Archive - Jul 2, 2010 - Story

May factory orders are the latest casualty of the gradual stimulus withdrawal: the forecast decline of -0.5% was almost tripled, coming out at -1.4%. This compares to an April increase of 1.0%. From the release: "New orders for manufactured goods in May, down following eight consecutive monthly increases, decreased $5.8 billion or 1.4 percent to $413.2 billion, the U.S. Census Bureau reported today. This followed a 1.0 percent April increase. Excluding transportation, new orders decreased 0.6 percent." And the artificual GDP booster, inventory ramp ups, has now plateaued: "Inventories, down following four consecutive monthly increases, decreased $2.0 billion or 0.4 percent to $520.4 billion. This followed a 0.6 percent April increase. The inventories-to-shipments ratio was 1.25, up from 1.24 in April." Little one can add here: this is merely the latest crumb on the path in the search for the full blown Double Dip Depression.

Those China CDS are looking ever more attractive. Earlier today, Bank of China, Asia’s third-
largest lender by market value, announced it plans to raise as much as 60
billion yuan ($8.9 billion) in a rights offer to replenish
capital. Bloomberg reports: "The lender will sell 1.1 shares for every 10 held, or as
many as 19.56 billion shares in Shanghai and 8.36 billion in
Hong Kong, a statement to the Hong Kong stock exchange showed
today." This latest equity offering in a region already drowning in capital raises was enough to halt trading in BOC shares until July 5 as the response to it would hardly be considered favorable. A sale by Bank of China would “damage market sentiment and banking shares further because we’ve already been flooded by share offerings,” Tang Yayun, a Shanghai-based analyst at Northeast Securities Co., said before the announcement. “This is a surprise given that they just completed a bond sale.” The bolded sentence is critical as it merely implies that the rot from the trillions in bad loans made to assorted house flippers, tulip sniffers, and opium den casino dwellers are finally coming home to roost. Indeed, Bank of China's capital adequacy ratio fell to 11.09 percent
as of March 31, below the minimum 11.5 percent required according to the China Banking Regulatory Commission. The next wave of the solvency crisis tsunami has now officially made landfall in China.

Pretty much says it all

The only reason for the decline in the unemployment rate to 9.5% was yet another decline in the labor force participation rate, which according to the BLS dropped another 652k people in the month of June. This resulted in a labor force to the civilian non-institutional population ratio of 64.7%: the second lowest number in decades of data, and only better than December 2009, when this number was 64.6%. The problem with this is that it badly underestimates the split between those who are marginally attached and those 14,623 who were formally unemployed in June. As the chart below shows, the double dip in the labor force participation is now very much pronounced. What this chart implies is that if there was a mean reversion to the last 10 year labor force participation average rate of 66.2%, there should be another 3.5 million jobless added to the 14.6 million tally. And as this differential is the easiest thing in the world for the BLS to fudge, adding the two and dividing by the labor force of 153,74, we get an unemployment rate of 11.8%, leaving aside all other such fudge factors are government hiring, temporary workers, birth death, etc. 9.5% or 11.8% - which one is more realistic for an economy finally realizing it never left the second great depression, you decide.

Gold fell a staggering $36.30, or 3.5% per 100 troy ounces on Thursday. The dollar, another safe haven asset, dropped 2%. Some analysts have suggested gold’s move was the result of a large fund unwinding a position by selling gold and buying back the euro. Yesterday’s activity was the decisive battle for the time being between the “it’s a commodity crowd” versus the “it’s money stupid” folks. Put another way, if you believe that we are in a deflationary cycle (like us), and you believe that gold is a commodity only (not like us), then its price must go down relative to currency during deflationary meltdowns.

If however you believe that Gold is not a commodity, and that it is money, then you believe it should hold value , or even appreciate in a deflationary spiral.

Private payrolls were a disappointment at just +83k, versus consensus of 112k. Birth-death added 147k. Census removed 225k, in line with consensus. Temporary help was another terrific "green shoot" increasing by +21k. And the Unemployment rate dropped to 9.5% because 652k people walked out of the labor force, which dropped from 154.393 million to 153.741 million. Another big miss for the recovery story and another confirmation of the data point. The only improvement was the percentage of those unemployed 26 weeks and longer dropped from 46% to 45.5%, or from 6.763 million to 6.751 million. Yet the most troubling indicator was the downward inflection in the average workweek, which once again dropped by 0.1 hours to 34.1 hours, while in manufacturing the drop was a severe 0.5 hours, following a rise of 0.4 hours in May. The slack in the laborforce is once again building up. Also, average hourly earnings declined by 0.1%, after an increase of 0.2% in May.

Today we end Fix It week on my show, although we hope to keep this recurring theme. But the largest hindrance to solutions for all of the problems we've discussed - be it the Deficit, Energy, Education or the Wars -- goes back to one place: the current Political Process in our country. We practically all share the same list of problems, regardless of ideology: The undue influence of moneyed interest, the focus on inane Culture Wars instead of proper governance, the low quality of our politicians coupled with their high incumbency rates, the lack of ethics, disclosure etc. The only question left is how to fix them and then, how do we muster the will? These are the questions we will address for my entire show today - and just to get the ball rolling, here are four of my favorite solutions. - Dylan Ratigan

Well that was quick. On June 17 the SNB announced it was ending currency interventions. After much ridicule, a straight line appreciation, and a SNB balance sheet bloated with euros, the SNB has realized the folly of its non-interventionist ways in a manipulative, Keynesian world, and at midnight eastern time came storming back into FX intervention by gobbling up another roughly ten billion in EUR, causing a 200 pip spike in the EURCHF. And as we have discussed previously, such episodes of lunacy do nothing but load up the country's balance sheet with even more euros, while the intervention half time is so low now to be negligible. Bloomberg reports, "The franc is already expensive but above 1.30 it will become a serious issue,” said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. “They’ll wait for the right moment to punish speculators. It’s only a question of time, the appreciation is simply too fast." Unfortunately for the SNB it will be speculators who have the last laugh, and with Switzerland now the target of every new deposit account opened in a bank-distrustful Europe, nothing that the SNB does will matter to curb the inflow of funds.

• Aussie PM Gillard scales back Australian mining tax in boost for election prospects.
• Crude oil fell below $73 a barrel, after slipping 6.8 percent in the previous four days.
• Employment fell in June for the first time this year.
• Gartner cuts 2010 global IT spending view cut on Euro woes.
• Germany, France to press Brussels on transaction tax.
• Greece sealed a deal with the European Investment Bank for €2B in financing.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 02/07/10 (Non-Farm Special)