My Two Cents - "Just When You Thought You'd Seen it All"

12/1/2011

As I wrote in the last installment regarding the situation in Europe, matters are progressing there much more quickly now as the continent sways back and forth between financial oblivion and a nervous peace brought about by paper promises (yes, paper promises) by central banks around the world. The purpose of this article is not to focus on the behind the scenes of these actions – we’ve already done that, but to examine some of the other outlying issues that are rarely mentioned.

Here in America, we are truly whistling past the graveyard. The financial press cannot stumble over itself enough to constantly remind us how extravagantly we spent money during this past week. The American shopper is back. Really? I still point at various consumer confidence polls, personal income numbers, and general indebtedness and wonder where the juice is coming from for all this consumer spending.

Manufactured Metrics?

One thing that has finally begun to see the light of day is the fact that many of our economic metrics have been and are being manipulated for the sake of public opinion. I’ve covered retail sales, labor market statistics, and GDP ad nauseum in these pages. Well, yesterday zerohedge made a posting showing three more important metrics – and the chicanery becomes even more obvious. In each case (ADP Employment Report, Chicago PMI, and Pending Home Sales), the reported number came in at a minimum of 4 standard deviations above the consensus. What does this mean?

Various media outlets, like Bloomberg, solicit predictions from economists and economic research firms on various economic data series. They take all the estimates and come up with a consensus forecast, which is essentially the average of the estimates they receive. They show the consensus and the range. Then when the actual number is reported, they show that as well. So in the series listed above economists were either off by 4SD or else something is seriously wrong. I think we all understand that the forecasts are never going to be precise on any regular basis, but to miss by 4SD? You could almost blindfold the forecasters and have them throw darts at a wall and get closer than this.

To drive home the significance of these events, occurrences that are 4 standard deviations from the mean are generally considered ‘outliers’. They are spurious type events that really have no basis in the underlying process. Many times such observations are thrown out depending on the type of study being done. So to have three of them occur within a relatively short time window is a rather big deal. Big enough of a deal that it should at least be a page 2 type news event since there is something obviously wrong with either the forecasting methodology, the reporting methodology – or both

The obvious conclusion here – and zerohedge pointed this out very eloquently – is that we’re being fed a line of baloney and that these ‘positive’ numbers are being reported to keep up the illusion that the economy is recovering when in fact it is not. So, all this said, what about the cyber Monday blitz? I can tell you this much.  I have contacts at both UPS and Fedex and they are seeing very high shipping volume right now. People are in fact spending an awful lot of money. At this point, it appears as though a much smaller proportion of the country is doing the majority of the spending. We’ll see how much of this was on credit in the months to come.  It certainly doesn’t appear as though most people are even bothered by what is going on in the Eurozone even though it affects us directly. They seem either less bothered or less willing to admit that the movie now playing in Europe is coming to their neighborhood theater – and sooner than they’d like.

The Great Liquidity Pump – Take 12

One of the most important issues of all with regard to the Eurozone and its systemic crisis is the prognosis for economic growth. One might wonder why that even matters at this point since the Euro is on the ropes, banks from Paris to Rome to Budapest are in trouble, and nobody seems to have answers. Make no mistake about this – the Eurozone cannot be bailed out; at least not without causing a dislocation of equal magnitude somewhere else. There have been several mainstream economists making the TV circuit asserting that the US could bailout Europe. Really? Many of these same people will use the IMF/World Bank model to make the case for the bailout of the EU. Not going to happen. Not without dislocations. What did take place is that the USFed (among others) stepped in and said it would provide what are essentially unlimited ‘loans’ to European banks to stave off the crisis.

Now we’re back to the coup situation I discussed last time. Is it becoming more clear how this all works? By virtually ignoring the prospects for economic growth in the Eurozone, the central bankers are going to foist a tab on the people of those countries that they will be hard pressed to get out from under for generations – if ever. Economic growth is the one way that a country can pay off its debts. Growth, coupled with sound fiscal behavior, creates surpluses and those surpluses can be used to pay down debt. No economic growth means no paying down debt. The IMF is forecasting that the Eurozone will re-enter recession in 2012. I will assert here that the EU never left the recession that started back in late 2007. I’ve showed the data for the US; and the EU has clearly followed suit.

Much of the way the crisis is being handled in Europe is along the same lines as what was done here in America back in 2008. Focus was placed largely on saving banks whose bets had gone terribly wrong. Only cursory attention was given to the macroeconomic picture and you can easily see what happened here. We now have fat banks, bursting with ‘profits’ thanks to bailouts and accounting rule changes (FASB Rule 157, etc) while we have an economy that is still churning out foreclosed homes faster than a broken widget machine. Trading revenue is up at the big wire houses while our kids are paying over 10% on student loans and Mr. and Mrs. America are shelling out an average of 14% on credit card debt. This is precisely what is going to happen in Europe. And to make matters worse, the people of those countries are going to be on the hook for the bill, much in the same way we are on the hook for 2008.

And oddly enough, the same pledges were made back on September 16 of this year. Quoting a Bloomberg News article:

The move, on the third anniversary of the collapse of the US investment bank Lehman Brothers, sent shares soaring in banks heavily exposed to debt default by Greece and the other struggling members of the 17-nation Eurozone. The euro, which had been falling in recent days, rebounded, rising roughly 1% in European trading on Thursday.

Speaking in Washington, Christine Lagarde, the president of the International Monetary Fund, said: “They [the banks] are getting together and acting together. To me, that is the most important message.”

Perhaps the biggest untold byline of yesterday’s aberrant policy decision by central bankers was to point out that first it was illegal for our fed to do what it did. It has two mandates: price stability and maximum employment. Printing untold trillions to bail out banks in the Eurozone hardly seems like a recipe to ensure price stability to me. And they haven’t exactly done a banner job on the employment side either. So when government figures and policy analysts say that no taxpayer monies are being used, they are only partially correct. In fact it is much worse than if they had simply given over a year’s tax receipts to the ECB for the purposes of stemming the tide.

It is not so much your money that has been pledged to this completely unworthy endeavor, rather it is your future labor. You will work harder, longer, and enjoy less fruits of that labor all in the name of preserving the status quo of a financial system that will only be back for another round of feeding once the shock from these events has worn off.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.