Trichet Joins The Beggar-Thy-Neighbour Club

The European economy is in a shambles and the European Central Bank is clearly worried. Although there is a bit of infighting among the central bank governing board, Trichet Says ECB Must Do Everything to Restore Confidence.

European Central Bank President Jean-Claude Trichet said the central bank would do everything possible to restore confidence and prosperity.

“Public authorities, executive branches, and central banks must do all they can to restore, preserve and foster confidence among households and corporations in order to pave the way for sustainable prosperity,” Trichet said in a speech in Tokyo today. “This calls for a measured response to changing conditions.”

The ECB’s 22-member Governing Council is divided over not only how low to cut borrowing costs but also whether to adopt unconventional monetary policy tools such as the purchase of debt assets to help revive its ailing 16-nation economy. The bank this month cut its benchmark less than economists had forecast, by a quarter point to 1.25 percent, and delayed a decision on new policy tools until its next meeting in May.

“As regards the possible further additional non-standard measures, I have been very clear,” Trichet said. “We will decide” at the next policy meeting, he said.

“It is important not to create or encourage expectations” about what will be decided at that meeting, Trichet said. “Be sure that what we will decide will fully take into account the financing structure of the euro area economy and will be fully in line with our medium-term strategy.”

While Trichet has signaled a quarter-point cut is likely, Germany’s Axel Weber said on April 15 he’s against taking the benchmark rate below 1 percent and would prefer not to buy corporate debt.

By contrast, council members George Provopoulos from Greece and Athanasios Orphanides of Cyprus have both indicated they may support cutting the key rate below 1 percent and purchasing debt securities to fight the risk of deflation.

Trichet said it was difficult to describe the euro as weak after its 6.2 percent drop against the dollar this year. When the euro was introduced, it was 1.17 to the dollar, now it’s about 1.31 so “to speak of a euro that is weak doesn’t reflect the present situation,” Trichet said.

Trichet said he agreed with the strong-dollar policy of the U.S. government.

Trichet Agrees With US Strong Dollar Policy

Excuse me but exactly what strong dollar policy is that? The US strong dollar policy consisted entirely of Paulson yapping about it. Perhaps Trichet did not notice, but Paulson is gone and Geithner is in.

Geithner does not seem to be worried about the dollar. Instead, Geithner has his hands full carrying the torch for the "Strong Goldman Policy" started under Paulson.

Please consider the following chart.

Base Money Supply % Change From A Year Ago



chart courtesy of St. Louis Fed
That certainly is not a strong dollar policy.

Trichet To Duplicate Paulson's "Strong Dollar Policy"

Does Trichet's dollar yapping signal he is about to institute a similar Strong Euro Policy?

I think so. Here's the clue: “To speak of a euro that is weak doesn’t reflect the present situation” Trichet said.

Trichet Worried About Deflation

Trichet is clearly worried about deflation. There is no other logical interpretation to his statement about fostering confidence: “Public authorities, executive branches, and central banks must do all they can to restore, preserve and foster confidence..."

Competitive currency debasement and beggar-thy-neighbour policies are spreading fast. Trichet has just signaled the ECB is a willing partner.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Deflation Has Gone Global

Deflation properly defined is a net decrease in the money supply and credit, with credit being marked to market. Deflation by that measure went global long ago.

This post however, is in reference to sustained price drops widely (and incorrectly) referred to as deflation.

Japan wholesale prices log fastest drop since 2002

In Japan wholesale prices log fastest drop since 2002.

Japanese wholesale prices fell at their fastest annual pace in nearly seven years last month, official data showed Monday, adding to worries about the renewed threat of deflation.

Corporate goods prices fell by 2.2 percent in March from a year earlier, down for a third straight month, the Bank of Japan reported. It was the steepest year-on-year drop since May 2002 and followed declines of 1.6 percent in February and 0.7 percent in January.

"Companies are in tough competition to cut prices due to weak consumer sentiment," said Hideyuki Araki, economist at the Resona Research Institute. "Consumers are now worried about their jobs or pay cuts. It's natural that they want cheaper goods," he said.

German wholesale prices see record decline in 22 years

In Germany wholesale prices see record decline in 22 years.

Wholesale prices in Germany dropped 8.0 percent in March compared with the same month last year, the biggest year-on-year decline since January 1987, the German Federal Statistical Office said Wednesday.

Compared to February, however, wholesale prices declined 0.9 percent, said the Wiesbaden-based statistics office.

