ADP Grossly Overstates Job Growth for Last 12 Months by 419,000 Jobs

ADP has announced revised methodology to "enhance" its monthly job reports, no doubt because its prior numbers simply were grossly inaccurate.

Indeed, I stopped commenting on ADP numbers because I thought they were absurd.

Let's take a look at their revised methodology. Here is the ADP Jobs Report for September using the revised methodology.

"Private sector employment increased by 88,200 jobs from August to September, according to the September ADP National Employment Report�. The report, which is derived from ADP�s actual payroll data, measures the change in total U.S. nonfarm private employment each month on a seasonally adjusted basis. Last month�s employment estimate was revised down from 80,000 to 76,400 jobs."

Please note that last sentence. Compare to what ADP actually reported last month:

"Employment in the U.S. nonfarm private business sector increased by 162,000 from August to September, on a seasonally adjusted basis. The estimated gains in previous months were revised lower: The July increase was reduced by 17,000 to an increase of 156,000, while the August increase was reduced by 12,000 to an increase of 189,000."

Got that? September private business sector increased by 162,000 but now we see September was revised down to 76,400 from 80,000 (not 162,000 as actually reported).

Revision Matching

Check out this statement from ADP FAQs.

Using this methodology developed for ADP by Moody�s Analytics, our adjusted historical ADP National Employment Report data dating back to 2001 has a 96 percent correlation with the revised BLS numbers.

ADP revisions match BLS revisions over time. Lovely.

Spotlight on Revisions

ZeroHedge totaled up the ADP revisions for 2012 and concluded ADP "Cancels" 365,000 Private Jobs Created In 2012.

I conclude the same thing. However, things are even worse than Zerohedge states. Here is a chart that I put together of ADP revisions.

Note: numbers in charts and tables in thousands.

ADP Original Vs. ADP Revised Monthly Job Gains or Losses



click on chart for sharper image

ADP was way underestimating job gains in 2011 and way over-estimated gains in 2012.

The net effect was 136,000 jobs over 20 months (about 6,800 per month). However that is a very misleading way of looking at things as the following table shows.

Time Period Analysis

Time Period	Cumulative Miss
2011 Miss	229.0
2012 Miss	-365.1
Last 12 Months	-419.1
Since Feb 2011	-136.1

As you can see, I match ZeroHedge for 2012. However, for the last year, ADP was off by an even higher 419,000 jobs, nearly 35,000 jobs a month for an entire year!

For 2011, ADP was off in the other direction by 229,000 jobs, roughly 19,000 per month. Here is the complete table that I worked from.

ADP Data Points Table

Date	ADP Revised	ADP Original	Revision	Cumulative Error
2011-02	155.3	197	-41.7	-41.7
2011-03	215.9	199	16.9	-24.8
2011-04	174.5	162	12.5	-12.3
2011-05	156.4	47	109.4	97.1
2011-06	118.3	136	-17.7	79.5
2011-07	180.3	125	55.3	134.8
2011-08	122.7	67	55.7	190.5
2011-09	197.5	105	92.5	283.0
2011-10	114.3	142	-27.7	255.3
2011-11	173.2	226	-52.8	202.5
2011-12	293.4	267	26.4	229.0
2012-01	218.9	182	36.9	265.8
2012-02	226.6	228	-1.4	264.4
2012-03	89.7	204	-114.3	150.1
2012-04	130.1	112	18.1	168.2
2012-05	81.2	131	-49.8	118.4
2012-06	115.4	173	-57.6	60.8
2012-07	145.5	156	-10.5	50.4
2012-08	76.4	189	-112.6	-62.3
2012-09	88.2	162	-73.8	-136.1

I note with amusement TrimTabs Says BLS Badly Missing Current Acceleration in Job Growth

TrimTabs Investment Research said today that the Bureau of Labor Statistics� (BLS) hefty upward revision of its August job growth estimate proves that the BLS missed the important acceleration in job growth this summer because it relies on incomplete surveys that are frequently revised.

Trimtabs said the BLS� initial estimate for August job growth was 96,000. Today, the BLS revised its August estimate upward 48% to 142,000 new jobs. Meanwhile TrimTabs estimate, based on real-time withholding tax data, said employment growth in August was 185,000.

TrimTabs reported the U.S. economy added 210,000 jobs in September while the BLS reported a job gain of only 114,000. TrimTabs said it expects the BLS to revise its September jobs estimate of 114,000 substantially higher next month.

I did not buy that story then, and I do not buy it now. More than likely, the BLS was catching up to misses earlier in the year, perhaps even 2011 vs. a genuine recent hiring spurt.

Obamacare Employment Analysis

I am sticking to what I said regarding Obamacare, especially Obama Slashes Four Hours Off Definition of "Full-Time" Employment

Additional Obamacare Employment Analysis

• Is Obamacare Responsible for the Surge in Part-Time Jobs?
• Prepping for Obamacare, Olive Garden and Red Lobster Cut Workers' Hours; Are Other Companies Doing the same?
• Mish Obamacare Mailbag: Expect More Part-Time Jobs

By the way, these ADP revisions suggest the stated unemployment rate is blatantly preposterous, something I say in every jobs report.

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

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Canada GDP "Unexpectedly" Shrinks; Pollyannas Come Out Of Woodwork

Economists who cannot see anything but the rear view mirror were surprised to learn Canadian Economy Shrinks as Oil, Mining Slump.

The Canadian economy shrank unexpectedly in August, pointing to a sharp third-quarter slowdown in growth from the first half and reinforcing the Bank of Canada's message that interest rate hikes are less imminent.

The surprising 0.1 percent contraction in August from July reflected broad weakness across most industries, prompting economists to revise forecasts down. The Canadian dollar weakened to below parity with its U.S. counterpart.

August's dip was the first monthly contraction in GDP since February. Statistics Canada said on Wednesday it was largely caused by decreased production in the natural resources sector - oil and gas extraction and mining - as well as in manufacturing,

Statscan said temporary maintenance work at some mines and oilfields was partly to blame. But some economists argued that the economy had stalled more broadly.

"There are too many negatives in this report to dismiss the headline weakness as being attributable to just temporary disruptions in some sectors," said Derek Holt and Dov Zigler of Scotia Capital.

Doug Porter, deputy chief economist at BMO Capital Markets, noted that output fell in 10 of 18 sectors. "We can't brush this off as driven by special factors," he said.

Flaherty was more sanguine. "We're going to see some variations, but overall, for the year we are on track with GDP growth," he told reporters.

Flaherty expects 2.1 percent growth this year, based on the average forecast of private sector economists his office surveyed this month.

The Bank of Canada has also suggested the third quarter was an anomaly. Last week it halved its forecast for third-quarter growth to an annualized 1 percent, but predicted a rebound to 2.5 percent growth in the fourth quarter and average growth of more than 2 percent through 2014.

Pollyannas Come Out Of Woodwork

BMO and Scotia Capital analysts may be late to the recession party (or not, I do not know previous calls),  but otherwise, Pollyannas like Jim Flaherty, Canada's Finance Minister, and officials at the Bank of Canada and Statscan are still looking for growth.

Forget about it. This is not an anomaly as suggested by the Bank of Canada.

As I have said repeatedly, the slowdown in Asia is going to hit Canadian commodity producers more than most think.  Moreover, signs suggest Canada's long overdue housing bust is finally underway according to the Canadian Real Estate Association Report on October 15.

Here is the key item: Actual (not seasonally adjusted) activity is down 15.1 % from year-ago levels, with more than half of all local markets posting declines of at least 10 per cent.

The rest of the report staked out a claim that real estate was "balanced", I maintain in the same way that spinning plates in this video can be stated as balanced.


With the US economy slowing, with Asia slowing, and with Europe in a full-blown recession, the odds of Canada and the US bucking the trend is essentially zero.

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

"Google Law" Yet Another Warped Policy by Hollande; Government Motors French Style

French president Fran�ois Hollande took two more swan dives into the pool of ludicrous actions in the past few days, first with car-maker Peugeot, quickly followed up with a guaranteed-to-fail proposal regarding search engine giant Google.

