Manufacturing Ain't Rosy

Krugman's attempts to lipstick our current pig of an economy are way off mark recently. When he's not advocating for yet another disconnect between CPI and inflation (ie real prices paid by real people for real things), or saying there is no inflation due to no wage growth, he's been trying to paint some rosy picture of manufacturing's rebound in our "recovery". The reality is he's just running cover for his pals at the FED and the DNC.

Krugman bases his ideas on what appears to be one rose-colored chart that he concocted... this one:

The quote that immediately follows it: "The weaker dollar really has made a big difference." 


Wait, what?


Since he doesn't give much backing other than to talk about how he technically derived the data for the chart, I'm a little confused at what Krugman is seeing as "a picture of the recent improvement in the US manufacturing trade position." Is it that tiny uptick at the end of the chart from -2.4 to -2.0? Or is it that huge uptick beginning in Q406? And why is the weaker Dollar getting credit for a big difference? 

The Dollars been getting weak for a long time. 

2002-2005 was a period of severe weakening of the dollar - to the tune of 30% weakening, yet during that time, the manufacturing balances plunged. Since the momentary rise in 2005, the Dollar has weakened by about only 16% and QE2 has been about neutral on the Dollar despite the FED's efforts to debase it away. So what "big difference" are we seeing from a "weaker dollar"? 


That's all really a sideshow, though, to the main thing Krugman is trying to do here. He takes whatever movement he's seeing in that manufacturing balance and makes a case that "America’s industrial heartland is now leading the economic recovery." And " the U.S. auto industry, which many people were writing off just two years ago, has weathered the storm."

Ford Casting Plant - Cleveland Ohio (closed 12/2010)

Ford Motor Plant - Detroit Michigan

General Motors Plant - Muncie Indiana

Some weathering. And how did the US auto industry come out so ahead in this game? Oh right... Government stimulus and bailout. 

Now, Krugman has to be the only person in the world who sees anything positive in the manufacturing sector. Let's check:

Wall Street Journal: US Stocks Pare Gains After Weak Manufacturing Data - May 19
BusinessWeek: Industrial companies down on lower production data - May 17

And now, this from today:

Those worried about a slowdown probably focused Tuesday on a report by the Richmond Federal Reserve showing a decline in manufacturing activity in May. The Richmond Fed index fell to a negative 6 after a reading of 10 in April, as shipments and new orders declined.

"When you combine this report with the Philadelphia Fed and New York Fed manufacturing reports, the odds are stacking up that we’re going to see some softening in the national ISM report that comes out on June 1," Sheldon said.

Softening anyone?

So two final things:

Where did Krugman go wrong and why is he being so blatantly wrong?

The first part takes a little critical thinking. The lower GDP we are experiencing led by lower consumption has meant some fewer imports. It's not that manufacturing is picking up and going great, it's that we just aren't consuming so voraciously now that our homes have become dwellings and not ATM's. So the trade imbalance is not so wildly out of whack. Therefore, the manufacturing balance is less negative than it has been.  Krugman's chart looks less correlated to the Dollar's strength then it does to the economies strength as a whole. This is very basic, but very bad, lying with charts.

The second part (why is he doing this?) is easy. With a double-dip recession on the way (and in spades), Krugman is building his case for more fiscal stimulus and more bailouts. He'll point back to green shoots in manufacturing that came about by Government bailout and spending and weep that the Republicans killed it out of their sheer hatred for unions and "the little guy." We'll hear sighing and mumbling coming from the NY Times pages over how the recovery was just taking hold when it was destroyed by hostage taking congressmen. This also sets the stage to ravage the Dollar. If the weak Dollar has done these great things, what can we get with a weaker Dollar? 

As currencies begin to devalue around the world, I can almost smell the hyperinflation.

QOTD: "Ok, I'm a Nazi"

You have to feel bad for Kirsten Dunst in this clip of Lars Von Trier declaring his affinity for Hitler and his own, sorta, Nazi status.