Crude oil prices have retreated 66 percent from a record 147 U.S. dollars per barrel in July 2008. As a result, solid fuels and petroleum products were 21.4 percent cheaper in March than a year earlier, the statistical office said.

Prices of grain, seeds and feed declined 42.6 percent in the past 12 months.

Statistics show that Germany's inflation has fallen to its lowest level in almost 10 years, as the global financial crisis has dragged the European Union's biggest economy into its worst recession since World War II.

European Central Bank (ECB) council member Athanasios Orphanides told local media a day earlier that the risk of deflation may push further monetary easing.

Chinese CPI, PPI Negative

Please consider the following chart of Chinese Inflation.



US CPI In First Year-Over-Year Decline Since 1955

In the US the CPI is in First 12-Month Decline Since 1955.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The index has decreased 0.4 percent over the last year, the first 12 month decline since August 1955.

On a seasonally adjusted basis, the CPI-U decreased 0.1 percent in March after rising 0.4 percent in February. The decrease was due to a downturn in the energy index, which declined 3.0 percent in March after rising 3.3 percent the previous month. All the energy indexes decreased, particularly the indexes for fuel oil,
natural gas, and motor fuel. The food index declined 0.1 percent for the second straight month to virtually the same level as October 2008. The food at home index declined 0.4 percent, the second straight such decrease, as the index for dairy and related products continued to decline.

US Produce Price Index (PPI) Biggest Drop In 59 Years

Inquiring minds are looking at Producer Price Indexes March 2009.

Finished Goods PPI



Intermediate and Crude Goods PPI



Notes from David Rosenberg at Merrill Lynch

Spare Capacity

"There seems to be a lot of market chatter today about how the dramatic fiscal and monetary stimulus is going to reignite inflation. Let's get a grip. We have a real unemployment rate of nearly 16% and a capacity utilization rate that looks about to decline to 65%. There is simply too much spare capacity to absorb to be concerned about what the government is going to do except prevent an outright deflationary environment from taking hold."

Deflation in headline to intensify going forward

"Relative to year-ago levels, overall [Consumer] prices fell by 0.4%, for the first dip into deflationary territory since August 1955. Looking ahead, easy energy comparisons versus a year-ago will be a key factor in leading the overall CPI lower in the months ahead. Food prices, eased to 4.4% Y/Y versus a peak of 6.1% Y/Y in October 2008, will also be a factor. By 3Q, we anticipate annual declines of 2.5%. Core prices were unchanged at 1.8% Y/Y in March, though down from the nearby peak of 2.5% in August 2008. By 3Q, the core CPI is also expected to ease toward 1.0%, with depressed demand and more competitive pricing for a broad array of consumer categories as tailwinds.

Underlying weakness in core CPI

"Owners’ equivalent rent – a category that accounts for 31% of the core CPI) – rose 0.2% M/M, in part due to falling natural gas prices, which have an inverse relationship to rent prices."

OER Grossly Distorts The CPI

"Owners' Equivalent Rent" (OER) is the largest component in the government measure of the Consumer Price Index (CPI).

OER is a process in which the BEA estimates what it would cost if owners were to rent the homes they own from themselves. OER is not a valid pricing barometer.

By ignoring housing prices, CPI massively understated inflation for years. The CPI is massively overstating inflation now.

The following chart shows the effect if one substitutes the Case-Shiller housing index for Owners' Equivalent Rent in the CPI.

Case-Shiller-CPI (CS-CPI) vs. CPI-U



click on chart for sharper image

Please see CS-CPI Negative 5.0% Third Straight Month for details about CS-CPI, a more realistic measure of consumer prices than the widely reported CPI.

Deflation has set in. It is now unmistakable by many measures, not just in the US but globally.

Bernanke's Deflation Preventing Scorecard

In case you missed it, here is Bernanke's Deflation Preventing Scorecard.

Bernanke is under the misguided notion that Fed policies in the 30's caused the Great Depression. Bernanke is wrong. Yes, the Fed (and government) policies in the 30's made the situation worse, but that was not the cause as Bernanke thinks.

Lessons From History

Students of the Great Depression are investigation lessons from history such as the Smoot Hawley Tariff Act.

The Smoot-Hawley Tariff Act was signed into law on June 17, 1930, and raised U.S. tariffs on over 20,000 imported goods to record levels, and, in the opinion of most economists, worsened the Great Depression. Many countries retaliated, and American exports and imports plunged by more than half. The tariff was replaced by lower bilateral agreements in the mid 1930s.