Government Motors French Style

Bloomberg reports France Guarantees Peugeot Debt in Exchange for Influence

The French government stepped in to rescue PSA Peugeot Citroen (UG), Europe�s second-largest carmaker, by guaranteeing as much as 7 billion euros ($9 billion) in new bonds in exchange for greater influence over company strategy.

The state and workers will each receive a seat on the board of directors, and an outside committee will be set up with veto power over any �significant� changes in Peugeot�s operations, the French Finance Ministry said today.

�The state will want to see this business run more in the interest of government, rather than in the interest of the shareholders,� said Erich Hauser, a Credit Suisse analyst with a neutral rating on the shares. �The rising debt of Peugeot clearly shows that the core things are getting worse.�

Sheer Madness

I would like to point out how ridiculous this action is, but Pater Tenebrarum at the Acting Man blog beat me to it.  He did a first-class job of making Hollande look foolish in his post Peugeot Bailed Out, More Trouble for the Banks.

The government and workers will receive board seats? Are they sure this is going to work out? We believe that this latest socialistic experiment is highly likely to turn into a bottomless pit for France's tax payers.

Not surprisingly, competing car makers in other European countries are rather unhappy that an inefficient competitor is kept on artificial life support. They are perfectly right to complain. To keep companies that are not competitive artificially afloat harms the economy at large, but it is especially detrimental to more able companies in the same branch of industry.

However, the French government insists that it is actually not providing aid to Peugeot, and will therefore not run afoul of EU regulations that forbid such state aid. It is not giving aid, it is merely providing 'support'.

Hang on, it gets even better. Guess who Peugeot is now in an alliance with to produce new cars consumers will � hopefully � want? You guessed it�. GM, the original  'government motors': Peugeot said today it�s making progress with GM on the alliance and the two have selected four vehicle projects to work on together.

"Google Law" Another Sign of Hollande's Warped Mind

That piece by Tenebrarum is a tough act to follow. Nonetheless, please consider the Wall Street Journal article France Calls On Google to Settle Rift With Publishers

France will consider adopting legislation that would force Google Inc. GOOG to pay for the right to cite news articles online if the U.S. search giant fails to settle a long-running dispute with French news publishers over how to share advertising revenue, the office of France's President Fran�ois Hollande said on Monday.

Mr. Hollande's ultimatum marks an escalation in the protracted battle pitting news publishers against Google, which has long resisted the idea of sharing ad revenue with content providers.

Google has warned it would exclude French newspapers from its search engine if France implements the proposed law, which would make search engines pay for the right to cite news online.

Leading French newspaper publishers last month called on the government to adopt legislation imposing a settlement in their dispute with Google, forcing it and other search engines to share some of the advertising revenue. Their request follows the German government's approval of draft legislation in August that would force search engines to pay commissions to German media websites.

The new law�sometimes dubbed the "Google law"�has been pitched by French newspapers as a means to help support their business, which is under threat from a long-term migration of advertising away from print media, a trend exacerbated by cuts in advertising as the French economy struggles.

Do A Search For Anything

Just so you know what we are talking about here, please do a Google search for anything. Hurricane Sandy is as good a topic as any.

Here is an image of the results.



Imagine Boston.Com, Bloomberg, the Washington Post, and the Weather Channel all demanding Google share add revenue with them for any ad that appears in those search results.

While you are at it, imagine me demanding ad revenue sharing for those doing a Google search for Mish. Many people find me that way. "Mish" is my brand, and I appear at the top of any such search.

Here is an image of a search for Mish.



Instead of getting some ad revenue when people click on links to French news articles, there will be no links to click on at all if Hollande does what he says (and Google responds the way they have said).

Hollande wants to help struggling newspapers, struggling car makers, struggling students, all with ludicrous actions on top of massive tax hikes. He even wants to ban homework because "It's Not Fair to Disadvantaged".

On June 8, I reported Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

It should be easy enough to guess the company that triggered that last bit of layoff-insanity, but in case you misplaced your thinking cap, the answer is Peugeot.

Prepare for the implosion of France, because it is nearly certain with Hollande at the helm.

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

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Governor Chris Christie Strongly Praises Obama's Response to Sandy; Could Christie's Comments Tip the Election?

Here's a headline story including an interview on Fox news that caught me by surprise: New Jersey Chris Christie Praises Obama, Doesn't 'Give a Damn' about Election Day

The presidential candidates have canceled all campaign events on Tuesday, but Republican New Jersey Chris Christie seemed to be stumping for President Barack Obama by appearing on several networks to praise the federal response to Hurricane Sandy.

In an interview on NBC, Christie called Obama "outstanding" for expediting relief efforts. He also told MSNBC that Obama "deserves great credit. He gave me his number at the White House and told me to call him if I needed anything," Christie said.

The New Jersey governor even took his message to Fox News, saying that Obama had helped "tremendously."

"I spoke to the president three times yesterday," he explained. "He called me for the last time at midnight last night asking what he could do. I said, if you can expedite designating New Jersey as a major disaster area that that would help us to get federal money and resources in here as quickly as possible to help clean up the damage here."

Chris Christie Video



Will Christie's Comments Tip the Election?

New Jersey, Christie's home state is solidly in the Obama column. However, storm-damaged Virginia is in a virtual dead heat. Praise from Governor Christie certainly cannot hurt Obama's election chances.

Mathematically, I do not believe Romney can win if he loses either Ohio or Virginia. Romney certainly cannot win if he loses both of them.

Here is question of the day: Is this genuine praise or is Christie looking to run for president in four years? I suggest both.

Regardless, widespread perception that Obama is doing a good job in response to Sandy, fueled by gushing praise from Christie may be enough to tip Virginia into the Obama column, and the election right with it.

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

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Japan Manufacturing PMI Falls to 18-Month Low

The Japanese economy continues to skid as evidenced by the October Japan Manufacturing PMI�

Key points

• Output and new orders both down at sharper rates
• Employment falls at fastest pace since July 2009
• Average output charges pared to steepest degree since December 2009

Summary

October�s PMI data indicated a further deterioration in the performance of the Japanese manufacturing sector. Orders and output both continued to fall during the month, while evidence of rising excess capacity led to a first reduction in employment for half a year. Manufacturers also intentionally cut back on their stock holdings as order books deteriorated and the outlook remained uncertain.

Production and new orders both fell at similarly marked rates during the latest survey period. Panellists reported that the car industry was a particular source of softer demand. Overseas new orders also fell during the month, the seventh successive month that a decline has been recorded.

As volumes of new orders and output fell further in October manufacturers were again able to make significant inroads into their work outstanding. Nearly a quarter of the survey panel indicated that backlogs were down in October and, with spare capacity seemingly rising, a number of companies also chose to lower their staffing levels.

I have little to add that I have not said before numerous times. The entire global economy is heading South in a major way, and Japan is in serious trouble given its monstrous debt levels.

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

NY Subway May Take Weeks to Restore Service, 5 Million Affected; 80 Flooded Homes Destroyed by Fire; Stunning Flood and Fire Images

Hurricane Sandy has moved on but the damage remains. The following picture of Times Square posted on Gizmodo caught my eye. Fortunately, it does not look real. Lights should not be on and there would be debris everywhere.

However, the Metra chairman did say water was "literally up to the ceiling" at one downtown station, so take this image and use your imagination, adding dead rats, debris, and whatever else suits your fancy.



Bloomberg reports the New York Subway System May Take Weeks to Recover From Flooding.

Restoring service on New York subway lines that have been flooded could take weeks, said Mortimer Downey, a former MTA executive director and current board member of the Washington Metropolitan Area Transit Authority.

�From the New York viewpoint, they�ve got a lot of work ahead of them,� Downey said in an interview. �It�s going to be days and possibly weeks.�

He declined to estimate what the recovery may cost because there�s no precedent for the work that will need to be done.

Previous reports said the New York city subway would remain closed for 14 hours to four days.

Unprecedented Challenges

Reuters reports Sandy leaves unprecedented challenges for New York City subways

The giant storm Sandy wreaked havoc on the New York City subway system, flooding tunnels, garages and rail yards and threatening to paralyze the nation's largest mass-transit system for days.

