Australia Manufacturing Collapses as Commodity Supercycle Stalls; Labor and Unions Wrecked Australia

Australia fundamentals deteriorate rapidly as evidenced by a collapse in the PMI Manufacturing Index in April.

Key Findings

• Manufacturing activity contracted significantly in April as conditions weakened amid a strong Australian dollar, intense import competition, high energy costs and weak local confidence.
• The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) fell 7.7 points to 36.7 on a seasonally adjusted basis. (Readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decrease.)
• This is the lowest level the Australian PMI® has recorded since May 2009, with many of the key sub-indexes also dropping to levels not seen since 2009. The three-month moving average in April fell to 42.2 points from 43.4 points in March.
• Contractions in activity were recorded in seven out of the eight manufacturing sub-sectors. Significant contractions were recorded in food, beverage & tobacco products; printing & recorded media; non-metallic mineral products; metal products; and machinery & equipment.
• Sharp declines in production, new orders and employment were recorded in April, while finished stocks and deliveries declined as well, albeit at a more moderate pace.
• Capacity utilization in the manufacturing sector fell 2.4 points to 68.6 (the lowest level since June 2009), consistent with the overall drop in activity in the sector.
• Exports continued to contract for the ninth consecutive month, as the exports sub-index fell to 24.5 in April. This was the lowest reading in the history of this sub-index (commencing in 2004).
• Significant contractions in manufacturing activity were recorded across most States, especially in Victoria where the record of activity fell 8.4 points to 29.1 in April, the lowest level on record.

New Orders

The new orders sub-index decreased by 7.0 points to 32.4 points in April (seasonally adjusted). This was the lowest level recorded for this sub-index since May 2009.

Employment

The seasonally adjusted employment sub-index decreased by 9.4 points to 39.3 in April, the lowest level since May 2009.

Inventories

Manufacturing inventories contracted again in April, with the sub-index falling 4.8 points to 46.4 (seasonally adjusted). The deliveries sub-index declined 7.3 points to 41.1, indicating that deliveries have been contracting since March 2012.

Australia PMI at a Glance

Series Data	Apr Index	Mar Index	Percentage Point Change	Direction	Rate of Change	Trend (Months)
PMI™	44.4	36.7	-7.7	Contracting	Faster	22
Production	41.7	33.1	-8.6	Contracting	Faster	13
Employment	48.7	39.3	-9.4	Contracting	Faster	18
New Orders	39.4	32.4	-7.0	Contracting	Faster	8
Inventories	51.2	46.4	-4.8	Contracting	From Expanding	1
Supplier Deliveries	48.4	41.1	-7.3	Contracting	Faster	14
Input Prices	65.5	57.0	-8.5	Expanding	Slower	131
Exports	27.4	24.5	-2.9	Contracting	Faster	9
Selling Prices	43.0	40.3	-2.7	Contracting	Faster	25
Average Wages	57.7	57.0	-0.7	Expanding	Slower	48
Capacity Utilization	71.0	68.6	-2.4	Decrease

Macro Alert From Steen Jakobsen

Via email, Steen Jakobsen at Saxo Bank sent these comments ...

Macro Alert: Australia is seeing significant slow-down.

1. Australia's benefit from the Super Cycle in commodities is petering out in 2013. Mining investment to GDP will peak at 8%. This concept is supported by the RBA. 
2. There are significant reductions in pipeline projects due to lower general level of commodity prices and cancellations. 
3. The non-mining economy is weaker and getting weaker
4. China slow-down hits Australia

Massive Imbalances

Please note the massive imbalances in the PMI report. Input prices have been expanding for 131 straight months. Wages have been expanding for 48 months. Selling prices have been contracting for 25 months.

New orders and exports tell the story. Wages are too high. Margin pressures mount. Employment must drop and it did. The employment index was down a monstrous 9.4 points.

Labor and Unions Wrecked Australia

The labor party and unions wrecked Australia. This was invisible for years because a housing boom and China-fueled commodity boom masked the untenable nature of wage and property bubble growth.