The cause of the great depression is simple: There was a massive runup in credit, margin, leverage and speculation in the late 1920's. Does that sound familiar? It should. The Smoot Hawley Tariff Act made the great depression worse but it did not cause it as some believe.

Nor did the Fed's so-called tight-money policies in the 30's cause the Great Depression although Fed actions certainly made the situation worse. So did many Roosevelt New Deal policies such as the Illegal Agricultural Adjustment Act, and the illegal confiscation of gold.

Six million piglets and 220,000 pregnant cows were slaughtered in the AAA's effort to raise livestock prices. Many cotton farmers plowed under a quarter of their crop in accordance with the AAA's plans.

The tax underwriting the AAA was declared unconstitutional by the Supreme Court in the case United States v. Butler, because, among other stated reasons, it taxed one farmer in order to pay another. Farm leaders supported the Butler decision.

Numerous policy decisions made the Great Depression worse and sadly those policy decisions are frequently cited as the cause.

Close analysis by any careful student of history would conclude the cause of the Great Depression was the massive runup in credit that preceded it, and that horrible policy decisions only made matters worse. And it is axiomatic that the cause of a problem and the solution to the problem cannot be the same. Thus, Bernanke's and Geithner's attempts to get banks to lend and consumers to spend cannot possibly be the cure to anything.

The Geithner-Obama-Bernanke policy track trifecta the US is on takes scarce resources (taxpayer dollars) and wastes them on the very banks and lending institutions that exacerbated the problem with foolish lending practices. This extremely poor policy decision is the modern day equivalent of Roosevelt's illegal Agricultural Adjustment Act. The big difference is the massive size and scale of the plan.

Base Money Supply % Change From A Year Ago



chart courtesy of St. Louis Fed

This expansion of money to bailout banks is not going to cause hyperinflation or even strong inflation for reasons outlined in Fiat World Mathematical Model. However, these foolish actions cannot possibly do anything good for the majority of taxpayers. All it can do is prolong the recession (depression) and increase national debt just as happened with Japan's deflation fighting efforts.

Nonetheless, in a sense, Geithner's Plan Can Succeed as long as one understand how success is defined. Success in this case being the bailout of banks, Goldman Sachs, PIMCO, and other financial institutions at the expense of everyone else.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Vanishing Employment Map

Slate is asking (and answering) this important employment related question: When Did Your County's Jobs Disappear?

The economic crisis, which has claimed more than 5 million jobs since the recession began, did not strike the entire country at once. A map of employment gains or losses by county tells the story of how those job losses first struck in the most vulnerable regions and then spread rapidly to the rest of the country. As early as August 2007, for example—several months before the recession officially began—jobs were already on the decline in southwest Florida; Orange County, Calif.; much of New Jersey; and Detroit, while other areas of the country remained on the uptick.

Using the Labor Department's local area unemployment statistics, Slate presents the recession as told by unemployment numbers for each county in America.

Blue dots represent a net increase in jobs, while red dots indicate a decrease. The larger the dot, the greater the number of jobs gained or lost. Click the arrows or calendar at the bottom to see each month of data. Click the green play button to see an animation of the data.

Kudos to Slate for this fascinating study. Please click on the link at the top so see how employment vanishes over time, and where. It's well worth a look.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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CS-CPI Negative 5.0% Third Straight Month

The following chart shows the effect if one substitutes the Case-Shiller housing index for Owners' Equivalent Rent in the CPI.

Case-Shiller-CPI (CS-CPI) vs. CPI-U



click on chart for sharper image.

The above chart is courtesy of my friend "TC" who writes:

For Feb 2009 the CS-CPI fell at a negative 5.0% YOY for essentially the third straight month (-4.9% for Dec 2008 & -5.1% for Jan 2009) as compared to a flat YOY reading (+0.2%) for the CPI-U. The Government OER (Owners Equivalent Rent) data continues to move higher (+2.1% YOY) while home prices continue to move lower (-19.5%) further amplifying the divergence between the two CPIs to once again its largest level ever. Additionally, the new 2009 OER "importance" (read weighting) rose by 210 basis points to nearly 1/4 of the CPI-U (24.433%). In fact, since 1987 the OER's importance has increased from 19.1% to today's present 24.4%. Now more than ever it's important that housing costs be accurately tracked in order to have a realistic CPI, yet there is continued emphasis on the dated OER metric.