"The New York City subway system is 108 years old, but it has never faced a disaster as devastating as what we experienced last night," Joseph Lhota, the chairman of the Metropolitan Transit Authority, said in a statement early on Tuesday.

He later said that water was "literally up to the ceiling" at one downtown station.

All seven subway tunnels running under the East River from Manhattan to Queens and Brooklyn took in water, and any resulting saltwater damage to the system's electrical components will have to be cleaned - in some cases off-site - before the system can be restored, MTA spokeswoman Deirdre Parker said on Tuesday.

At dawn, emergency crews were assessing the damage to tunnels and elevated tracks. Restoring the system is likely to be a gradual process, Parker said.

"It's really hard to say which areas will come back first," she said, adding it will likely be a combination of limited subway and bus service. "It will come back gradually."

The storm brought a record storm surge of almost 14 feet (4.2 meters) to downtown Manhattan, well above the previous record of 10 feet (3 meters) during Hurricane Donna in 1960, the National Weather Service said.

ABC Video



Link if Video does not play: Sandy Floods NYC Subway System

80 Flooded Homes Destroyed by Fire

The Huffington Post reports At least 80 Flooded Houses Destroyed By NYC Blaze.

A huge fire destroyed 80 to 100 houses in a flooded beachfront neighborhood Tuesday, forcing firefighters to undertake daring rescues and injuring three people.

More than 190 firefighters contained the blaze but were still putting out some pockets of fire more than nine hours after it erupted.

As daylight broke, neighbors walked around aimlessly through their smoke-filled Breezy Point neighborhood, which sits on the Rockaway peninsula jutting into the Atlantic Ocean. Electrical wires dangled within feet of the street.

Click on preceding link for a video and images of the fire.

The economic losses from Sandy will far exceed the physical damages. Ridership losses on the NY subway alone will be catastrophic.

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

Greece Coalition Splinters, Austerity Vote Delayed, PM Warns of 'Chaos'; Another Puppet Show or Is This For Real?

In Greece, Prime Minister Antonis Samaras coalition has split. The result is yet another delay in an austerity vote required for the next tranche of loans to Greece, and the PM warns of 'chaos'.

Greece's conservative Prime Minister Antonis Samaras is at odds with the Democratic Left party, a coalition partner, which is threatening to vote against the new austerity measures unless labor reforms included in them are scrapped.

Samaras formed a coalition with the traditional rival Socialists and the Democratic Left after general elections in June. In a statement, the prime minister said he had "exhausted all the available time" to try and reach a consensus.

"The problem is not whether we (introduce) this measure or that measure. On the contrary: It is what we would do if no agreement is reached and the country is led into chaos."

Unemployment in Greece has topped 25 percent, with rapidly worsening poverty that has prompted the Democratic Left to harden its position.

"There are certain issues for us that are fundamental � like labor issues," Theodoros Margaritis, a senior member of the Democratic Left party, told private Skai television. "The dilemma is with Mr. Samaras. Does he want a left-wing party in his government or not? Does he want our consent on certain issues or does he want to proceed alone? If he wants, he may proceed alone."

Cracks in Greece's coalition government are likely to be tested late Tuesday when lawmakers are set to vote on a privatization bill. The new law would give the government broader powers to privatize public utilities, but is facing growing dissent from deputies in the Socialist party and Democratic Left.

Another Puppet Show or Is This For Real?  

Is the inevitable about to happen or is this simply another puppet show for the masses?

Having seen so many puppet shows only to see the leftist puppets succumb to warnings of chaos or worse, I simply do not know.

However, when this coalition finally does splinter to smithereens, the radical left will win the next election and promptly tell the Troika to go to hell.

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

670,000 Without Power in NYC; Flood Crests 13.88 Feet, Besting 1960 Record of 10.02 Feet; Wall Street Flooded

The good news for New York City is the storm crest has peaked. The bad news is the cleanup will take days, or longer, and much of the city is blacked-out.

Please consider Hurricane Sandy�s Waters Flood Blacked-Out New York City.

Hurricane Sandy sent floodwater gushing into New York�s five boroughs, submerging cars, tunnels and the subway system and plunging skyscrapers and neighborhoods into darkness. Two deaths were reported in Queens and more than 670,000 were without power in the region as of 11:30 p.m. local time yesterday, according to Consolidated Edison Inc.

The company cut electricity to some areas to save its equipment and a transformer exploded at a plant on 14th Street, blacking out others. New York University evacuated its Langone Medical Center when it went dark and backup systems failed.

After the storm�s tide crested about 8 p.m., the East River topped its seawall in the Financial District and flowed up Wall Street in a torrent that turned avenues into canals and intersections into lakes. Flooding took over Brooklyn�s Red Hook neighborhood, submerging cars to the roof, while the Gowanus Canal overflowed and tree limbs plummeted.

A flood gauge at Battery Park, at the southernmost end of Manhattan, registered at 13.88 feet as of 9:24 p.m., beating the modern record of 10.02 feet in September 1960 during Hurricane Donna, the National Weather Service said.

The Metropolitan Transportation Authority was investigating water entering a subway tunnel in Lower Manhattan, said Charles Seaton, spokesman for the largest U.S. transit agency, which stopped its 24-hour system for weather for only the second time in its 108-year history. There�s no way to tell when the system run again, he said.

The Lincoln Tunnel was the only major crossing in and out of Manhattan by about 8:30 p.m. The Brooklyn Battery Tunnel and the Queens Midtown Tunnel both had flooding, according to Ortiz.

Anything electrical that salt water touches is likely ruined. If those subway systems were badly-flooded, there are going to be serious repercussions. We will know more Tuesday morning.

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

85% of Atlantic City Flooded; New York Subway in Jeopardy; Markets Closed Again Tuesday; Hurricane Sandy Image from Space

As many as 2 million customers are without power as Sandy slammed into New Jersey and New York.

The markets will be closed again on Tuesday but may  resume on Wednesday, the final trading day of the month. New York's mass transit system remains shut and it is unclear when service will be restored.

Here is an Image of Hurricane Sandy from Space from a New York Post Tweet.



Large Nor'Easter on Steroids

Accuweather (Premium) says Northeast Catastrophe Unfolding.

An extremely rare and dangerous storm, "Sandy," has roared in from the Atlantic Monday evening. Inundations have already occurred and will get worse through the first part of Monday night.

According to Expert Senior Meteorologist Steve Wistar, "Sandy is unfolding as the Northeast's Katrina in terms of impact."

There is the potential from the central New Jersey coast to New York City and western Long Island have some of their worst coastal flooding on record with Sandy tracking into New Jersey.

High Winds, Power Outages and Downed Trees



Sandy will not be your typical hurricane as it moves in from the southeast. Hurricanes are small and compact. Damaging wind gusts will reach from Boston to Washington, D.C., and inland to the central Appalachians.

Sandy will be more like a large nor'easter on steroids. It could have the impact of a Category 2 hurricane in some locations.

85% of Atlantic City Flooded

The Wall Street Journal reports Flooded Atlantic City Feels the Early Brunt.

"This is the worst-case scenario for us," said Tom Foley, Atlantic City's director of emergency management. "In 28 years, I've never seen weather this bad."

Officials called for a mandatory evacuation of the entire county, closed the casinos, closed county and municipal roadways, installed a curfew of 6 p.m. to 6 a.m. and summoned the National Guard to assist with a rescue effort in Atlantic City that grew increasingly urgent as the storm bore down.



Agence France-Presse/Getty Images

About 3,000 of the city's 40,000 residents people stayed, Mr. Foley said. One woman had a fatal heart attack as she tried to evacuate, Gov. Chris Christie said. Her name wasn't immediately released.

New York Subway in Jeopardy

Please consider Salt Water Puts Subway 'In Jeopardy'

Before Hurricane Sandy was expected to make landfall Monday, the Metropolitan Transportation Authority worked to seal off openings that could allow corrosive salt water to sweep into the system and incapacitate trains into the coming weekend. Still, the threat of an extended shutdown loomed over a system that carries 5.2 million passengers a day and is essential to the city's economy.

The subway system is "in jeopardy," MTA Chairman Joseph Lhota said Monday. "Our subway system and salt water do not mix."