I imagine Dunst is getting paid through some sort of knock on royalty for the film Melancholia. A film that we get to observe lose distributors in real time during this interview. Time to start shorting the odds that Dunst gets to play love interest for a super hero in America again.




"Riefenstahl and Goebbels give it 2 Thumbs UP!"

"Five Swastikas" - Der Stürmer

"Von Trier's Triumph of the Will!" - Das Schwarze Korps

The Paul Ryan Defense

Many thanks go out to Representative Paul Ryan for giving everyone in America a valid excuse to be late on all debt payments.



Me: Hello, Wells Fargo?
WF: Yes, how can we service you?
Me: I'm going to be late on a mortgage payment, but it's in order for me to get into a materially better position to pay the rest of mortgage. Cool?
WF: Oh, absolutely!
Me: I mean, you won't penalize me with any fees or record a late payment or anything right?
WF: Oh, no. We just want what's best for you and are happy to accommodate whatever repayment works for you.

Somehow, I don't think so.

FICO Declares: We're Still Relevant, Really!

The Austrians over at Mises are covering a MarketWatch story about the damage of strategic default to your Credit Score. There are so many layers of B.S. here I don't even know where to begin.

I guess I'll start with the Fair-Issacs scaremonger warning everyone of the dangers of strategic default because of the credit score hit. The scary begins with a <gasp> 140 point drop in your score followed by a stern warning about how discriminating banks are these days.

Fannie, please!

Banks aren't discriminating. They just aren't lending. The halcyon days of securitizing unlimited loans are done. It's easier for banks to just keep money in their reserves and make interest, risk free, from the FED. Then there are the cherry fees they are collecting from distressed checking customers. They don't have to put anything at risk for those billions each year. The 720 or 580 credit score is irrelevant at this point. Everyone is too risky for a measly 3-4%. Fair-Issacs is trying to convince us that they matter. They need more $12/mo credit monitoring customers and $29.95 triple score buyers.

It's a waste of time. The FICO is screwed because banks don't need to lookup and when you got choose between eating and paying the mortgage (let alone credit monitoring) - you are buying the food. Especially when 20% of mortgages are now underwater. FICO needs us to believe that we'll be eligible for more debt if we keep our number looking good by not being one of the strategic defaulters.

But haven't we basically figured out that we don't really want all that debt? Didn't the housing-bubble/mortgage-backed/non-modifying-modification/robo-foreclosure/forged-document/fraud-flash-crash leave a lot of Americans deciding to get off the debt game? So what difference does a FICO score make? Mises makes the point:

So, even if you had to pay another $10 a month for phone and a little more for insurance the thousands saved each month not feeding an underwater mortgage is still worth it.

And this is where I scratch my head with the Austrians. Their whole piece seems to be an encouragement for people to up and walk away from their homes and mortgages. They've been recurring this theme for a while now. I don't have a problem with strategic default, per se. But I'm not going to argue for it in an open forum.  It's a decision that shouldn't be made cavalierly. Encouraging anonymous readers toward it just doesn't make sense for a blog representing one of the foundational figures of Austrian Economics. It's the kind of thing the Keyensians would point to as a sign of the unseriousness of the other side.

But then again, the Keyensians want to inflate away those mortgages. In either case, FICO is an anachronism from the era of personal debt bubbles.

April FOMC Minutes Word Picture

Six times in 21 pages, we get everything bad in the economy soft peddled as transitory. Ya know, FOMC... you keep using this word. But I don't think you know what it means. Seriously, they use the word "transitory" sorta like a doctor might say a malignant tumor is "transitory" right before giving you 6 weeks to live.

If you drink, consider yourself to have found a new drinking game. I've embedded the whole document below, but lifted out the transitory quotes for your convenience.



"Participants viewed the weakness in first-quarter economic growth as likely to be largely transitory..."


