that the Brotherhood insists on the return of the legitimately elected president Morsi, the main problem is that many people have nothing left to lose due to the miserable economic situation. Moreover, like many other Arab states, Egypt's demographics are such that there is a very large contingent of young people. Young people are by nature less likely to shirk confrontation, they are more hot-headed and less risk-averse than older people. Many are also jobless and see no future for themselves in today's Egypt. It may therefore not be so easy to suppress the revolt and the probability of a civil war breaking out cannot be dismissed out of hand.

Egyptian Pound



Civil War Has Started

It appears to me that a civil war has already started. Regardless, the pertinent question is "How quickly can the military suppress the violence?"

I do not know the answer to that. However, one can watch the stock market, interest rates, credit default swaps, and the Egyptian pound to survey the progress. The currency has stabilized for now, but indicators in aggregate are not so promising. Initially, yields fell following the overthrow of Morsi. Now, along with CDS, they are on the rise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Tweedle Dum vs. Tweedle Dee; Does Janet Yellen Have What It Takes?

The battle over the next Fed chairman is on. Will it be Janet Yellen or Larry Summers?

The Washington Post comments "Janet Yellen called the housing bust and has been mostly right on jobs", asking Does she have what it takes to lead the Fed?

Don't bother reading the article. And don't bother reading any of the equally ridiculous pro-Summers articles you can easily find.

For starters, it is highly likely that President Obama has already made up his mind. He is pretending there is a choice to be made when there is really no choice unless some political event forces a change in direction between now and the announcement.

The supporters of Yellen cite her focus on jobs. The supporters of Larry Summers cite his crisis management skills.

The detractors of Yellen cite her even-more-dovish-than-Bernanke monetary stance. The detractors of Larry Summers question his crisis management skills.

I suggest Summers has a proven track record of crisis management due to his proven track record of causing them, hardly a ringing endorsement for Fed chairman. 

The Detractors Win

The detractors win both sides. Neither Yellen nor Summers is qualified. In fact, there is not a single person who would take the job that is qualified. There should not be a Fed at all.

The idea that a group of economic wonks can sit down and micromanage the economy to health is preposterous. Central bank clowns have proven time and time again they have no idea what the interest rate should be.

A massive bubble in dotcom stocks followed by a massive bubble in housing is proof enough. And this Fed on which Yellen sits has triggered asset bubbles in stocks and bonds and she cannot even see it.

Crisis Management Needed

Curiously, lots of analysis suggest we do not need Larry Summers because there is not going to be another crisis.

Rest assured there will be another crisis, and much sooner than most think. But that does not make Summers qualified. His role is to help create crises, not stop them.

Tweedle Dum vs. Tweedle Dee

The only candidate that makes sense is the candidate who will set a target date to end the Fed. Unfortunately, no such candidate is on the short list.



The choice is between Tweedle-Dee who rates to slosh money around even more than Bernanke in a futile effort to create jobs, and Tweedle-Dum who will do whatever Wall Street wants.

Practically speaking, is there really a difference?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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US Car Makers Crank Out Cars Around the Clock; Who is Buying the Cars?

US car makers are cranking out cars three shifts a day. The goal is to run plants around the clock, 365 days a year, even eliminating breaks.

Please consider Open All Night: America's Car Factories.

Nearly 40% of car factories in North America now operate on work schedules that push production well past 80 hours a week, compared with 11% in 2008, said Ron Harbour, a senior partner with the Oliver Wyman Inc. management consulting firm.

"There has never been a time in the U.S. industry that we've had this high a level of capacity utilization," he said.

But fresh from a near-death experience during the recession, auto makers are reluctant to put money into bricks, mortar and machinery that could become a drag on profits if car sales fall. Volkswagen new $1 billion Chattanooga, Tenn., factory recently cut 500 workers after sales of its new Passat sedan swooned.

Through a series of agreements negotiated with the United Auto Workers union, the Detroit Three now can schedule work at night and on weekends without paying as much in overtime as they would have in the past. Adding a third shift, as many plants have done, also reduces overtime. Overtime pay also starts after 40 hours a week, not after eight hours a day as in the past. On top of those savings, a newly hired Big Three factory worker now earns about $15 an hour versus $28 an hour for veteran workers, under postrecession labor pacts.

Toledo factory managers recently changed break schedules to squeeze out even more production. Instead of shutting down the assembly line eight times a day for routine breaks, they have hired extra workers to fill in during breaks, so the line doesn't stop running.

GM is running six of its U.S. plants through the night on three-shift schedules. Last year, GM produced 3.24 million vehicles in North America compared with 4.52 million in 2007—when it had five more assembly factories.

Ford has gone a step further, adding a fourth crew of workers at some engine and transmission plants to keep those factories running 152 hours out of the 168 hours in a week.