The MTA closed down its entire regional network of rails and buses on Sunday evening and expect it will remain dark at least until Wednesday morning. Agency officials couldn't say how quickly the subway could be brought back into operation if the storm left the system awash in water from what were predicted to be surges as high as 11 feet. They said a timetable would depend on the amount of water that actually reached the 14 subway tunnels under the Harlem and East rivers, where the system is most exposed to catastrophic flooding.

Klaus Jacob, a research scientist at Columbia University's Lamont-Doherty Earth Observatory, wrote in a report last year that it could take as long as 29 days to pump out a full inundation of the tunnels.

"You can't order a part from Westinghouse or General Electric GE that is 100 years old," Mr. Jacob said. MTA workers will have to clean and test flooded equipment, "then you cross your fingers and hope that it works," he said.

Broken Window Fallacy Yet Again

With every catastrophe comes some economic illiterate talking about the stimulus benefits of it all. Presumably they have not read about the Broken Window Fallacy.

For a discussion of the broken window theory, please see Government Bailouts and the Stock Market - The Seen and the Unseen.

With the broken window in mind, please consider some complete economic nonsense in the Reuters article Economy may skirt direct hit from Hurricane Sandy.

Economists say some of the impact caused by businesses closing will be offset by reconstruction efforts, and point to catastrophic storms like Katrina, which devastated New Orleans but did not deal lasting damage to the national economy.

Peter Morici at the University of Maryland estimates that Sandy will cause about $35 billion to $45 billion in losses and damages but then be followed by as much as $36 billion in recovery spending.

Evan Gold, a senior vice-president at Planalytics, a Philadelphia consulting firm that advises businesses on weather-related matters, was more realistic as was Mark Zandi at Moody's.

Zanzi estimates regional GDP is $2.5 trillion and the cost to the region is about $10 billion a day if the region's economy grinds to a halt.

Evan Gold states "If consumers in this part of the country are spending hundreds, if not thousands, of dollars to buy things like generators, or after the storm, to do clean-up, that is likely going to cut into budgets that people might have for their holiday shopping".

Broken windows and floods have a net economic cost, not a benefit.

In general, it is never of economic benefit to have productive assets destroyed. It is also never of economic benefit to waste money on stimulus programs that have no realistic payback.

Keynesian clowns still have not figured this out.

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

Hurricane Sandy Update: First $100+ Billion Storm in U.S. History?

Sandy is classified as a Hurricane 1 status, a low-grade hurricane. However, don't let that fool you in terms of impact. It's not the absolute magnitude of the hurricane, but rather the magnitude vs. what the infrastructure can handle that matters.

Barometric pressure is 27.76, the lowest pressure recorded for a storm in the Northeast. Sandy is unprecedented in size as well. The hurricane is likely to reach shore with a full moon high tide raising storm surges several more feet.

Accuweather notes "The storm surge will reach generally 5-10 feet with up to 15 feet possible in a locations along and to the north of where the center makes landfall. When a 2-foot tide this evening is combined with 10- to 20-foot wave action, water will reach more than 30 feet above sea level in places. ... Total damage from Hurricane Sandy may well exceed Katrina's $96 billion. This could be the first $100+ billion storm in U.S. history."

New Jersey, New York, Washington DC, West Virginia, Pennsylvania, Maryland, Vermont, and Connecticut have all declared states of emergency. Parts of New Jersey are under mandatory evacuation. At least 60 million people will be affected.

As Sandy Barrels Toward New Jersey Coast, the hurricane remains on track to become a historic storm for the mid-Atlantic and southern New England.

New Jersey and New York City face very dangerous conditions and catastrophic damage. As of 2:40 p.m. EDT Monday CNN, nearly 300,000 customers are without power in seven states. New Jersey has the most at 92,000. Over 7,000 flights have been cancelled.

Damaging and life-threatening impact from the giant, powerful storm will reach as far inland as the central Appalachians and will span the coast from North Carolina to southern New England.

The record tide gauge in Atlantic City New Jersey is 9.0 feet. Sandy is at 8.25 feet now, and a near-lock to surpass the previous high, perhaps by many feet. Moderate to major flooding is already occurring in the Chesapeake Bay.

The Chesapeake Bay near Kiptopeke, Va., is at major flood stage of 5.95 feet, less than one foot below the record high of 7.1 feet set on March 7, 1962.

The Chesapeake Bay Bridge Tunnel, Va., is at 6.71 feet. This is also only 1 foot below the record flood stage of 7.5 feet set on Sept. 18, 2003.

In the Appalachian mountains, blizzard whiteout conditions with as much as two feet of snow are expected.

You can follow the Path of Hurricane Sandy on Accuweather.

You can also follow the life threatening storm on Weather Channel.

The Weather Channel reports peak tide levels may top those from both Hurricane Irene by 2 feet and  the previous record from the Dec. 1992 Nor'easter and Hurricane Donna in 1960.

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

Retail Sales in Spain Plunge 10.9%, Largest Drop on Record; All Pain, No Gain

In a seriously misguided effort to balance its budget, In early September Spain Passed Largest VAT Hike In History.

I wrote at the time, "Stunning Ineptitude Will Make History Books".

Spain's unemployment rate is over 25% and the youth unemployment rate is near 53% yet the fools in the Spanish government hiked taxes yet again, this time by the largest amount in history.

Spain's handling of this economic implosion is sure to make the history books as a prime example of complete ignorance in how to deal with a fiscal crisis.

History in the Making

That prediction took a single month to pan out. Reuters reports Spain retail sales decimated by VAT hike.

Spanish retail sales fell at their fastest pace on record in September as already battered consumer confidence took another hit from a hike in value added tax, driving many shoppers to trade down to cheaper products.

Sales fell 10.9 percent year on year, Monday's National Statistics Institute data showed, reflecting an economy struggling through its second recession in three years and plagued by chronically high unemployment.

The drop was the biggest in calendar-adjusted terms since current records began in January 2004, and marked the 27th monthly decline in a row.

"It's clear there are no signs the crisis is abating," economist at Nomura Silvio Peruzzo said. "The headline (retail) figures show a sharp drop and indicate that domestic demand is not going to be anywhere near what the government is anticipating."

All Pain, No Gain

The last thing Spain needs is ridiculous tax hikes. Clearly they are counterproductive. So why do the jackasses keep hiking taxes?

That's a good question, and here is the two-part answer.

1. Counterpart jackasses in Brussels insist upon it
2. The government in Spain refuses to change work rules and shrink government, something that desperately needs to be done

To be sure more pain is coming to Spain. Shrinking government and reducing pensions would be painful as well, but at least there would be long-term benefit. Hiking taxes is all pain and no gain.

Spain really needs to exit the euro, and it will, but not before the entire country is in the gutter and the masses have finally had enough.

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

EU Bureaucracy has Lost Control of Italy; Social Mood Turns Black

In Italy, former prime minister Silvio Berlusconi waged a full frontal attack on technocrat prime minister Mario Monti, Germany, Angela Merkel and the EU imposed austerity during a 1.5 hours press conference near Milan.

The problem for Brussels is Berlusconi can force a vote because by withdrawing his support to Monti's government, the current coalition will collapse.

The People of Liberty party needs to consider that "with a no-confidence vote by us, we would determine a situation that would be interpreted in a certain way by the financial markets and would cause early elections," Berlusconi told reporters yesterday near Milan. "We will consider these facts and decide whether to immediately withdraw our support of the government."

Such a step would likely force President Giorgio Napolitano to call early elections, before a vote due by May. It also would probably fan Europe's debt crisis, as Monti's austerity policies have contributed to a decline in Italy's bond yields, with markets more focused on Spain in recent months.

"It's impossible to say what is in Berlusconi's head now, but if he decides to end his support to Monti, early elections become almost inevitable," said Roberto D'Alimonte, a professor of politics at Rome's LUISS University. "Berlusconi would lose the elections anyway, but would likely get more votes thanks to an anti-austerity platform and that would increase his party's bargaining power in the next parliament."

In Sicily, exit polls show the candidate of Beppe Grillo's Movimento 5 Stelle (Giancarlo Cancellieri) as the winner for the Regional Governor position with 27% of the votes.

Reader "AM" who is from Italy but now lives in Hong Kong writes ...