Now, it's payback time.

On September 14, prime minister Julia Gillard, leader of the Australian Labor Party will be thrown out of office in a landslide. Unfortunately, it will take years for Australia to recover from the damage caused by Labor.

Addendum - Comments from Steve Keen

Steve Keen blames both parties.

Via email, Keen says "The damage began under Labor with Hawke and Keating, was turbocharged by the Liberals under Howard, and simply maintained by Rudd/Gillard Labor. And unions have lost significant power all the way through--they've been bystanders, not active participants. It's instead been a series of distortions caused by a neoliberal philosophy that is shared by both parties."

Hmm. Parties talk differently but act the same. Where have we seen that before?

In the US, it's on war, bailouts, and spending that always goes up. Romneycare and Obamacare were the same. For political purposes people pretend differences exist when they don't, except on some social issues.

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

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Global Manufacturing Stagnates; Global Recession Will Follow

The JPMorgan Global Manufacturing PMI shows Global manufacturing growth slows to near-stagnation.

At 50.5 in April, the JPMorgan Global Manufacturing PMI™ – a composite index* produced by JPMorgan and Markit in association with ISM and IFPSM – signalled expansion for the fourth straight month. The rate of expansion decelerated slightly during April, meaning that growth so far in 2013 has remained, at best, only marginal.

Japan, South Korea, Indonesia and Vietnam were the only nations to report a faster rate of improvement in operating conditions during April. Europe remained the main drag on the global aggregate, with the euro area contracting at the sharpest pace in the year-to-date and the UK stagnating.

The US PMI fell sharply to signal the slowest growth for six months. There was further stagnation in neighbouring Canada, while Mexico expanded at the weakest pace in 20 months in Mexico. Growth of manufacturing also slowed to near-stagnation in China, Russia, India and Brazil.

Global PMI April vs. March



Every facet of global manufacturing is slowing and global growth will follow. A global recession is certainly baked in the cake, if indeed a recession is not already in progress.

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

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Shock and Awe: ECB Prepared to "Cope With Consequences of Negative Deposit Rates"; Dancing in the Dark Experiment

As expected the ECB, cut its lending rate 25 basis points to 0.50%.

Yesterday, I suggested the ECB may try a "shock and awe" move. They did, just not the move anyone expected.

Instead, Mario Draghi said the ECB was Prepared to "Cope With Consequences of Negative Deposit Rates".

Shock and Awe

Bloomberg reports Euro Falls as Draghi Open to Negative Rates; Dollar Strengthens

The euro fell for the first time in five days against the dollar after European Central Bank President Mario Draghi said policy makers may take the unprecedented step of charging banks to hold excess reserves.

“The euro was quite upbeat until Draghi made his comment that the ECB would be able to cope with any consequences of negative deposit rates,” said Daragh Maher, a currency strategist at HSBC Holdings Plc in London. “Previously, the language of the ECB on this front has characterized it as uncharted waters. Today, it seems the ECB is more open to the idea. The euro was clearly spooked by the mere concept of negative deposit rates in the euro zone.”

For an analysis of what this means, with a tip of the hat to Steen Jakobsen at Saxo Bank for the link, let's flashback to a decision to cut the deposit rate to zero in July of 2012.

Dancing in the Dark Experiment

The Financial Times says ECB Dances in the Dark

It’s clear the ECB has gone into experimental mode.

A positive deposit rate was the last thing anchoring money market rates to zero — or vague profitability. This is because banks could arbitrage the difference between the rates they received at the ECB and the rates money market funds were able to invest at.

By cutting the deposit rate, the ECB is killing this arbitrage. There will not be any profit associated with taking money from non-banks and parking it at the ECB for a small profit. Non-banks won’t even be able to get zero.

This will leave real-rates exposed to further deterioration.

The ECB, of course, is hoping that non-banks will choose to channel that money into risky assets instead.

Death of Banking

FT Alphaville makes the case Negative rates as a precursor to the death of banking.