The techniques have helped expand production by 600,000 vehicles during the past 15 months—the equivalent of about three assembly plants, says James Tetreault, Ford's vice president of North America manufacturing. Ford doesn't plan to build a new North American assembly plant, he says.

"In an ideal world, we'd like all our plants to run around the clock, 365 days a year," says Mr. Tetreault. "That would be a financial dream. But we don't know how to do that yet."

Who is Buying Cars?

So who is buying new cars? It's not millennials struggling to find a job, loaded up in student debt and delaying family formation.

The Wall Street Journal reports Who's Buying 'Youth' Cars? Seniors.

In recent years, auto makers have developed a bevy of pint-size models like the Chevy Sonic, Fiat, Ford Fiesta and Kia Soul, and promoted them using social-media, music festival sponsorships, and in some cases, daredevil stunts. To hype the new Chevy Sonic, General Motors Co. filmed the subcompact parachuting out of a plane for an online campaign aimed squarely at 18-to-30-year-olds.

But the largest customers for these cars, about 42% of buyers this year through May, are closer to retirement age, according to registration data compiled by car-shopping website Edmunds.com. The proportion is up from just 29% five years ago.

Meantime, the percentage of 18- to 34-year-olds buying new subcompact cars fell to 12% through May, down from 17% in 2008, according to registration data.

Of course, 50 and 60-somethings are some of the biggest buyers of all cars.

"The baby boomer generation is the largest cohort in the marketplace," Kia's Mr. Sprague said. "Just by virtue of their numbers being so large, we'll continue to see them skew the data for a long time."

Last year, buyers 55 and older accounted for more than 40% of all new car sales, up from 33% in 2008 while buyers between the ages of 18 and 34 represented only 12% of new-car purchases. And that is down from 14% five years ago, according to Edmunds.com.

Auto makers' big prize is the "Millennial Generation"—that group of consumers in their 20s and 30s whose numbers could rival the postwar baby boom that has dominated the auto market for decades.

Millennial Generation "Big Prize"

As more and more seniors stay employed longer (because they have to),  the demand for cars has kept pace. I keep wondering how long that can last. The average age of those working at fast-food restaurants is telling.

There is no pent-up demand that I can see, at least in the age group of those buying.

Auto makers are targeting the big prize, the millennial generation, and curiously even youth cars are not going to the youth. And I do not think they will.

The generation of millennials is nowhere near as big as the boomers, and as a class, the millennials are struggling in low-pay jobs (if they can find work at all), and burdened down in student debt to boot.

And look at the pay differential of the car makers: $15 an hour for new workers versus $28 an hour for veteran workers.

Most importantly, a secular shift in attitudes towards cars and debt have changed. Millennials are not boomers nor do they have boomer attitudes. Carmakers should enjoy the boom while it lasts. The "big prize" is not around the corner.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

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China Releases "Willfully Fraudulent" Inflation and GDP Data

It's easy to make a case that GDP data everywhere is fraudulent because of the definition which includes government deficit spending, regardless of how ridiculous or useless the spending is. However, China takes the distortions to a level well beyond other countries.

Please consider Dodgy data may add $1 trillion to Chinese economy.

China may be exaggerating the size of its economy to the tune of $1 trillion by releasing "willfully fraudulent" inflation and GDP [gross domestic product] data, according to a study out this week.

Numbers from the world's second largest economy are treated with skepticism by some economists, but this latest report has attempted to quantify the scale of discrepancy.

"There is strong evidence indicating that the rate of real Chinese GDP growth, and ultimately total real GDP, may be significantly over stated," said Christopher Balding, associate professor at Peking University's HSBC Business School, and the report's author.

Through "significant and systematic irregularities", official estimates overstate China's true GDP by 8 to 12 percent, or $1 trillion, according to Balding.

In particular, the report focused on housing inflation data, which is one of the biggest items in the Consumer Price Index (CPI). China's booming economy has caused people to migrate from rural areas to the expanding cities, causing house prices to rocket in industrialised areas. Yet official statistics showed rural house prices increasing more than those in urban areas, said Balding.

According to the National Bureau of Statistics China, the price of private housing in rural areas grew at 1.67 percent per year on average, more than three times faster than prices in urban areas, which averaged 0.53 percent.

In addition, official statistics suggest the price of private housing in China rose by a very modest 8.14% over the 11-year period, despite a housing market boom and a quintupling in nominal GDP.

"The claim that the housing component of CPI grew by less than 10 percent between 2000 and 2011 is nothing less than comical," Professor Balding wrote.

Housing and the CPI

On many occasions I have commented on the distortions of housing and the CPI. The same holds true in the US. For example, please consider ...

• January 30, 2013: Dissecting the Fed-Sponsored Housing Bubble; HPI-CPI Revisited; Real Housing Prices; Price Inflation Higher than Fed Admits
• March 13, 2102: How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI
• May 8, 2013: Hugely Negative Real Interest Rates Fuel Yet Another Housing Bubble; A Word About "Inflation" and Treasury Yields

As in the US, China does not directly include housing prices in the CPI. I believe housing prices should be in the CPI.