Hello Mish

I am also an Italian citizen living in Hong Kong.  I have been away from Italy since 1995 but I still read and follow Italian (and European) news and politics. I believe the EU will not hold together over the medium term and some countries, for example Belgium, Italy and Spain, might not survive the collapse of the EU in the current form and might even break up.

Some headlines from the "Corriere della Sera"  from this weekend for your information that might turn out to be eventful over time and some related considerations of mine:

Record Vote Avoidance in Sicily

Key Points

• Only 47% of the people eligible voted yesterday in the regional elections in Sicily vs. close to 60% in 2008.
• The results will become available later today and there are no official exit polls, but one partial exit poll in the Palermo province projects the candidate of Beppe Grillo's Movimento 5 Stelle (Giancarlo Cancellieri) as the winner for the Regional Governor position with 27% of the votes.
• Whoever wins will not be able to govern Sicily without complex and likely most unstable alliances with other parties because of the extreme fragmentation due to the decline of the established parties.

The mainstream media is desperately trying to support the established parties, especially the moderate small political centre parties (including trying to break up Berlusconi's PdL party in order to ferry votes to the centre).

Their problem is that the centre and centre-left are crumbling. Instead of the rise of a moderate centre, the nationalistic and local right is rising: Movimento 5 Stelle is projected at over 20% of the national vote.

Berlusconi Attacks Monti and Germany

• Berlusconi is back with a frontal attack to Mario Monti, Germany, Angela Merkel and the EU imposed austerity during a 1.5 hours press conference near Milan on Saturday, 10/27.
• Berlusconi might withdraw support to Monti's government already this week leading to early national elections in January or February.  This will be fought tooth and nail by the Italian and EU establishments. 
• Berlusconi wanted to announce the withdrawal of his support for Monti's government already during the call on Saturday but his family and counselors managed to convince him ponder the decision for a few more days.

This is a major, major political event in Italy and in the EU

1. Berlusconi is back and might even form a new party if he cannot fully reform the PdL, his current party, part of which has been drifting toward supporting Monti for a second mandate.
2. Berlusconi can and will force a vote because by withdrawing his support to Monti's government, he is accelerating the events, forcing his opponents, such as the PD (Partito Democratico, the reformed communists) to quickly drop support for the current government too because it will be fatal to any party to get to the elections still supporting Monti which is now a major liability for anyone close to him and his government.
3. The EU bureaucrats have managed to impose an unelected government onto Italy but now the situation is exploding in their face and they seem to be genuinely surprised by the events i.e. the massive rise of the right in all its forms (localist, nationalist, radical, anti EU, anti Euro and populist).
4. The political situation in Italy is fragmenting into at least five major aggregation areas: i) PD (reformed communists) estimated at 25% of the national vote; ii) Movimento 5 Stelle at 20% to 30%; iii) Berlusconi, possibly with his new party, for which there are no estimates and which just announced an alliance with Lega Nord, let's pencil in 20% together with Lega Nord; iv)The moderate, fragmented, catholic centre supporting Monti which is rapidly losing strength and that we can model at 20%; v) The radical left (communists) at 10%;

The establishment is in panic. This was first page news on all Italian newspaper on Saturday evening and already on Sunday there has been a massive onslaught against Berlusconi from all sides.  Expect and EU onslaught shortly.

Think what you want about Berlusconi's ethics and morals but he has an uncanny ability to assess the secular mood (he is a media tycoon after all) and where popular sentiment is going and he has just seen a major opening now at the right of all established parties and against the EU.

Northern Italy has been fermenting with protests and is becoming radical.  The paradox is that the rich part of the country is collapsing under the Euro and the EU driven austerity, crushed by competition from Germany, competition from Asia and other emerging region with weaker currencies and improving technology and skills and by high commodity and energy costs.

Angela Merkel seems to have misread the situation, underestimated Berlusconi and made major strategic blunders by openly driving out Berlusconi and getting an enemy for life and by openly supporting the failed Sarkozy reelection bid. Sarkozy is now gone, Hollande is now openly confronting her and Berlusconi could be back, possibly indirectly pulling the levers of Italy's next government as party president.

Angela Merkel is increasingly despised in Italy (and beyond) with a speed which I found surprising. The social mood of the country is turning black very quickly.

Expect massive fireworks in Italy and in the EU shortly.  I believe that the EU bureaucracy has lost control of Italy but have not realized it yet. The EU is also about to lose control in Spain, Greece and possibly France.

Best Regards,
AM

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

Multigenerational Households On Rise; Boomerang Students Return Home; What's the Impact on Housing Demand?

According to a study by the U.S. Census Bureau Multigenerational households on rise in U.S.

More than 4.3 million, or 5.6 percent, of the 76 million family households in the U.S. today are multigenerational households, or families living together that include a grandparent, parent and children as well as other family members, according to a study by the U.S. Census Bureau's American Community Survey.

Multigenerational Families

• 3.7% in 2000
• 4.0% in 2010
• 5.6% in 2012

There was only a gain of .3% in the 10 years between 2000 and 2010, but a gain of 1.6% in the next two years.

That small 1.6% increase represents a decrease in demand of 1.216 million homes.

However, those survey results are for three generations and thus do not include all the kids graduating from college, with no job, and moving back home.

Boomerang Students Return Home

Boomerang kids with no jobs returning home has an even greater impact on housing demand. CNN Living discusses the "boomerang" effect in College grads and their families learn to live together.

More than half of college graduates move back home, sociologist Katherine Newman wrote in her book, "The Accordion Family: Boomerang Kids, Anxious Parents, and the Private Toll of Global Competition," based on surveys conducted worldwide.

And many of them are finding it isn't as painful as it sounds, she said. By setting ground rules and establishing expectations on both sides, parents and their adult children are learning to live together.

"People anticipate it will be more complicated than it turns out to be," said Newman, dean of the Zanvyl Krieger School of Arts and Sciences at Johns Hopkins University. "It's remarkably smooth for most families."

Perhaps that's because it's such a common phenomenon. A Pew Research Center analysis of U.S. census data found that the share of Americans living in multigenerational households is at its highest level since the 1950s.

Overall, 39% of adults ages 18 to 34 say they either live with their parents or moved back in at some point in recent years, according the report. Among 18- to 24-year-olds, 53% said they live at home or moved in temporarily, compared with 41% among adults ages 25 to 29, and 17% among those ages 30 to 34.

For adult children, part of the fear of returning home has to do with being torn away from their social circles. But, thanks to social media, especially Facebook, they're staying in touch with more friends from different times in their lives, Newman said, and finding that others are moving back home, too. The Pew report found that among adults ages 25 to 34, 61% said they have friends or family members who have moved back in with their parents over the past few years because of economic conditions.

Boomerang Generation OK Living With Mom

The Pew Research Center notes The Boomerang Generation Feeling OK about Living with Mom and Dad.

If there�s supposed to be a stigma attached to living with mom and dad through one�s late twenties or early thirties, today�s �boomerang generation� didn�t get that memo. Among the three-in-ten young adults ages 25 to 34 (29%) who�ve been in that situation during the rough economy of recent years, large majorities say they�re satisfied with their living arrangements (78%) and upbeat about their future finances (77%).

To be sure, most young adults who find themselves under the same roof with mom and dad aren�t exactly living the high life. Nearly eight-in-ten (78%) of these 25- to 34-year-olds say they don�t currently have enough money to lead the kind of life they want, compared with 55% of their same-aged peers who aren�t living with their parents.

One reason young adults who are living with their parents may be relatively upbeat about their situation is that this has become such a widespread phenomenon. Among adults ages 25 to 34, 61% say they have friends or family members who have moved back in with their parents over the past few years because of economic conditions. Furthermore, three-in-ten parents of adult children (29%) report that a child of theirs has moved back in with them in the past few years because of the economy.



A Pew Research analysis of Census Bureau data shows that the share of Americans living in multi-generational family households is the highest it has been since the 1950s, having increased significantly in the past five years. Adults ages 25 to 34 are among the most likely to be living in multi-generational households: In 2010, 21.6% lived in this type of household, up from 15.8% in 2000 (the vast majority were living with their parents). The share of 25- to 34-year-olds living in multi-generational households was at its lowest in 1980 (11%) and has risen steadily since then, spiking upward since the recession started in 2007.

