Unemployment

Despite a very marginal improvement (from 53.6 to 53.8), Markit US Manufacturing PMI remains stubbornly stuck at 19-month lows, unable to bounce from the weathewr-strewn, port-strike-ridden weakness of Q1. As Markit notes, "a modest upturn in the headline manufacturing PMI belies some more worrying undercurrents which point to potential weakness in coming months," and the slump in unemployment index suggests things are not well at all...

"The letter has been sent." Greece formally invites the troika back to Athens sparking anger, resentment among a conquered people.

In almost all cases, including the most recent rise, the intermittent change in psychology that drove interest rates higher in the short run, occurred despite weakening inflation. There was, however, always a strong sentiment that the rise marked the end of the bull market, and a major trend reversal was taking place. This is also the case today. Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. While Treasury bond yields have repeatedly shown the ability to rise in response to a multitude of short-run concerns that fade in and out of the bond market on a regular basis, the secular low in Treasury bond yields is not likely to occur until inflation troughs and real yields are well below long-run mean values.

Sometime this fall, the Federal Reserve will begin a new tightening cycle. Publicly, Federal Reserve officials appear to be confident that the American labor market may be overheating or that inflation may be on the way in. Is this the case? In looking at Employment, Industrial Production, Consumer Prices, Capacity Utilization, Retail Sales, and the West Texas Intermediate price of oil, there's no evidence that the Fed should raise rates. What is the Fed worried about? Probably, and almost exclusively, it's financial asset price appreciation.

There could be trouble ahead....

When we discuss an "economic collapse," most people think of a collapse of the financial markets; and without a doubt, one is coming very shortly. But let us not neglect the long-term economic collapse that is already happening all around us. If you stand back and take a broader view of things, what has been happening to the U.S. economy truly is quite shocking. The following are 12 ways that the U.S. economy is already in worse shape than it was during the depths of the last recession...

How hard do you work compared to the rest of the world?

All eyes may be on Greece right now, but in reality, the economic malaise is widespread across the continent.  It’s clear that Greece is not the problem. It’s a symptom of the problem. The real problem is that every one of these nations has violated the universal law of prosperity: produce more than you consume. This is the way it works in nature, and for individuals.

Why are commodity prices, including oil prices, lagging? Ultimately, it comes back to the question, “Why isn’t the world economy making very many of the end products that use these commodities?” If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing. It looks to me as though we are heading into a deflationary depression, because prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening.

The US economy is widely seen as the world’s best performing major economy at the moment. However, so far this year most economic data have actually been somewhere between very soft and lackluster. The steep fall in truck tonnage is definitely an alarm signal. It indicates that inventories are already too high relative to demand, something that seems to be confirmed by recent industrial production and retail sales data. Given that tonnage has continued to decline since the end of Q1, one can no longer blame the port strikes either. To be sure, the US economy is not yet signaling an imminent recession. At best though it is muddling through at a very subdued pace. It probably won’t take much to push it over the edge.

The one line item everyone looks for in every Greek forecast is what its debt will be now that reality is finally allowed to creep in. We have dutifully highlighted it on the chart below: it is now expected to hit 238% by 2018. But it was another number that caught our attention: Citi's estimate for Greek HICP (inflation) in 2017. 22.5%  In other words, Citi predicts that by 2017 Greece will have hyperinflation even if it remains in the Eurozone.

If yesterday's market action was boring, today has been a virtual carbon copy which started with the usual early Chinese selloff levitating into a mildly positive close, with the SHCOMP closing just above the psychological 4,000 level: the next big hurdle will be 4058, the 38.2% Fib correction of the recent fall. In the US equity futures are currently unchanged ahead of a day in which there is no macro economic data but lots of corporate earnings led by Microsoft, Verizon, UTX and of course Apple. Most importantly, some modest USD weakness overnight (DXY -0.1%) has helped the commodity complex, with gold rebounding from overnight lows, while crude has at least stopped the recent carnage which sent WTI below $50.

You know it's bad when... With most of California experiencing "extreme to exceptional drought," and the crisis now in its fourth year, state officials recently unleashed the first cutback to farmers' water rights since 1977, ordering cities and towns to cut water use by as much as 36%. With the drought showing no sign of letting up any time soon, and the state’s agricultural industry suffering (a recent study by UC Davis projected that the drought would cost California’s economy $2.7 billion in 2015 alone), Yahoo reports farmers have begun desperately turning to "water witches" who "dowse" for water sources using rods and sticks.

French President Francois Hollande said that the 19 countries using the euro need their own government complete with a budget and parliament to cooperate better and overcome the Greek crisis. “Circumstances are leading us to accelerate,” Hollande said in an opinion piece published by the Journal du Dimanche on Sunday. “What threatens us is not too much Europe, but a lack of it.”... Countries in favor of more integration should move ahead, forming an “avant-garde,” Hollande said.

Everyone seems to be focusing on Greece these days – a country so indebted that it needs even more loans to repay just a fraction of its gigantic credits. Clearly this is unsustainable and something has to give. Even the IMF agrees. But what about the other Southern European countries? Actually, Portugal’s financial situation is looking particularly shaky, and any hiccups could have serious cross-border repercussions from Madrid all the way to Berlin.