Ignoring asset bubbles is ridiculous, just as the US proved.

Regardless, it is preposterous to presume "the price of private housing in rural areas grew at 1.67 percent per year on average, more than three times faster than prices in urban areas, which averaged 0.53 percent."

Moreover, and unlike other countries, China includes money that is allocated and not even spent. Chinese electricity usage reports are questionable to say the least.

Is Chinese GDP distorted? Of course. GDP everywhere is so distorted as to be useless, but China is at the head of the list.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Minimizing ObamaPain: Economic Distortions at the 50-Employee Margin

In response to Is Obamacare Really Responsible for Rise in Part-Time Employment? If So, Why Doesn't Average Weekly Hours Show Just That? I received an interesting email from a reader "Robert" who owned a family business with close to 50 employees.

Hello Mish

Having been in a family steel fabricating business for eight years, I can tell you that rather than take on new employees, we always added hours rather than employees when things were active.  We ran for years with 42 employees through good times and bad. Even though we sold the business about 6 years ago, I can tell you that if I were still running things today, rather than go over 50 employees, my decision would have been to add overtime hours to meet higher demand. This increase in hours would have tended to offset the trend in some other industries to cut hours to less than 30 hrs/week leading to the observed flat trend of Average Weekly Hours in data provided by the BLS.

Minimizing ObamaPain

And so it goes. Some industries hire temps, some increase hours (especially companies near 50 workers), and some reduce hours and hire more workers.

The net effect has been a huge shift towards hiring more part-time workers, but the distortions are not uniform.

Everyone does what they can to minimize ObamaPain

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Losing Faith in Gold at the Wrong Time; Did Paulson's Sale Mark the Bottom? Who's Left to Sell?

Bloomberg, frequently a fount of anti-gold propaganda came out with a pair of articles on Wednesday, worth a read primarily from a contrarian point of view.

Gold Bull Paulson Cuts SPDR Stake by Half in Bear Market

Bloomberg reports Gold Bull Paulson Cuts SPDR Stake by Half in Bear Market

Billionaire hedge fund manager John Paulson, who told investors as recently as last month that they should own gold, cut his holdings in the metal by more than half as prices plunged into a bear market.

Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 “due to a reduced need for hedging,” according to an e-mailed response to questions.

Billionaires George Soros and Daniel Loeb sold their entire SPDR stakes in the past quarter, U.S. Securities and Exchange Commission filings showed.

At an investor conference on July 17, Paulson affirmed a commitment to investing in the metal and stocks of producers to hedge against currency debasement as central banks pump money into economies. The firm didn’t provide additional comment yesterday on its SPDR stake. The hedge fund made $15 billion for investors in 2007 by betting against subprime mortgages before the housing
collapse.

Money managers cut their bullish gold bets by 27 percent to 48,103 futures and options in the week ended Aug. 6, U.S. Commodity Futures Trading Commission data show on Aug. 9. The net-long positions dropped 76 percent since early October.

David Einhorn’s Greenlight Capital Inc. sold its entire stake of 1.97 million shares in Barrick, the largest producer of the metal, in the second quarter, a government filing showed yesterday. Jonathan Gasthalter, a spokesman, declined to comment.

“Confidence in gold is rattled over the short term, and we saw rotation of funds out of gold into equities that continue to march higher,” Scott Gardner, who helps manage $400 million at Verdmont Capital SA in Panama City, said in a telephone interview.

Who's Left to Sell?

With all that selling, some might wonder "Who's Left to Sell?" The answer might not be what you think at first glance.

Since someone has to own the assets at any point in time, there is still someone left to sell. There always is. However, from a sentiment standpoint, high profile gold supporters dumping their stash en masse is what it takes to make a bottom.

Losing Faith in Gold at the Wrong Time

Bloomberg poured it on with a sappy report Losing Faith in Gold From Ghana to Vancouver Proves Rout.

The article starts off with a video "Crime Hits Ghana Mining Town Amid Gold Decline". In a second video, Bloomberg's Niki O'Callaghan reports on gold's decline from its 2011 peak, which has ravaged markets and livelihoods around the world.

Here are a few clips from the article.

Gold’s swift fall, including two days in April when it plunged the most since 1980, has ravaged hopes and livelihoods around the world -- from the 1 million miners in Ghana who scour in the dirt, to thousands of executives and geologists at mining exploration firms that are running out of cash in Vancouver. Gone too are jobs for auditors, bankers and analysts in the finance capitals of Toronto and London. Investors who bet big and lost are shifting assets elsewhere and scaling back retirement plans.

“The foundation for gold has eroded,” said Edward Lashinski, the Chicago-based director of global strategy for futures trading at RBC Capital Markets LLC. “Capital can be deployed much more effectively in other enterprises that actually see a return.”

