0 Mish on Capital Account May 1: Discussion of Europe, Austerity, Paul Krugman, Jobs, and the Greenspan Contrarian Indicator (GCI)

Once again it was a pleasure to be on Capital Account with Lauren Lyster Tuesday afternoon. We discussed Europe, austerity measures, Paul Krugman, whether or not the Fed could create jobs, and the Greenspan Contrarian Indicator.

Link if video below does not play: Mish Tackles Paul Krugman and the Greenspan Contrarian Indicator (GCI) .



For more on the GCI, Please see Contrary Indicator Alert: Greenspan Says U.S. Stocks ‘Very Cheap,’ Likely to Rise

I have a lot of fun doing these. I do not come in until after the 6 minute mark but Lauren had some excellent comments before I came on.

Mike "Mish" Shedlock
http://mishblogdotcom.blogspot.com
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0 China Manufacturing "Expands" at Faster Pace; China Manufacturing "Contracts" 6th Consecutive Month; Confused by Conflicting Headlines?

China manufacturing is reported to be in contraction and expansion simultaneously. The Chinese government reports expansion. The HBSC PMI says China is in contraction for the 6th consecutive month.

Obviously this is impossible, so the question is "who to believe?"

China Manufacturing Expands at Faster Pace

Bloomberg reports China’s Stocks Rise Most in Two Weeks on Manufacturing, Fee Cut

China’s stocks rose the most in two weeks after manufacturing expanded at a faster pace and the nation’s two stock exchanges said they will cut trading fees by 25 percent to attract investors.

Citic Securities Co. and Haitong Securities Co. led brokerages higher on speculation the regulators’ move may boost stock trading. Jiangxi Copper Co. and Yunnan Copper Industry Co. (000878) gained more than 9 percent after the Purchasing Managers’ Index rose to 53.3 in April, the fastest pace in a year.

“We’re definitely going to have a major bull market ahead,” Jerry Lou, the chief strategy officer at Morgan Stanley Huaxin in Shanghai, said in an April 24 phone interview.

China Manufacturing Contracts 6th Consecutive Month

Markit reports China Manufacturing Sector Operating Conditions Deteriorate at Marginal Rate

April data pointed to further reductions in manufacturing output and new business, although rates of decline were marginal in both cases. Consequently, companies remained cautious with regards to hiring, highlighted by the index measuring trends in manufacturing employment reaching its lowest level in 37 months.



After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to give a single-figure snapshot of operating conditions in the manufacturing economy – posted 49.3 in April, up from 48.3 in March. That indicated a sixth successive month-on-month worsening of manufacturing sector operating conditions in China.

Key points

• Manufacturing output and new orders both fall at marginal rates
• Employment down at fastest rate in over three years
• Input cost inflation remains subdued

Comment

Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

“The upward revision to April’s final PMI reading, compared to the flash estimate, confirms that the pace of China's slowdown is stabilized. The 8.1% y-o-y GDP growth is likely to be the cyclical trough. As easing measures are starting to work and additional easing measures are on the way in the light of accommodative inflation outlook in the coming months, we expect Chinese GDP growth to bottom out in 2Q and recover modestly to over 8.5% in 2H.”

Cyclical Trough Coming Up?

What is with these perpetually bullish comments on Markit? I am seriously at a loss here.

For months on end we heard nonsense about no recession in Europe, followed by no recession in Germany, followed by calls for a short recession.

Then the bottom fell out days ago as noted in Eurozone Manufacturing PMI Hits 34 Month Low; German Manufacturing Hits 33 Month Low; Orders Drop Steeply Across the Board.

Absurd Predictions

Here we are again with preposterous predictions of a cyclical bottom in China.

I do not know what the next quarter will bring, or even the next several quarters,  but these guys are not on the ball nor are they in left field. Frankly, they are not even in the ballpark.

If China GDP posts a cyclical bottom at 8.1% I will eat my hat. I believe, along with Michael Pettis at China Financial Markets that China will "average" 3.5% GDP or less for the rest of the decade.

For details, including two bets Pettis made with The Economist please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

If China growth slows to 3.5% or lower on average, the bottom will be far less, perhaps even negative. Regardless, the idea that China's GDP will bottom at 8.1% is absurd.

Mike "Mish" Shedlock
http://mishblogdotcom.blogspot.com
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0 Contrary Indicator Alert: Greenspan Says U.S. Stocks ‘Very Cheap,’ Likely to Rise

Bloomberg authors By Steve Matthews and Tom Keene report Greenspan Says U.S. Stocks ‘Very Cheap,’ Likely to Rise

Former Federal Reserve Chairman Alan Greenspan said U.S. stocks offer good value and are likely to rise as corporate earnings increase over time.

“Stocks are very cheap,” Greenspan said today at the Bloomberg Washington Summit hosted by Bloomberg Link, citing “a very low price-earnings ratio.”

“There is no place for earnings to grow except into stock prices,” said Greenspan, who served as Fed chairman from August 1987 to January 2006.

Another valuation metric, known as the Fed model because it was derived from a July 1997 report from the central bank, shows U.S. equities are close to the cheapest level ever relative to debt. The technique compares the earnings yield for stocks with Treasury rates.

Fed Model Idiocy

The Fed Model has been discredited so many times and in so many places, that Matthews and Keene should both know better than bring it up. For a discussion, please see Why Is Bad Advice So Common?