What we believe is that rather than stimulating the lending market — and the economy along with it — such a rate policy could have a disastrous impact on collateral markets and money market funds, not to mention the net interest income of lending institutions. All of which could unleash a protracted deflationary spiral.

The move could also presage the death of banks and lending institutions completely.

FT Alphaville cites Morgan Stanley Research as follows:

Our rates team expects short end German yields to follow financing rates into negative territory and some investors to extend along duration and credit curves to achieve positive yields to maturity.

But we do not think negative ECB deposit rates would drive any increase in cross-border interbank lending. Rather, we see a risk of greater Balkanisation of European banking markets from funding pressures.

Today, a fall in rates would hit NII and reduce banks confidence in their earnings build and capital plan – making them wish to delever more not less, although time should heal. Market liquidity is likely to fall; Bank and insurers earnings under further pressure.

In Japan, JGB trading volumes fell by 2/3 over the coming 12 years as ZIRP was adopted, particularly at the short end – one reason why the Japan Central Bank does not want front end rates to be negative. Negative rates would likely be a negative for earnings and could thus impact solvency of banks and insurers.

The greatest risk our rates colleagues see would be for negative rates 2-3 years down the curve, in which case banks would need to re-price credit further.

Morgan Stanley European Insurance analyst Jon Hocking writes: "Earnings and solvency margins for European insurers are already under severe pressure from very low long-term bond yields."

Deposit Rate of Zero Did Not Work

It's clear that cutting the deposit rate to zero did not work. So why will cutting them to less than zero work?

A negative deposit rate will not stimulate lending because it does not fix any structural problems, it does not fix any liquidity issues, and it makes solvency problems worse by turning guaranteed arbitrage gains into guaranteed losses on excess reserves.

Should this actually succeed in stimulating lending, expect it to also succeed at stimulating losses on that lending.

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

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S&P Predicts 20% Drop in Spain's Housing Prices Over Next 4 Years; Bad Bank to Dump Distressed Properties on Market

Spain's "bad bank", Sareb to speed up distressed property sales in an ambitious new timetable for liquidation.

The bad bank is hoping to sell almost 42,000 housing units in the next five years. This is about half of the properties in its €50 billion (£42.5 billion approximately) portfolio.

However, falling house prices and a desire among buyers for modern properties in prime locations could hamper these plans for swift sale. Already the value of assets is being slashed by Sareb to clear their books, but attracting investors is proving to be no easy task.

At the beginning of March the International Monetary Fund (IMF) declared: "The clean-up of undercapitalised banks has reached an advanced stage, and key reforms of Spain's financial sector have been either adopted or designed." Sareb has also been praised for its receipt of distressed real estate assets from the country's weakest banks. The bad bank has also finalised agreements with participating banks to manage the transfer of assets.

Cleanup "Advance Stage" Nonsense from IMF

To suggest the cleanup of undercapitalized banks is in an "advance stage" is complete nonsense. It only makes partial sense if there is a zero percent probability of haircuts on Spanish sovereign debt.

I suggest the probability of haircuts on Spanish government bonds is far greater than 50%. And since Spanish banks are loaded to the gills with sovereign debt, the banks are severely undercapitalized by implication.

S&P Predicts 20% Drop in Spain's Housing Prices

Courtesy of Mish-Modified google translate from El Economista, please consider S&P predicts that housing in Spain fall by 20% over the next four years.

The credit rating agency Standard & Poor's does not see "signs of improvement" in the Spanish property market given the "precarious economic conditions and the heavy weight of the 'stock' of unsold homes," and anticipates that home prices will fall 20% over the next four years.

"We see little chance of that Spanish households become more solvent, as prices continue to fall, the purchasing power continues to decline and interest rates are stabilizing. This should keep demand very depressed," said S&P in a report on the European property market.

Sareb's plans to sell 45,500 homes in the next five years, about half of its portfolio, will likely determine the pace of declines in housing prices.

Should the divestiture from Sareb be gradual, housing prices in Spain will fall 8% in 2013 and 5% in 2014, after falling 10.5% in 2012 and 28% from their highs reached in March 2008.