The drop frustrates ordinary and sophisticated investors alike. John Paulson, the New York hedge fund manager noted for making $15 billion with a bet against the U.S. housing market in 2007, told investors in February 2012 that gold would be his next triumph. His gold fund lost 59 percent through July this year, according to a person familiar with the results. The University of Texas Investment Management Co. -- whose advisers include Dallas hedge fund manager Kyle Bass, also known for a winning housing gamble -- has seen a gold hoard once valued at $1.5 billion decline by more than $400 million.

‘Trash Bags’

“We’re holding trash bags,” said Philip Mann, 53, who with his wife put about $160,000, half their retirement savings, into gold and silver coins starting in 2009. They’re now worth at least 40 percent less, including sales mark-ups, he said. The drop forced him to cash out a 401(k) retirement plan, losing money to penalties. It also drained resources for two sons’ college bills and the planned purchase of a new home, said Mann, a retail supply-chain manager in Portland, Tennessee.

“Gold is still a bubble,” said Ronald Wildmann, managing director of Basinvest AG in Zurich, which manages 100 million Swiss francs ($107 million).

Sappy Bloomberg Reporting

Pray tell how can a decline in gold force anyone to cash out their 401K, losing additional money to penalties? The answer is "It can't".

The real story is Mann put money he needed for other purposes into a speculative bet at the wrong time. That byline is not remotely newsworthy.

The same thing happened with housing in 2005 and with equities in 2007. And with all the equity bulls and their absurd faith in the Fed, it is going to happen again with equities.

More Bloomberg Propaganda

Want some additional anti-gold propaganda courtesy of Bloomberg? If so, please consider a 13-segment slideshow on "The Real Cost of Owning Gold"

Did Paulson's Sale Mark the Bottom?

I think so, and so does Pater Tenebrarum at the Acting Man blog in his article Gold and Gold Stocks Update – John Paulson Sells GLD

Paulson & Co. – a Victim of Redemptions?

Today news hit that John Paulson has finally sold a big chunk of his position in GLD. It is not terribly surprising that this happened in the quarter when gold made its low. After Paulson sold his holdings in bank stocks, the group soared, with many of the stocks he had sold at the lows rising by 200% and more thereafter. However, this time it has probably less to do with his bad timing, but very likely more with the bad timing of investors in his funds.

As the Bloomberg article mentions: "Paulson & Co., the largest investor in the SPDR Gold Trust, the biggest exchange-traded product for the metal, pared its stake to 10.2 million shares in the three months ended June 30 from 21.8 million at the end of the first quarter, according to a government filing yesterday. The New York-based firm, which manages $18 billion, cut its ownership for the first time since 2011 due to a reduced need for hedging, according to an e-mailed response to questions."

A friend reminded us that Paulson & Co. runs many funds that are denominated in gold. Any redemptions from these funds would therefore reduce the need for hedging. So it seems that Paulson's investors have cut their exposure to the gold denominated versions of his funds at exactly the wrong moment. This is actually something that always tends to happen near market lows.

Apparently a number of other prominent hedge funds, including the Soros fund, also cut their exposure in the second quarter. So far they have all been wrong twice: first by holding on until the lows were made, and then by selling just as the market reversed and a rally started.

As a matter of fact, we think it is a good thing these investors are gone. They were all late-comers to the gold bull market and their involvement has essentially proved to be a curse rather than a blessing. In fact, one should probably begin to get careful once they decide to get involved again, which is bound to happen at some point. In the meantime, these latest news may well contribute to a developing 'wall of worry' backdrop.

Bloomberg Slant

Via email, Tenebrarum had this comment regarding Soros selling his gold: "Bloomberg is not telling you everything. When Soros sold the positions they are talking about (which by the way is old news regurgitated), he concurrently bought a huge position in call options on GDXJ - an investment that was far greater than what he sold."

Comment on Paulson's Sale

The one thing upsetting about Paulson's gold sale is the fact that he dumped his gold even though "he told investors as recently as last month that they should own gold".

If this was purposeful, I consider it unethical. The other possibility is redemptions forced the sale. Of course both could be true.

The Bottom?

Only in hindsight will we know if Paulson selling marks the bottom, but I sure like my chances here with all the bears coming out of the woodwork in praise of equities and trashing gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Is Selling Bonds the Taste of Things to Come?

Treasury yields are on the rise as I have noted on numerous occasions recently.

The action has prompted the world’s largest hedge-fund manager, to throw in the towel on treasuries and inflation-linked TIPS.

Please consider Dalio Patched All Weather’s Rate Risk as U.S. Bonds Fell

As the bond market plunged in late June, Ray Dalio convened the clients of Bridgewater Associates LP, the world’s largest hedge-fund manager, to tell them that a fund designed to withstand a broad range of market scenarios was too vulnerable to changes in interest rates.