The Pew Research survey found that among all adults ages 18 to 34, 24% moved back in with their parents in recent years after living on their own because of economic conditions.

According to the survey 40% of 18- to 24-year-olds currently live with their parents, and the vast majority of them say they did not move back home because of economic conditions (in fact many of them may have never moved out in the first place). Among those ages 25 to 34, only 12% currently live with their parents, but another 17% say they moved back home temporarily in recent years because of economic conditions.

Overall, 39% of all adults ages 18 to 34 say they either live with their parents now or moved back in temporarily in recent years, but there is considerable variance by age. Among 18- to 24-year-olds more than half (53%) live at home or moved in for a time during the past few years. Among adults ages 25 to 29, 41% live with or moved back in with their parents, and among those ages 30 to 34, 17% fall into this category.

2010 Census Population Numbers



What's the Impact on Housing Demand?

According to data from Table 2 (above) of the 2010 Census, there are approximately 62.65 million people in the 20-34 age group.

If 24% of them are currently living at home for economic reasons, that represents a potential 15 million houses, apartments or condos. Wow.

However, the survey results are based on those who moved in "for a time during the past few years". It does not detail those currently living at home due to economic reasons.

On the other hand, the survey does not reflect households doubling up, friends sharing houses or condos, sisters or brothers sharing houses, etc.

Thus, a precise impact is not at hand, but it appears to easily be in the millions, and that is on top of the 4.3 million three-generational households as noted in the first link.

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

"Wine Country" Economic Conference Hosted By Mish
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Poll Shows Overwhelming Support for Secessionist Candidates in Catalan Election

Secessionist Candidates are about to dominate the next election according to recent polls in Catalonia.

My friend Bran totals the polls up this way.

• Corvergencia and Union goes from 62 seats to 65 or 66 (Independence)
• ERC aumenta from 10 to 16 (Independence)
• SI from 0 to 4 (Independence)
• ICV-EUiA pasa from 10 to 12-14 (Moderate - more federalism , not rule out independence)
• PSC drops from 28 to 18 (No independence)
• PP drops from 18 to 17 (No independence)
• Ciutadans from 3 to 6 (No independence )

Moreover, although the PSC is against secession, the party wants to amend the Constitution to recognize the right of Calatanes decide.

The leader of the PSC, Pere Navarro, has said that his party is a third way between the "centrality of PP and Artur Mas reckless prophecy "of independence.

Navarro wants to recognize the right of the people to decide. In light of his statements likening independence with recklessness, I have to ask "decide what?"

Here is the count as I see it.

It seems there are 85-86 solid votes for independence, 12-14 votes wavering, 23 solid no votes, and 18 no votes yet supporting some sort of constitutional reforms.

The score is 85 minimum for independence vs. 55+- other, even if you count the ICV votes as No independence.

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

Australian Banksia Securities Assets Frozen As Mortgage Lending Scheme Blows Sky High; Six Canadian Banks on Moody's Review for Downgrade

Every day I get emails and links from all over the world. I wish I had time to comment on all of them. Here are a pair of stories regarding Canada and Australia.

The Financial Post reports Six Canadian banks on review for Moody�s downgrade

Debt rating heavyweight Moody�s Investors Service served notice on six of Canada�s biggest banks that it may cut their rating by as much as two notches because of concern over high consumer debt levels and soaring housing prices.

The downgrade warning covers Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, Caisse Centrale Desjardins and National Bank of Canada.

Moody�s said it will also consider the removal of government support from the ratings of some of the subordinate debt issued by the institutions, a move that would have significant negative implications on the country�s major lenders which have traditionally enjoyed an implicit promise of a bailout by the state if ever they got into serious trouble.

�Today�s review of the Canadian banks reflects our concerns about high consumer debt levels and elevated housing prices which leave Canadian banks more vulnerable to increased risks to the Canadian economy, and for some banks a sizeable exposure to volatile capital markets businesses is of concern,� Moody�s analyst David Beattie said in a statement.

The move comes about four months after Moody�s downgrade Royal Bank of Canada, the country�s biggest bank by assets, by two notches because of its exposure to increasingly volatile global capital markets. At the same time the rating agency also cut the ratings of 14 other large banks mostly based in Europe and the U.S.

Moody�s noted that consumer indebtedness has been rising steeply for the last several years, with the ratio of household debt to income recently hitting a record 163%, up from 137% in 2007, a reflection of what it called growth in debt outpacing growth in income.

Meanwhile, the rating agency is calling for economic growth of just 2% to 3% for this year and next year respectively, at the same time that external risks arising from the crisis in Europe and the struggling U.S. economy continue to rise.

Moody's Late To The Party

As is typically the case, Moody's is way late to the party. It is also overoptimistic about Canadian growth prospects.

The big three rating agencies and the IMF all fail to understand the global forces at play.

Australian Banksia Securities Assets Frozen

In Australia, the collapse of "non-bank" Banksia Securities has affected thousands of investors fools who put $660 million in a guaranteed to blowup mortgage-lending scheme that chased high yields.

How did Banksia Securities offer above market returns? The answer is risky mortgages and commercial property loans now going bust.

Please consider Rural savings threatened after collapse

Thousands of farmers and other regional Victorians face a nervous wait after the collapse last night of the financing group Banksia Securities, which has put at risk $660 million in savings.

As a non-bank lender, Banksia offers investors high interest on debentures and then lends these funds out as mortgages or commercial property loans.

Given Banksia does not hold a banking licence, the funds in the debentures are not backed by a deposit guarantee.

Debenture firms often target retirees as investors, generating new business through promises of high-interest returns backed by property.

McGrathNicol last night froze the $660 million in investments and stopped all interest payments as it began an urgent review of the company's accounts.

The attempt to claw back funds could cause a credit crunch among some property developers that relied on Banksia for loans.

Opposition Finance spokesman Robin Scott said Labor was worried about the damage Banksia's collapse may do on regional communities, particularly on jobs and development.

Mr Scott said while it was too early to know the full impact he hoped the state government would look at ways of to help those most affected.

Questions of the Day

This is yet another disastrous borrow-short, lend-long scheme blown sky high. The New Australian blog asked Is this Australia�s Northern Rock moment?

I have a question of my own: Why should the government help anyone affected by this?

Those stupid enough to have money in Banksia given the precarious state of Australian real estate deserve to lose it.

The same holds true for developers. Any developer stupid enough to depend on Banksia for credit should now pay the price.

Credit Crunch On the Way

If developers are cut off, the result would be a genuine credit crunch as opposed to a lack of demand for money.

For a comparison to the proclaimed credit crunch in Europe, please see Credit Crunch in Europe; Eurozone Lending Sinking Fast; Money Supply Contracts

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

New Definition of "Sustainable" is Six Months; New Word Needed to Replace "Haircut"

Germany's Finance Minister Wolfgang Schaeuble has changed the meaning of the word sustainable to "six months".

While "sustainable" never had a definitive time-frame, when it comes to economic recoveries I am quite certain the term has never before been used to mean anything as short as "six months".

For a look at revised definitions, please consider German finance minister rules out Greek debt "haircut"

German Finance Minister Wolfgang Schaeuble ruled out public investors accepting a debt restructuring, or "haircut", on their Greek bonds but said in an interview to be aired on Sunday that a debt repurchasing program could be considered.

"(A haircut) is a discussion that has little to do with the reality in the member states of the euro zone," Schaeuble said in an interview with Deutschlandfunk radio.

Schaeuble said sovereign states could legally not write off billions of euros of losses on their official holdings of Greek government bonds.

Schaeuble reiterated no agreement had been made on how to help Greece implement austerity cuts after Stournaras said international lenders had given Athens more time and a package of austerity measures would be put to parliament next week.

Any agreement with near-bankrupt Greece would have to be sustainable - last longer than six months - and be trusted by financial markets.

A debt repurchasing program, in which Greece would get new loans in order to pay back old debt, could be an option, Schaeuble said.

"That is a consideration that one can make seriously. It has been put up for discussion by some members of the central bank board."