Falls widespread in Europe

On the whole of Europe, the agency notes that the downward trend in most European property markets continue this year as a result of the economic downturn. In most countries housing prices will continue on a path "down" this year and only start to stabilize or slowdown in 2014.

After Spain, the largest decreases will occur in the Netherlands (-5.5%) and France (-5%).

S&P Optimistic

I am of the opinion the S&P is overly optimistic about Spain, about France, and about the Netherlands.

The European recession is worsening, credit conditions are awful, employment conditions are awful, and there are scant buyers of property because discounts are not large enough and credit is nowhere to be found.

None of this remotely takes into consideration the very strong likelihood of a Spanish debt writedown in the next year or so.

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

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April 2013 Manufacturing ISM at a Glance; What do the Numbers Mean?

US Manufacturing as measured by the April 2013 Manufacturing ISM Report On Business® is treading water barely above contraction.

Economic activity in the manufacturing sector expanded in April for the fifth consecutive month, and the overall economy grew for the 47th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

ISM at a Glance

Series Data	Apr Index	Mar Index	Percentage Point Change	Direction	Rate of Change	Trend (Months)
PMI™	50.7	51.3	-0.6	Growing	Slowing	5
New Orders	52.3	51.4	+0.9	Growing	Faster	4
Production	53.5	52.2	+1.3	Growing	Faster	8
Employment	50.2	54.2	-4.0	Growing	Slower	43
Supplier Deliveries	50.9	49.4	+1.5	Slowing	From Faster	1
Inventories	46.5	49.5	-3.0	Contracting	Faster	2
Customers' Inventories	44.5	47.5	-3.0	Too Low	Faster	17
Prices	50.0	54.5	-4.5	Unchanged	From Increasing	1
Backlog of Orders	53.0	51.0	+2.0	Growing	Faster	3
Exports	54.0	56.0	-2.0	Growing	Slower	5
Imports	55.0	54.0	+1.0	Growing	Faster	3

Synopsis

Manufacturing employment has grown for 43 months. I expect that trend to break next month.

Production was up but inventories were way lower. The drop in inventories, in conjunction with a big slowdown in employment, is likely a leading indicator of future production.

The positive surprise that does not fit into the above assessment is that new orders grew at a faster rate. Next month may be telling. I expect the new order divergence to resolve to the downside as the global economy and the US economy are both slowing.

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

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Expect ECB to Cut Rates on Friday; Even a "Shock-and-Awe" Cut Won't Help One Bit

Eurozone inflation collapsed to 1.2% in the latest report, from an expected print of 1.6%. Given the ECB has an inflation target of 2%, rate cut calls range all the way from a cut of 25 basis points to a cut of 75 basis points.

With the current rate at .75%, a 75 basis point to 0% is very unlikely. A cut of 25 or 50 basis points is almost certain but even 50 basis points won't do much good.

Steen Jakobsen, chief economist at Saxo Bank writes via email:

Calls for cut in ECB rate by 25 bps from 75 bps to 50 bps. We see 25 bps

Background:

Inflation have dropped to +1.2% against at target of +/- 2.0%
Unemployment rate now at 12.1% in Europe (A record high)
Survey data again going south
Data been weaker into the meeting
European GDP is looking like -1.5 / 2.0% right now without ‘some miracle’ or stimulus help.

Issues:

Monetary policy is impotent at zero bound. 25 bps plus or minus will not change the banks appetite for risk – ECB latest lending report says that in excess of 30% of banks see less appetite for lending to SMEs [Small to Medium Enterprises] vis-à-vis last quarter. Only exception is Germany where the number is +6%

ECB needs to create better “transmission” – however local regulators prevent this as Spain has a minimum mortgage rate of 325 bps is in place and the Netherlands a 300 bps minimum. Moreover,  banks are under capital constraint due to incoming increase demand from BIS III.

A TARP-like institution backed by tax receipt is very unlikely as Germany again shot down any belief in banking union only yesterday.