Bridgewater, citing months of study, said it had underestimated the interest-rate sensitivity of various assets in its All Weather fund and was taking steps to mitigate the risk, according to clients who listened to or read a transcript of the June 24 call. By the end of the month, the Westport, Connecticut-based firm had sold off enough Treasuries and inflation-linked bonds to help reduce the fund’s most rate-sensitive assets by $37 billion, according to fund documents and data provided by investors.

The move, disclosed to investors five days after the Federal Reserve said it’s prepared to phase out its unprecedented bond purchases, was unusual for the fund. As its name suggests, All Weather is designed to produce returns in most economic environments and avoid altering asset allocations when the outlook changes. All Weather incurred a second-quarter loss of 8.4 percent that was primarily tied to its $56 billion portfolio of inflation-linked debt, said the clients, who asked not to be named because the fund is private. ‘A Foretaste’

The decline at All Weather and similar funds, including those run by Cliff Asness’s AQR Capital Management LLC and Invesco Ltd. (IVZ), shows Bridgewater’s pioneering strategy for allocating assets between stocks and bonds, known as risk parity, can leave investors overexposed to rising interest rates. The losses were amplified for some funds by a selloff in inflation-linked securities that also caught Bill Gross’s $262 billion Pimco Total Return Fund (PTTRX) off guard.

“This is just a foretaste of what is going to happen,” said Ramin Nakisa, a global asset-allocation strategist at UBS Investment Bank who co-wrote a March research report titled “When Risk Parity Goes Wrong.” Nakisa called June’s selloff in Treasuries and inflation-linked bonds “a dress rehearsal” for the volatility awaiting when the U.S. Federal Reserve actually begins to taper its bond-buying program, known as quantitative easing.

All Weather trimmed its use of leverage to about 144 percent of net assets at the end of June, according to the clients who requested anonymity. Gross exposures to different asset classes declined to about $116 billion from $138 billion in the quarter, while net assets stayed at $80 billion.

Reflections on Leverage

Lovely. All Weather now has a mere 144 percent leverage? What happens if stocks, bonds, and commodities all take a dive?

Here's the deal: This selloff in treasuries may be over. Or it may not be. Anyone who thinks they know is fooling themselves.

What I do know is leverage works both ways. I also know that the Fed has so distorted the economic horizon that it is next to impossible to predict what's coming down the pike.

Stocks, bonds, and commodities other than gold all rose in unison over the past few years. My bet is on an unwinding of that trade.

I see no value in treasuries, no value in corporate bonds, no value in equities, and no value in municipal bonds.

I do see value in gold, so that is where I am. Without leverage. Patiently waiting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Is Obamacare Really Responsible for Rise in Part-Time Employment? If So, Why Doesn't Average Weekly Hours Show Just That?

Inquiring minds are digging into average weekly hours of workers looking for Obamacare effects on which to place blame.

Average Weekly Hours Of Production And Nonsupervisory Employees



Since this data series began in 1964, the average weekly workweek has been trending lower.

Note the tendency following each recession. 1990-1998 is the only exception to the general rule that hours never recovered to the previous pre-recession level.

Last Five Observations

• 2013-07: 33.6 Hours 
• 2013-06: 33.7 Hours   
• 2013-05: 33.7 Hours   
• 2013-04: 33.7 Hours   
• 2013-03: 33.8 Hours   

Lets' zero in to a tighter timeline for a closer look.



The second chart shows that in spite of Obamacare, average weekly hours has been bouncing between 33.6 and 33.8 for quite some time.

Several readers emailed such data is proof that Obamacare is not having the effect that I have repeatedly stated that it has.

They are wrong.

Just because hours have stabilized does not mean there is no Obamacare effect. It simply means some industries have not been impacted as much as others.  You just have to know where to look.

Focus on Home Centers, General Merchandise, Services for Elderly

Jed Graham at Investor's Business Daily highlights select areas in his report ObamaCare Fuels Sharp Workweek Drop In 4 Industries, while coming to the proper conclusion.

Anyone who insists ObamaCare employer penalties aren't having a meaningful impact on work hours simply hasn't looked closely at the evidence.

In a private economy with 114 million workers clocking 34.4 hours a week on average, it's easy to miss important changes. What feels like a wave to modest-wage workers getting hit may appear to be a mere ripple from an altitude of 40,000 feet.

After all, 1.4 million workers could lose an 8-hour shift and it would shave just six minutes off the average workweek. But if one looks closely, it's not hard to find industry groups with an unprecedented drop in work hours since ObamaCare became law.



Among retail bakeries, home-improvement stores and providers of social assistance to the elderly and disabled, the workweek for nonmanagers has fallen to record-low levels — by far.

At general merchandise stores, department stores and discounters, the rate at which the workweek has fallen since early 2012 is way off the charts relative to prior data going back to 1990.