Definition of Haircut

While investigating definitions, let's also take a look at the meaning of "haircut" since there supposedly will not be one.

In the financial world, the word "haircut" typically means a reduction in the value of bonds held as collateral. As we have seen, haircuts can be voluntary or involuntary. However, and as we have also seen, the definition of "voluntary" has been stretched beyond reasonable imagination.

Whether voluntary or not, giving Greece more time to pay back loans would be a form of a haircut.

Giving Greece money to pay back existing loans then reissuing the debt on more favorable terms to Greece would certainly be a haircut from any reasonable point of view.

Both options are under serious discussion, but let's not dare call them "haircuts". Let's instead call the process a "manicure".

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

Superb Hugh Hendry Interview on Gold, Hyperinflation, Treasuries, Stocks, Japan, China, Real Assets

Here is an excellent interview at The Economist Buttonwood Conference featuring Hugh Hendry. You may have to enter your email address to play, but I doubt it has to be accurate as there was no verification process.

The interview is well worth a play in entirety, covering Gold, Hyperinflation, Treasuries, Stocks, Japan, China, and Real Assets. It's the best interview I have seen lately.



Link if video does not play: Buttonwood Gathering Part 5.

Select Quotes

On US Treasuries: "Don't tell me China will sell their US treasuries. If they sell their treasuries, the renminbi goes higher and higher and higher. And their companies that export go bust."

That is something I have been saying for years. Indeed, the Fed and the US Treasury would be pleased to have China dump treasuries.

On Chinese GDP: "We have a roadmap from the 1920's. The UK played the role of the US and the US played the role of China.  With the leverage of the creditor cycle, UK GPP peak to trough fell 8%. One year, in America, in real terms, GDP fell 23%. That's the leverage. Now am I sitting here with video cameras saying the Chinese economy will contract 23%? Of course I'm not. But if we have a coffee later I might say something different."

That last sentence above generated tremendous laughter at the conference .

Negative 23% is excessively negative, but we are in the same general camp. China is going to surprise way to the downside. China will not economically pass the US as The Economist expects.

For further discussion, please see The Dating Game: Michael Pettis Challenges The Economist to a Bet on China.

There was an interesting comment on gold at the end. Hendry had been long gold and short the S&P in  a paired trade since 2006. That trade worked exceptionally well through 2008. He still likes gold but not as enthusiastically as he did, and he does not like the miners.

Regarding miners, I disagree.

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

Credit Crunch in Europe; Eurozone Lending Sinking Fast; Money Supply Contracts

A collapse in demand for credit is underway in Europe. Bank lending is down sharply and the decline has "surprised the experts".

I wasn't surprised in the least, but nonetheless, please consider Lending in the euro zone is declining fast, courtesy of Google translate (slightly modified by Mish) from Die Welt.

In the crisis-hit euro zone, fears rise of a credit crunch. The sharp decline in bank loans to companies surprised even the experts.

The sum of bank loans to companies and households in the euro zone shrank more than expected in September. Bank lending in comparison to the same month last year shrank by 0.8 percent, said the European Central Bank (ECB). Analysts had expected a decline of only 0.6 percent.

The lending to companies fell month on month by 20 billion euros after it was dropped in August only to six billion euros. In many countries recessionary demand for loans is naturally low.

"At least in some euro area countries, the capital constraints affect the supply of credit from the banks to the real economy," said Commerzbank expert Michael Schubert. The complaints about the business in France over high hurdles in lending would have declined in recent months, is slow. A similar picture is apparent in Italy.

Credit Crunch or No Demand?

The article bills this event as a "credit crunch". I would define a credit crunch as demand for credit that is not met. Here, I primarily see falling demand. Why businesses should want to expand in this environment is beyond me, and indeed they don't.

So if there is no reason for businesses to expand, especially if Germany and France have hit the skids. And both countries have hit the skids (as expected, at least by me) and as noted in Eurozone Downturn Deepens, PMI at 40-Month Low; Manufacturing Weakness in Germany; Considerable Service and Manufacturing Contraction in France.

So why the surprise? The answer is most of these guys cannot think.

Money Supply Contracts at Sharp Pace

Ambrose Evans-Pritchard reports Eurozone nears Japan-style trap as money and credit contract again.

Data from the European Central Bank show that the tentative rebound in the money supply over the summer may have stalled again in September.

The broad M3 gauge -- watched by experts as an early warning signal for the economy a year or so ahead -- shrank by �30bn and is now down by �143bn since April. This is highly unusual.

"The message is clear," said Lars Christensen from Danske Bank. "The ECB needs to stop obsessing about fiscal issues and do real quantitative easing (QE) if it wants to stop the eurozone going the way of Japan."

Loans to firms and households fell 1.3pc as banks continue to shrink their balance sheet to meet tougher rules. Private bank lending has been falling almost continuously since April.

"This credit contraction is what happened in Japan in the early 1990 and we have to be careful not get into deflationary spiral," said Prof Richard Werner from Southampton University, a Japan expert. "They to need to launch true QE or an expansion in broad credit creation, and it cant be done easily."

Message is Clear

Lars Christensen from Danske Bank says the "message is clear" and proposes QE as the solution. Prof Richard Werner from Southampton University, an alleged "Japan expert" made similar statements.

What's clear is both are spouting complete economic nonsense and both are devoid of any knowledge of history. Japan launched various monetary and fiscal stimulus programs over the course of 20+ years and it got them nothing but a massive pile of debt to show for it.

Please note that eurozone excess reserves are piling up to the tune of �770 billion as of September according to the Wall Street Journal report The ECB, �Sterilization� and Money Supply. It's nearly �900 billion now. Lovely.

QE is not going to stimulate the demand for credit. It didn't in Japan, it didn't in the US, it hasn't so far in Europe.

More QE in Europe won't spur lending either, but it might give gold a nice lift.

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

Dire State of Affairs in Illinois; Mish Six-Point Proposal

I just finished slogging through a 69 page PDF by the State Budget Crisis Task Force outlining the dire state of affairs in Illinois.

I knew in advance that pension funding is the biggest issue facing Illinois. The task force shows exactly that. Here is a summary.

Pension Funding Levels

• Teachers Retirement System (TRS) - 46.1%
• State University Employees Retirement System (SURS) - 45.3%
• State Employees Retirement System (SERS) - 34.9%
• General Assembly Retirement System (GARS) - 20.2%
• Judicial Retirement System (JRS) - 31.0%

Those funding levels assume 8% returns going forward, something that is not going to happen. So as bad as the above looks, the true pension underfunding is even worse.

Illinois' infrastructure is in bad shape, and the report has the details.

There were many things in the report that I did not know about including the loopholes that let legislators pretend Illinois' budget is balanced when it's not.

Here is a surprising fact: Illinois has more governmental taxing agencies than any other state including California, a grand total of nearly 7,000 taxing bodies!

Here's a juicy tidbit on infrastructure "Nearly two-thirds of Metra and CTA passenger rail cars were in a marginal state. Nearly half of Metra and CTA train stations were past their useful life, and about one-third of CTA and Pace buses were in the last quarter (or less) of their useful life."

The report finished with "recommendations" but they were broad stroke, budgetary meaningless things like timely reporting, long-term planning, accrual planning, etc.

I am in favor of most of the report recommendations, but they will not solve a single problem.

Here is the scariest single sentence in the report "If the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years."

Illinois is insolvent, but what can be done about it?

Mish Six-Point Proposal

1. Immediately end all defined-benefit pension plans
2. Default on pension obligations in the fairest possible manner (cap benefits)
3. End collective bargaining of public unions  
4. Eliminate prevailing wage laws that are murder on local budgets
5. Lower corporate income taxes to attract business
6. Eliminate property taxes as the primary method of funding schools

Point number two is against the constitution but I believe it could be accomplished by taxing all benefits above a certain amount at 100%. The alternative is also simple. If the money is not there (the pension plan is bankrupt) all payouts will cease.

The way to win approval from the unions is to set the cap high enough so that the majority of union members get 100% of their benefits.

State Task Force Report

Everything that follows is from the report. It is lengthy and will be easier to read if it is not in blockquotes as per my usual format. Emphasis is generally, but not necessarily mine.