The CS-CPI and CPI-U will be interesting data points for the next 6+ months as last year's Mar - Oct data points were much higher than today's due largely to high energy prices last year. This will likely produce data points officially showing deflation within the CPI-U for the first time since 1950 and potentially showing -10% deflation for the CS-CPI.

What is equally amazing is that it was about 2 1/2 years ago (Sep 2005) when the CS-CPI was positive 7.8% year-over-year and we're now 1280 basis points lower. Deflation is here and it's now even beginning to show in the government's CPI-U data.

"Owners' Equivalent Rent" (OER) is the largest component in the government measure of the Consumer Price Index (CPI).

OER is a process in which the BEA estimates what it would cost if owners were to rent the homes they own from themselves. OER is not a valid pricing barometer.

By ignoring housing prices, CPI massively understated inflation for years. The CPI is massively overstating inflation now.

See Case Shiller March 2009 Analysis for the Case-Shiller Housing data used to compute these charts.

For more on the methodology behind this post please see the discussion following CS-CPI Negative 3.1% Year over Year in November.

Real interest are very high even at zero percent!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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State Tax Revenue Drops Most In 50 Years; Taxpayers Frugal With Refunds

Frugality is setting in and it is showing up in income tax refund spending and sales tax collections. Here is look at both starting with tax revenue.

CNN Money is reporting State revenue falls 4%.

Revenue of U.S. states fell 4% in the 2008 fourth quarter as sales tax collections had their biggest drop in 50 years, and 41 states were on track for revenue declines of more than triple that rate for the first quarter of 2009, according to a report released on Tuesday.

Total tax revenue declined in 35 states, while six saw double-digit declines, according to the institute, which is the public policy research arm of the State University of New York.

Initial data for the first quarter of 2009 showed 41 states reporting that overall tax collections were down 12.8% in January and February versus the same two months in 2008, the report said.

Sales tax collections, a major revenue generator for states, fell by 6.1% in the fourth quarter of 2008 from the year-earlier period. The decline was wide-spread, hitting 34 out of the 45 states with broad-based sales taxes, according to the report.

States in the far west region, which includes California, had the biggest overall tax revenue decline in the last quarter of 2008, followed by Great Lakes States, according to the institute. Collections in the Plains States had the best performance, coming in flat for the quarter.

Frugality Sets In With Refunds

An AP Poll shows Taxpayers more frugal with refunds.

Poll Findings

* Fifty-four percent of those receiving refunds said they intend to pay off credit card, utility, housing and other bills, according to an Associated Press-GfK poll released Monday. That compares with 35 percent who said the same thing a year ago.

* 38 percent of those receiving a refund said they plan to spend at least part of it. But the spending appears to be mostly on basic needs: 17 percent said they would use the money for everyday needs such as food and clothing. It was 7 percent a year ago.

* 31 percent of those receiving refunds said they will use at least part of the money to pay credit card bills, compared with 17 percent a year ago.

* 19 percent said they will use their refunds to pay utility bills, compared with 10 percent a year ago.

* 17 percent said they will use their refunds for rent or mortgage payments, compared with 7 percent a year ago.

* 11 percent of those receiving refunds said they would use them to go on vacation, a slight increase from a year ago.

* 5 percent said they planned to use their refund for a down payment on a car, also a slight increase.

* 4 percent said they would use their refunds to buy stocks or bonds, about the same as a year ago.

* 8 percent of those who owe taxes said they were very likely or somewhat likely to use a credit card to pay their tax bill.

Paying of debt is of course a deflationary event.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Tea Party Signs and the Road to Statism

Here are a couple of very cute pictures someone posted as a comment on my blog. If I get more details like the kids first names and what tea party these signs were made for, I will update the post.

We Can't Spend Our Way Out Of Debt



Is Obama Really Any Better Than Bush When It Comes to Statism?



Update

Brad from Portland writes:

The kids are mine: Elias 4 and Dahlia 2. They are just models for my signs, I don't talk politics to them. I went to the Portland Tea Party alone, and it was about an order of magnitude larger than I expected, several thousand people I'd guess. One person who was close told me he reads you everyday.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Goodbye to the Rally?

The market rallied on great Wells Fargo news. However, I am skeptical if not outright cynical of such bullishness. I am not the only one.