The White House pointed to hours worked in the restaurant sector to disprove an ObamaCare impact, but the data don't support the claim. Because average hours worked are already below 25 hours, part-timers hired for 28 hours would raise the average.

Questions and Answers

Q: Why doesn't a chart of average weekly hours show the Obamacare effect?
A: It does. You just have to look in the right places.

Q: Is Obamacare responsible for the overall trend of declining workweek hours?
A: The workweek has been declining since the series began, so the answer must be no. However, Obamacare has indeed contributed to the trend as shown above.

Q: Is Obamacare to blame for rising part-time employment?
A: Yes

Obamacare Effects

For more on "Obamacare Effects", please see

• Trends in Full and Part-Time Employment; Obamacare Job Double Counting and Other Economic Distortions
 
• Immigration Bill Incentivizes Employers To Fire Americans and Hire Amnestied Immigrants; Immigration and Obamacare’s Employer Mandate
 
• 22% Think Obamacare Will Make Their Situation Better, 42% Say Worse
 
• Obamacare Effects Hit Local Governments, Small Businesses, Temp Staffing Agencies; Chicago Dumps Retirees Into Obamacare
 
• Don't Worry, Trend Towards Hiring Temps is Only Temporary (And Not at All Related to Obamacare)
 
• Obamacare Premiums 47% Higher But Deductibles 27% Lower Than Grandfathered Health Plans; Obamacare Lies
 
• Opting Out of Obamacare (the Unaffordable Health Care Act); Not Even Labor Unions Want It 
 
• Prepping for Obamacare, Olive Garden and Red Lobster Cut Workers' Hours; Are Other Companies Doing the same? Tip Sharing Lowers Minimum Wage; Like One, Like All?
 
• Is Obamacare Responsible for the Surge in Part-Time Jobs? What About Obama's Defense Layoff Suspensions?

As Jed Graham states "Anyone who insists ObamaCare employer penalties aren't having a meaningful impact on work hours simply hasn't looked closely at the evidence."

To which I would add ... the economic distortions go far beyond part-time employment.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Philly Fed Misses Expectations; Industrial Production Unchanged; Manufacturing Declines; Treasury Yields Soar Anyway

Philly Fed Misses Expectations

Bloomberg reports Manufacturing in Philadelphia Regions Expands for Third Month

The Federal Reserve Bank of Philadelphia’s general economic index fell to 9.3 this month from a reading of 19.8 in July that was the highest since March 2011. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.

The median forecast of 54 economists surveyed by Bloomberg called for a reading of 15. Estimates ranged from 7 to 23.

Industrial Production Unchanged

Manufacturing in the Philadelphia region may be up, but overall manufacturing is negative while industrial production is unchanged for July.

Industrial production in the U.S. was unchanged in July as a slowdown at factories overshadowed an increase in mining.

The reading for output at factories, mines and utilities followed a 0.2 percent gain the prior month that was smaller than previously reported, a report from the Federal Reserve showed today in Washington. The median forecast in a Bloomberg survey of 82 economists called for a 0.3 percent rise in July.

Manufacturing, which makes up 75 percent of total production, declined for the first time in three months.

Month-Over-Month Manufacturing Declines



Manufacturing is down month-over-month but only slightly. Let's look at some longer term trends in manufacturing and industrial production.

Industrial Production Percent Change From Year Ago



Manufacturing Percent Change From Year Ago



Trends are certainly weakening in manufacturing and industrial production.

Wal-Mart Cuts Profit Outlook

As noted earlier, Wal-Mart, Macy's, Kohl's Cut Profit Outlook; Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery.

With a weaker than expected Philly Fed, negative manufacturing, flat industrial production numbers, and a declining outlook at Wal-Mart and other retail stores, one might have thought treasury yields would drop.

Nonetheless, treasury yields rose, presumably on the assumption the Fed is still going to taper asset purchases starting next month and the economy will strengthen.

The first assumption is questionable, the latter is highly overoptimistic.

$TNX 10-Year Treasury Yield



$TYX 30-Year Treasury Yield



Yields Rise Significantly in Two Days

• In the last two days Yield on the 30-Year long bond rose from 3.602% to as high as 3.837%, a rise of 23.5 basis points (nearly a quarter percentage point).
• Yield on the 10-Year treasury note rose from 2.552% to as high as 2.821%, a significant rise of 26.9 basis points (over a quarter percentage point).

Curve Watchers Anonymous offers the following chart to help put things in proper perspective.

Yield Curve Historical Perspective



 click on chart for sharper image

• $TYX: 30-Year Treasury Yield - Green
• $TNX: 10-Year Treasury Yield - Orange
• $FVX: 05-Year Treasury Yield - Blue
• $IRX: 03-Mnth Treasury Yield - Brown

To understand the significance of this move higher in treasury yields, please see Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What's Next For Housing?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Wal-Mart, Macy's, Kohl's Cut Profit Outlook; Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery

The earnings hit parade keeps on rolling, but not in the directions bulls wanted or expected. And with stocks priced well beyond perfection, today's reaction should hardly be a surprise. Yet, treasury yields soared once again in spite of poor earnings, and in spite of a flat industrial production report.