"Participants revised up their projections for total inflation in 2011, reflecting recent increases in energy and other commodity prices, but they generally anticipated that the recent increase in inflation would be transitory..."


"Participants generally anticipated that the higher level of overall inflation would be transitory..."


"Significant increases in energy and other commodity prices had boosted overall inflation, but members expected this increase to be transitory..."


"Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory...."


"Participants raised their forecasts for overall inflation this year; however, most expected that the increase would be transitory..."



Fomc Minutes April

Schiff on Our Relationship With China

This morning, I wrote the following in my Wrong Wage post:

To me, the implication is that as wages rise in the "Chi" half but stagnant in the "merica" half of Chimerica, we will be increasingly paying more for Chinese made goods AND have more demand for those goods by the emerging Chinese middle-class themselves. So from a supply side and the demand side we will have pressures driving up the cost of our goods while US wages stagnate. 

Now, Peter Schiff is saying something very similar at this point in an interview on RT:

http://youtu.be/hkEthqUEKA4?t=6m12s

"People keep saying that China has an export economy. They don't. They have a production economy. The fact that they export their production is their loss. If they simply let the dollar fall and their own currency rise, they would still produce. Except it would be the Chinese that would enjoy the products that are being produced instead of Americans. And the Chinese economy would be much stronger."

The whole interview is worth watching, so I embedded it here. I think it's notable that we are starting to hear more of the idea that China doesn't need to export to the US to sustain it's economy. This goes against a lot of the conventional wisdom on our relationship to China. Interesting times ahead.

  

More on Fort Knox

What we're likely to find if we try to sell the gold in Fort Knox:

http://youtu.be/Ewy6Jvb6h_k?hd=1&t=3m14s



  

Debt Limit Solutions by Friz Freleng

When I see headlines like:

Selling Gold at Fort Knox Emerges as Next Big Question in Debate on Federal Debt Limit

I have to wonder if Friz Freleng is now considered the main idea guy at the table?

And now for something just as serious:

Hopefully, Yosemite Sam never succeeded in getting that gold out of Fort Knox. Would be a shame if we actually didn't have any to sell.

You know, this video is sorta ironic if you picture Yosemite Uncle Sam or maybe Yosemite Ben Bernanke.


  

Looking At The Wrong Wages

Paul Krugman is adamant that there is no inflation risk in the US Economy. One of his recurring arguments is that labor costs are not rising and therefore a wage-price inflation spiral is impossible. From his recent The Inflation Monster post highlighting Average Hourly Earnings of All Employees:

First, do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food?
Second, do you any sign that employers are getting ready to make more generous wage offers?

These rhetorical questions Krugman, of course, answers as "No" and therefore inflation is not going to happen.


Now, I'm no Nobel Prize winner, but it seems to me that we are looking at the wrong wages. The chart above captures US employees. But how many goods are being produced by US employees anymore? Sure, US workers are facing 9% unemployment and can't demand higher wages but they aren't making anything Americans buy.

So what's happening in the places where our goods are created?
China announced a 21% wage increase in December to go into effect starting this month. Even before that increase, SFGate reports:

The pay of the migrant laborers who fuel China's export industry rose by 40 percent in 2010, according to Credit Suisse's Tao. It will continue climbing 20 percent to 30 percent in each of the next three years as Chinese leaders pump up domestic demand.

And looking further out, we can expect our manufacturing base to have wage increases of 84% over five years.


So to answer Krugman's questions considering the full working population of  Chimerica the answer becomes a resounding "YES!" 


To me, the implication is that as wages rise in the "Chi" half but stagnant in the "merica" half of Chimerica, we will be increasingly paying more for Chinese made goods AND have more demand for those goods by the emerging Chinese middle-class themselves. So from a supply side and the demand side we will have pressures driving up the cost of our goods while US wages stagnate. 


The result will be, at best, '70s style stagflation.