Investors Fooling Themselves

Echoing the opinion of Steen, please consider Investors may be fooling themselves about an ECB rate cut

High hopes ride on the European Central Bank, which is set to make its latest monetary policy announcement on Thursday. Despite the fact that poor economic data continues to flow out of the euro zone, investors seem convinced that the euro area is a fleeting concern, and certain that the ECB will cut rates from their current level of 0.75% in order to relax credit.

Despite the likelihood of a rate cut, the euro zone is still mired in a sovereign debt and banking crisis, with a recession that isn’t likely to go away so fast. We’ve already argued that even if the ECB slashes its target interest rate, the effect is unlikely to trickle down into the real economy, and particularly to small- and medium-sized enterprises (SMEs).
The options

Deutsche Bank wraps up all the options it thinks the ECB has (and the likelihood of each happening) in this handy chart:



Importantly, banks are still scared to lend to one another, so they’re paying a premium to fund themselves. While interest rates have fallen across the board because of earlier ECB actions, borrowing rates for SMEs and individuals have not fallen much in the last year.

Shock and Awe?

Consensus is for a 25 basis point cut.

I would not at all be surprised by a "shock-and-awe" announcement of 50 basis points. However, cuts of any size will not help because the problems in the eurozone are structural:

Structural Issues 

• Banks are undercapitalized
• Interest rate differentials although way lower are still high
• Target II imbalances are high
• Austerity via tax hikes is an absolute killer
• Work rules in southern Europe are badly in need of an overhaul
• The Euro itself is fundamentally flawed 

Anyone who thinks that even a 75 basis point cut would solve those issues is not thinking clearly.

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

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Canada Goes After Bitcoin; Saskatoon Realtor Lists Home Priced in Bitcoins; Is Bitcoin a Money Laundering Machine?

Is Bitcoin a Money Laundering Machine?

Bitcoin trumpets itself as being totally anonymous. Facts speak otherwise. New Bitcoin World tackles the issue in Can code and competition build a better Bitcoin?

Everyone from the mainstream media to Wikileaks to the now-disbanded hacker collective LulzSec has trumpeted Bitcoin as "anonymous." But the truth is that researchers have long since proven it's anything but — since every bitcoin transaction appears on a public ledger distributed to everyone in the network (called the "block chain"), tracking bitcoins back to individuals is often trivial.

Zerocoin promises true anonymity by giving Bitcoin its own built-in money laundering system.  The special sauce is a zero-knowledge proof, a statement used to verify a piece of secret information without giving away the secret in the process. This makes it so that if someone looks at the block chain, they’ll be able to see that you minted a zerocoin at some point, but there will be no way to tell which one you're redeeming.

Saskatoon Realtor Lists Home Priced in Bitcoins

Just in time for tax season, the Canada Revenue Agency says BitCoins aren't tax exempt.

Originally designed as a virtual currency alternative to conventional money, the cash value of a BitCoin jumped from under $50 US to above $250 and back earlier this month, as speculators flooded the market after awareness of them grew.

Saskatoon realtor Paul Chavady said he has listed a house priced in BitCoins, and has found clients willing to pay his fees in the electronic currency.
The CRA told the CBC there are two separate tax rules that apply to the electronic currency, depending on whether they are used as money to buy things or if they were merely bought and sold for speculative purposes.

"Barter transaction rules apply where BitCoins are used to purchase goods or services," Canada Revenue Agency spokesman Philippe Brideau said in an email.

When it comes to trading BitCoins for profit, the tax man says there are tax implications there, too.

"When BitCoins are bought or sold like a commodity, any resulting gains or losses could be income or capital for the taxpayer depending on the specific facts," ruled the CRA.

If you think the anonymity of bitcoin will hide what you are doing, you probably better think twice. And the more popular bitcoin gets, the more government will be asking questions.

If bitcoin gets big enough, governments will do far more than ask questions, they will demand an accounting of every transaction, where the money went, and whether taxes were properly paid.

For more on bitcoins please see Mish Interview With "Bitcoin Jesus"

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

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