Wal-Mart, Macy's, Kohl's Cut Profit Outlook

Yahoo!Finance reports Wal-Mart cuts profit outlook on shopper worries

Wal-Mart Stores Inc. cut its annual profit and revenue outlook Thursday as the world's largest retailer expects a tough economy at home and abroad to continue to squeeze its low-income shoppers through the rest of the year.

Wal-Mart also reported second-quarter results that missed Wall Street estimates. The company's stock fell nearly 2 percent in premarket trading.

Wal-Mart's sober assessment of consumer spending adds to worries in earnings from Macy's Inc. and Kohl's Corp. Both lowered their expectations for the year after reporting disappointing results.

Wal-Mart said recent tax changes have further put pressure on its shoppers. Americans are dealing with a 2 percentage-point increase in payroll taxes that took effect Jan. 1. That means that take-home pay for a household earning $50,000 a year has been sliced by $1,000.

"The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending," Wal-Mart Chief Financial Officer Charles Holley said in a statement. He noted a "reluctance" among its customers to spend on discretionary items like flat-screen TVs.

Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery

The Wall Street Journal reports Cisco to Cut 4,000 Jobs, Blames Weak Economic Recovery.

Cisco Systems Inc. is once again tightening its belt, this time before bad news hits the bottom line.

The Silicon Valley network-equipment giant on Wednesday said it would cut 4,000 jobs, or 5% of its workforce, despite reporting an 18% jump in profit in the fourth fiscal quarter.

"What we see is slow steady improvement, but not at the pace we want," Mr. Chambers told analysts on a conference call.

While orders from customers in the Americas rose 5% in the fourth period, for example, orders from Asia declined 3%—and its business in China fell 6%.

Cisco, based in San Jose, Calif., is best known for hardware that helps pump data to and around the Internet, selling both to communications carriers as well as other classes of companies. The performance of those mainstay businesses was mixed.

Revenue in Cisco's biggest segment, switching equipment, rose 5%. But sales were flat in the company's original business of routing gear.

Cisco may be a mixed bag, but the outlook for retailers certainly is not. Wal-Mart accounts for a whopping 10 percent of nonautomotive retail sales, and its outlook is telling. And once again interest rates are up across the US treasury curve which certainly will not be good for housing or jobs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Interested In Buying Gold? Why Wait?

The title of this post is a play on the Yahoo! Finance video Wait for Further Pullback in which Jeff Macke asked Options Monster founder Jon Najarian if this rally was the "real deal".

Najarian says gold is looking good so far but it's still locked in a range. Where others see resistance in the $1,325 area, Najarian is more optimistic. "It was $1,425 in June of this year. I think that's the next stopping point."

Najarian says the trade here is to chill and wait for a pullback. If it gives up the ghost again and drops below $1,300 he's a buyer. If not he's happy to let others chase.

Gold "Looking Good" So Why Wait?

Najarian says "gold is looking good". He also thinks "$1,425 is the next stopping point".

But low and behold,  Najarian wants another pullback to $1300 first. Good grief. Why does anyone think they can time anything to that degree?

I suggest it cannot be done. If you think $1,425 is the next stopping point, does it matter that much if you buy at $1300 vs $1325?

Here's the deal: I do not know what the "next stop" is for gold, nor does anyone else.  What I do know is that micro-managing entry points, hoping for a $25 pullback when you believe the price is headed $100 or more higher is silly.

By the way, I also think "gold is looking good" here, but I am talking my book as well as my belief. That aside, I am pleased to see all these wimpy bulls. One of these breakouts is going to hold, and I will not be hoping for a pullback when it happens.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mortgage Applications Decline 13th Time in 15 Weeks; Are Mortgage Rates Cheap? What's Next For Housing?

Here are a couple of charts courtesy of Bankrate. The annotations are mine.

15-Year Fixed Rate Mortgages



30-Year Fixed Rate Mortgages



Explaining the Rebound in Housing

If you are looking for what fueled the rebound in home sales and the increase in home prices, look no further than the above chart.

In the two-year period from December 2010 until December 2012, the rate on popular 30-year mortgages fell from 4.97% to 3.42%, a decline of 155 basis points (1.55 percentage points). In April, rates were still near record lows at 3.56%.

Are Mortgage Rates Cheap?

From the record low in December 2012, 30-year fixed rate mortgages have risen 97 basis points to 4.39%.

While still low historically, it's the direction of the trend that is important, not the absolute number. A one percentage point increase in rates decreases housing affordability by 10-11%.