�What Would It Take� Calculations

• If the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years.
• To close the gap with an income tax increase would require the individual tax rate to rise to 7.1 percent from the then-existing 3.0 percent and a proportional rise in the corporate rate.
• To close the gap with a sales tax increase would require the rate to jump from 6.25 percent to 13.5 percent.
• To close the gap with spending cuts alone would require over 25 percent across the board reductions in all spending (other than for pensions, debt service, and transportation).

Of Illinois� three biggest fiscal problems � pension costs that are crowding out the rest of the budget, Medicaid cost increases that have grown faster than the state�s resources and will be unsustainable as the federal ARRA funds expire.

Despite greater recognition that the growth in pension costs cannot be sustained, different views of how to cut or shift the costs have led to a stalemate. No action on pension reform is expected until after the November 2012 elections at the earliest.

Illinois� demographics show an aging population with a trend toward fewer workers and more retirees, which will pose daunting fiscal challenges in the years ahead. Illinois is also a diverse state with a variety of competing interests, which makes it difficult for political leaders to reach consensus on key issues.

The Politics of Spend, but Don�t Tax

While in Illinois, as elsewhere, the desire to please constituents by expanding government services without increasing taxes is a given, the origins of the structural gap between spending growth and sustainable revenues can be traced to the 1990s. Governor Rod Blagojevich (Illinois� first Democratic governor since 1976) was elected in 2002 with an agenda to expand programs for children, seniors, and the poor.

However, conflict between Blagojevich and Speaker of the House Michael Madigan (both Democrats) meant that tax increases became virtually impossible as the two �checkmated one another.� The governor declared he would veto any general tax increase�. Madigan blocked all the revenue initiatives proposed by the governor.�

Illinois� Squishy Balanced Budget Requirement

It would appear that Illinois� budget is required to be balanced. The Illinois Constitution states that �Proposed expenditures shall not exceed funds estimated to be available for the fiscal year shown in the budget�

However, Illinois� balanced budget requirement has some serious limitations.

First, it refers to anticipated revenues, and there is no requirement that the state adjust its spending if the anticipated revenues are not realized. There is nothing to stop a governor or General Assembly from using an unrealistically high estimate when crafting the budget.

Illinois� balanced budget requirement is also a cash concept, referring only to the current fiscal year. This means that the balanced budget requirement does not refer to future pension liabilities or unpaid bills from the previous year. Each fiscal year from 2009 to 2012 ended with a larger stack of unpaid bills � $8 billion at the end of fiscal year 2012 � and each year these bills were ignored when projecting balance for the next year�s budget.

Underfunded Retirement Promises Are Crowding Out Other Needs

It is widely recognized that Illinois  has the worst unfunded pension liability of any state. Its five retirement systems had a total of $85 billion in unfunded liability in 2011 (Table 2), and the figure has increased since then. Dealing with some of the lowest funded ratios of public pensions in the nation has contributed to the state�s ongoing fiscal crisis. Illinois� pension problems were cited by Moody�s Investors Service when it downgraded the state�s bond ratings in January 2012, making Illinois� credit rating the lowest of all fifty states. However, Illinois has done nothing to reform state employee pensions since that time and it is doubtful that anything will happen before 2013.

Table 2 describes the five retirement systems the State of Illinois is responsible for funding: Teachers Retirement System (TRS), State University Employees Retirement System (SURS), State Employees Retirement System (SERS), General Assembly Retirement System (GARS), and Judicial Retirement System (JRS). It also shows the Illinois Municipal Retirement Fund (IMRF), which the state administers but the local government entities are responsible for funding. Most of the state�s
$85 billion in unfunded liabilities are in the three largest funds, TRS, SURS, and SERS. All five state funds have funding ratios below 41 percent. The IMRF has a much higher funding ratio because of a state law that obliges local governments to make �annual required contributions� (ARC).



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The Way Pension Costs Are Reported Can Obscure the Problem

Illinois� pension systems are likely in a more dire fiscal condition than they seem. Illinois� three largest pension systems discount future pension liabilities using an assumed rate of return on investments of around 8 percent. Since the financial crisis, ongoing economic instability in Europe, and worries of a double-dip recession, many believe that this assumed rate of return is overly optimistic. Most state pension systems have exceeded an 8 percent rate of return over the past several decades, but the rates have been much lower in recent years. Lower discount rates will soon be required in Illinois and other states.

Under new rules approved by the Governmental Accounting Standards Board (GASB) in June 2012, Illinois will be required to report liabilities using �market rates,� which are typically closer to 5 percent. Although this change will no doubt have a positive impact by more accurately estimating the level of state liabilities, it reveals an even more precarious financial position. For example, �under the new rules, the Illinois Teachers� Pension System [TRS], one of the country�s worst funded, would have shown just an 18 percent funding ratio as of July 2010.�

Schools

In Illinois, total preK-12 education spending per pupil slightly exceeds the national average, but the proportion that comes from the state�s own resources is low in comparison to other states. In the 2008-2009 academic year Illinois was ranked forty-eighth in per-pupil education revenues from state sources, but tenth in per pupil revenues from local sources. Illinois� heavy reliance on local property taxes to fund education means that disparities between wealthy and poor communities are reflected in the quality of the schools.

During the 2009-2010 academic year, Illinois� wealthiest elementary districts spent about $24,000 per pupil while the poorest districts spent about $6,000. A 2010 national study found that Illinois has the second-highest disparity between high-poverty and low-poverty schools.

Illinois has the third highest number of school districts of all U.S. states. More than 200 of Illinois� 868 school districts have only one school.

Underinvestment in Infrastructure

Crowding out has also become increasingly evident in the case of Illinois� aging infrastructure. In 2010, the American Society of Civil Engineers (ASCE) Infrastructure Report Card gave Illinois an overall grade of D+.140 The state�s infrastructure is in urgent need of immediate repairs to meet basic standards of public safety, and in need of expansion and modernization to accommodate future growth. However, as Illinois continues to struggle to pay its pension, Medicaid, and debt obligations, the state�s infrastructure condition will only worsen. Illinois state agencies estimate that infrastructure needs over the next twenty to thirty years will exceed $300 billion. But the state does not have a comprehensive capital improvement plan, and the information needed to make an accurate assessment of the condition of Illinois� infrastructure is incomplete.

Condition of Illinois� Infrastructure

The poor condition of Illinois� infrastructure � including highways, roads, bridges, trains, buses, dams, locks, and buildings � has become critical.

A FY 2011 survey of Illinois� highways and roads by the Illinois Department of Transportation indicated that approximately half of Illinois� highways and roads were in Fair or Poor condition. According to the Federal Highway Administration, in 2010 over 15 percent of Illinois� 26,000 bridges were structurally deficient or functionally obsolete.

Illinois� mass transit infrastructure is also lacking: in 2010 approximately one-third of mass transit bridges and structures; maintenance facilities; and buses were not in a state of good repair. Nearly two-thirds of Metra and CTA passenger rail cars were in a �marginal� state. Nearly half of Metra and CTA train stations were past their useful life, and about one-third of CTA and Pace buses were in the last quarter (or less) of their useful life. Little state funding is available to address these needs.

Local Government Fiscal Stress

Local government taxing jurisdictions weave a complex web in Illinois. According to the 2007 Census of Governments, Illinois has more units of government than any other state � nearly 7,000. This includes 102 counties, 1,400 townships, 1,300 municipalities, 868 school districts, and about 4,000 special taxing districts such as library, fire protection, forest preserve, and park districts.

In Illinois, the fiscal condition of thousands of local governments is intertwined with that of the state. At present, neither is in a position to help the other. The state�s fiscal stresses have led to cutbacks in transfers of state revenues to local governments, exactly at the time that local governments are most in need of assistance.

Everything above, starting with "What Would It Take Calculations" were pieces snipped from the 69-page PDF.

Illinois is in deep "sheet" and the primary proposals under discussion all involve tax hikes and more pandering to public unions which will do nothing but drive businesses away.

My six-point alternate proposal would put Illinois back on a track towards fiscal sanity and also encourage businesses to relocate to Illinois.

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

"Wine Country" Economic Conference Hosted By Mish
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