The general idea that stocks are "cheap" offers more further ground for intelligent debate, but I strongly disagree and said so recently in Misty Water-Colored Memories, Dirt-Cheap Stocks, and Patient Opportunism

Finally, history shows Greenspan to be one of the biggest contrarian indicators in history.

Greenspan is a Contrary Indicator

After warning about irrational exuberance in 1996, Greenspan embraced the "productivity miracle" and "dotcom revolution" in 1999. Mid-summer of 2000 Greenspan fell in love with his own analysis and was worried about inflation risks. Shortly thereafter the Greenspan Fed embarked on an incredible campaign slashing interest rates to 1% in panic over deflation.

Greenspan is now trumping up the idea that credit conditions are like 1998. I talked about this in No Greenspan, Conditions are NOT Like 1998.

On May 21,2006 Greenspan said housing prices won't fall nationally. That prompted me to write Greenspan Predicts Housing Bust.

History shows Greenspan was worried about Y2K problems (slashing interest rates and adding fuel to the dotcom bubble). Y2K went off without even minor glitches.

In 2001 Greenspan pleaded with Congress to adopt Bush's $1.35 trillion tax cut. Greenspan's rationale was the government would run huge $5.6 trillion surpluses over the subsequent decade after the cuts. It's right here in the Testimony of Chairman Alan Greenspan Before the Committee on the Budget, U.S. Senate January 25, 2001.

In 2007 Greenspan was worried about inflation. How did that work out?

Greenspan on the Daily Show



Towards the end of that Interview with Jon Stewart Greenspan admits he and the Fed did not know what they were doing and blamed it on "human nature".

Indeed! And that is why the Fed is always chasing its tail, and why Greenspan is wrong again today.

Mike "Mish" Shedlock
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0 Bank of Spain Confirms Foreigners Dump Spanish Bonds; Spanish Banks Foolishly Load Up

Anyone with a clue is dumping Spanish bonds, and the investment community in Germany, France, and Italy is doing just that, as Spanish banks foolishly lever up on risk.

Via Google Translate, please consider Bank of Spain confirmed that foreign capital flees Spanish bonds

The weight of foreign capital in the total of Spanish government debt has declined considerably in the first three months of the year, rising from 50.48% at end-2011 to 37.54% last March. At the same time, the Spanish bank increases its exposure to domestic bonds to record highs of more than 170 billion euros.

62 Billion Euro Leakage in Last 3 Months

In the last three months the international portfolio in bonds and letters of the State has suffered a leak of nearly 62 billion euros from 281.439 billion euros down to 219.601 billion euros at March 31.

Spanish banks increased their exposure to a record of 170.611 million euros, 29.16% of the total compared to 16.93% representing the end of December.

Specifically, the weight of the debt portfolio of the state of Spanish banks has six consecutive months of gains, especially since last November with the purchase of more than 100,000 million.

This has been fueled largely soothing the open bar of liquidity held by the European Central Bank (ECB), which granted a trillion euros of credit to a 1% interest that has helped Spanish banks invest in bonds.

LTRO "Helped" Spanish Banks?

Notice that absurd reference to "help" in the last paragraph above. There was "help" alright, help by ECB president Mario Draghi to allow German, French, and Italian banks to dump Spanish debt hand over fist to fools in Spain.

If one thought bureaucrats could think, one might think this was Super Mario's plan from the beginning.

Certified Crackpot Plan

Who should pay for the idiocy of loading up on Spanish debt once it implodes? The answer of course is the banks and the bondholders. But No!

Harvard Economics professor Martin Feldstein has hatched a certified crackpot plan to force risk onto taxpayers. For details, please see Ludicrous Proposal by Harvard Economics Professor to Force Taxpayers to Buy Spanish Bonds; Mish's Five-Point Alternative Proposal

Mike "Mish" Shedlock
http://mishblogdotcom.blogspot.com
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0 I'm Swapping Some Gold for Silver

Roughly one year ago (April 27, 2011 to be precise) I wrote Taking Silver Profits - Swapping Silver for Gold

I have held physical silver and gold investments continuously for 5 years, and on and off before that. Today I cashed out of silver, trading it for an equal dollar value of gold.

For the sake of full disclosure, my physical precious metals holdings are now entirely at GoldMoney and I have an affiliate relationship with them.

As a result of that relationship, I will likely be back in silver soon, but in small amounts, and hopefully at decreasing prices. If silver crashes, I will consider switching a considerable percentage of my gold for an equal dollar value of silver.

Given the unstable nature of parabolic and hyperbolic spikes, I believe the price of silver is highly likely to revisit the low $20's at some point.I see no point in chasing silver higher here. Moreover, except for pure speculation, I see little reason to even hold silver in this spike.

Both gold and silver seem susceptible to a pullback, but especially silver because of the unstable nature of its advance. For now, I will take my chances with gold.

Silver never got to the low 20's. Perhaps it does and perhaps it doesn't. Since gold was roughly $1500 and silver roughly $46 at the time I made the swap, It's fair to say I am happy with the trade.

I did about 1/3 of what I would like to do.

Bear in mind this trade is not a recommendation. Indeed, I think I am early. If so, and if silver makes an excursion to the low $20's (perhaps even the mid-20's) I am likely to swap a lot more. If not, and silver blasts higher, I am back in.

As noted above: For the sake of full disclosure, my physical precious metals holdings are now entirely at GoldMoney and I have an affiliate relationship with them.

If anyone wants information about GoldMoney or investing in physical gold and silver in general, please Email Mish

Mike "Mish" Shedlock
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