US Treasury Rates

Mortgage rates are generally tied to rates on 10-Year US treasuries. Here is a chart that explains the rise in mortgage rates.



click on chart for sharper image

• $TYX: 30-Year Treasury Yield - Green
• $TNX: 10-Year Treasury Yield - Orange
• $FVX: 05-Year Treasury Yield - Blue
• $IRX: 03-Mnth Treasury Yield - Brown

The above chart from yesterday's post Treasury Yields Rise Following .2% Rise in Retail Sales; Fed Tapering Begins in September?

Treasury Yields and Housing Affordability

On June 24, in 10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability? I commented ...

Anyone who stretched to buy is no longer qualified unless they locked some time ago.

Refinancing will soon be dead in the water (anyone who has not already locked no longer has any incentive) and new home affordability has taken a big hit.

Mainstream media talking heads say this will not affect the housing recovery. Assuming this trend sticks (even if rates simply level off now), how can this bond revolt not affect housing?

Mortgage Applications Decline 13th Time in 15 Weeks

From the latest Mortgage Bankers Association Weekly Application Survey ...

• Mortgage applications decreased 4.7 percent from the previous week
• The Refinance Index decreased 4 percent from the previous week
• The seasonally adjusted Purchase Index decreased 5 percent from the previous week
• The unadjusted Purchase Index decreased 6 percent compared with the previous week

One week does not make a trend, but the trend looks ominous. The weekly application surveys show a decline in mortgage applications for the 13th time in 15 weeks.

What's Next For Housing?

Curiously, refinance applications although trending lower, still account for about 63% of applications.

I spoke with my friend Michael Becker, a mortgage broker at WCS Funding Group and he commented that he is still refinancing people with rates over 6%. Some people just now have the equity available to refinance.

Yet, with rising rates, the drop in affordability, the pent-up demand to buy declining, and the decline in the number of applications, don't expect too much more (if any), rise in home values. And don't expect mortgage applications to break this trend either.

OK Ben, you still going to taper?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Egypt Police Storm Pro-Mursi Camps; Deadly Clashes; Stocks Lower, Market Closed Until August 18

Violence in Egypt took a turn for the worse as Police Storm Pro-Mursi Camps.

Egypt’s security forces stormed two sit-ins in Cairo where Islamist supporters of former President Mohamed Mursi have been protesting his overthrow. Bursts of gunfire rang out, and reports of casualties varied widely.

At least 15 people were confirmed dead as security forces moved into the camps at Rabaa and Nahda in the capital, according to Mohamed Sultan, head of the ambulance authority. State TV said the casualties included five police. An e-mailed claim, which couldn’t be independently verified, from a Muslim Brotherhood-led alliance that backs Mursi said more than 2,200 protesters were killed at Rabaa alone.



Image from  El Watan/EPA

Protesters' tents burn as Egyptian security forces move in to clear one of the two sit-in sites of supporters of ousted president Morsi, near Rabaa Adawiya mosque, in Cairo, Egypt, on August 14, 2013.

“What happened isn’t the end of instability,” Ziad Akl, a senior analyst with Cairo-based Al Ahram Centre for Political and Strategic Studies. “Dispersing the sit-in just means the Muslim Brotherhood will seek other ways to protest and put pressure on the government.”

Economic Picture ‘Hideous’

“The economic picture remains hideous by any standards,” said Crispin Hawes, head of the Middle East program at the New York-based Eurasia Group, which monitors political risk. “One of the major pillars of the Egyptian economy is tourism. The longer that the violence goes on, the longer it will take for Egypt to recover the type of tourism revenues it was generating before the revolution in 2011. It has all the potential for a major disaster, so much can go wrong.”

Stocks Lower, Market Closed Until August 18

Bloomberg reports Egyptian Stocks Lower, Bourse Closed.

All but two stocks on the index fell as police stormed the camps at Rabaa and Nahda in the capital, where Mursi supporters have congregated since he was overthrown by the military last month. The death toll reported by the Health Ministry was disputed by the Muslim Brotherhood, which claims hundreds were killed by security forces. The group and its allies had vowed to maintain demonstrations until Mursi is restored to office.

“The biggest concern is things on the streets may be getting out of hand and no one knows what the consequences will be,” said Ashraf Akhnoukh, Cairo-based manager for Middle East and North Africa markets at Commercial International Brokerage Co. “For investors, it’s unclear whether this operation can be completed today or if it will be protracted into a street battle that results in a state of emergency or a curfew.”

Bourse Closing

The bourse’s decision to close tomorrow is the first since January 2011, the start of the revolt against former President Hosni Mubarak, when trading was suspended for almost two months. Trading will resume Aug. 18, the bourse said in a statement.

‘Much Worse’

“We now believe that things in Egypt have the strong potential of getting much worse, pushing through the positive aura that has comforted local investors hoping of a business-friendly environment and no MB in combination with pressured fundamentals,” Emad Mostaque, a strategist at Noah Capital Markets, said in the e-mailed note.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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