Minyan Peter, one of the best reads anywhere, seems to agree. Please consider Goldman Sachs: Green This Morning, Hurricane Tonight?

Last night, Goldman Sachs (GS) announced its first-quarter earnings early, following Wells Fargo's (WFC) early release last Thursday.

From my perspective, corporations only accelerate positive earnings news under 2 conditions: a) There's serious market doubt about the ongoing viability of the company, or b) The company wants to take advantage of the good news to issue securities (debt or stock), and the lawyers require updated disclosure.

As longtime Minyans know, I believe that companies only issue common stock under 2 circumstances: a) when they absolutely have to, and b) when they're stupid not to. And it's with these criteria that I evaluate every stock offering.

....

But everything feels very rushed -- albeit highly choreographed -- as if both Washington and Wall Street (and dare I add Omaha, since Mr. Buffett is a major shareholder of both Wells Fargo and Goldman Sachs) want us to believe that, with "green shoots" popping up out of the economic soil left and right, record or new record earnings out of at least these 2 banks for the first quarter, and the hope that the government will permit Goldman Sachs to repay the TARP (looming stress tests notwithstanding), the private sector should once again purchase common stock in financial services firms in size.

Highly Choreographed Is Right

Please read Minyan Peter's post in entirety. His insights are always worth a complete look.

To his thoughts I would like to add "highly choreographed" is a huge understatement. Is there anyone who did not think Goldman would "beat the street"?

Even still, no one knows how these things will play out. Those who think they do are just fantasizing. I prefer to wait and see.

What we now know is Goldman beat by a mile. Yes I know it was a sham and so did Barry Ritholtz on the Big Picture Blog as noted in How to Puff Up Earnings, Goldman Sachs Style.

Buy The Sham Or Sell The Sham?

But sham or not, the key question is "Buy The Sham Or Sell The Sham?" because the news itself is irrelevant. The reaction to the news is what is important!

Sell The Sham

For now the market says sell the sham. Moreover, Goldman Sachs is an interesting case study. Please consider the following chart.



click on chart for sharper image

Inquiring minds note that on prior occasions, a volume selloff of Goldman Sachs marked a very temporary short term bottom followed by a massive subsequent selloff. Whether this is a warning shot remains to be seen. However, a more than 100% rally makes it hard to argue against the theory "take the profits and run".

Options Expiry Effect

Options expiration on Friday complicates the read. Rob Roy at Atlantic Advisors posted the following chart in SPY Open Interest and Pin Risk.

SPY Options Expiring Worthless At Each Strike Point



With the SPY closing Friday at $85.81, the greatest number of options would expire worthless if the SPY were to fall to $80 which would be a drop of 6.77% this week. Nearly as damaging to option holders overall would be a fall to $82 which is only a drop of 4.44%. With 5 days of trading, this is all quite possible.

GS Maximum Pain

Call option soared ahead of the widely expected blowout as the following chart shows.



The above chart is courtesy of Option Pain as of 2009-04-14.

$105 is a ways away from Monday's close near $115 but it is certainly a lot closer than $130 or wildly optimistic CALL bet at $150.

Actual Data

Here is a chart of the actual PUT CALL Data from CBOE



click on chart for sharper image

One of the advantages of looking at the hard data is you can ignore outliers of exceptionally high data at various points. Max Pain may be at $105 but my eye gravitated towards the $115 area where Goldman sits right now.

Question of the Day

The question is: "Is this weakness an option expiration thing or not?"

While no one knows the answer, the context is not pretty for many reasons. Here is one key indicator.

Where We Stand

Every day Kevin Depew posts "Where We Stand".



Where We Stand (WWS) is not a timing indicator (nor is it intended to be). Yet every bear market rally has ended with all (or all but 1) of the above indicators green. Likewise, every bear market rally started with every one of the above indicators solidly in the red. A nice turning point can often be found simply by watching the shift from red to green and vice versa in the above table.

WWS is not foolproof (no indicator is) so do not bet your life on it. Nonetheless, history (so far) suggests that once a turn is made, the turn keeps going until it is switches from nearly all one color to nearly all another color. By the way, I am not personally endorsing WWS to any formal degree. I am merely noting what I have noticed about it.

What I See

I see pretty rampant optimism in equity options, general belief that we have turned the economic corner (I highly doubt we have), technically overbought indicators, euphoria on CNBC, and a selloff for whatever reason on supposedly good news. While the market could continue to rally, this is certainly not a good mix.

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