Japan Manufacturing Contracts at Sharpest Rate for 19 Months; New Orders and Output Plunge; Watch the Yen

In Japan things have gone from Grim to Grimmer. The Markit/JMMA Japan Manufacturing PMI™ shows Japanese manufacturing sector contracts at sharpest rate in 19 months.
Key points:

Output and new orders both continue to decline
Capital goods producers register sharpest falls in production and sales
Inventories and employment cut amid subdued economic outlook

Summary:

Operating conditions in the Japanese manufacturing sector continued to worsen in November. The deterioration was driven by falls in output, new orders and employment as the economic climate remained difficult. Amid an uncertain outlook, manufacturers also cut inventory levels and lowered purchasing activity.

Investment goods producers also recorded the steepest fall in staffing levels during November. With the consumer and intermediate market groups also registering reductions in employment, a net fall in total manufacturing payroll numbers was recorded for the second month in succession.

Reduced sales and a subdued economic outlook were reported to have led to the reduction in staffing levels in the latest survey period. Similar factors led to declines in inventories and purchasing activity over the month. The fall in stocks of raw materials and semi-manufactured goods was the steepest in over a year-and-a-half, while input buying was pared to the steepest degree since April 2011.
Watch Japan's Current Account and the Yen

On November 12, in Japan Plunges Into Deep Recession; GDP Shrinks 3.5% Annualized; Japan Current Account Turns Negative First Time in 30 Years I noted that Japan trade deficit hits record as relations with China poisoned.
Japan Current Account Turns Negative

The trick for Japan is how to finance its national debt, now at a majorly unsustainable 235% of GDP.

Japan was able to do so for years on account of its current account surplus, of which trade is typically the largest component.

You can now kiss that surplus goodbye because Japan Current Account Turns Negative
Bug in Search of Windshield

As my friend John Mauldin suggests, Japan is a bug in search of a windshield. I highly doubt Japan can make it to 2022 or even 2017 before it runs into serious issues.

Actually, Japan has extremely serious issues already, it's just that the market is ignoring them for now. If interest rates rise by a mere 2% or so, interest on the national debt will consume 100% of Japanese tax revenue.

Global imbalances are mounting. I suspect within the next couple of years (if not 2013) Japan will resort to the printing press to finance interest on its national debt and the Japanese central bank will start a major currency war with all its trading partners to force down the value of the yen.

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

Worst Socialist Ever

Many have noted that under success hating kenyan islamosocialist Barack Obama nominal corporate profits just set a new record.  Uh so what.  A dollar isn't worth what it used to be worth.  Graphing nominal quantities is silly.  The more interesting points is that the ratio of after tax corporate profits to GDP just set a new record (data only go back to 1947)


Notice also how corporate profits were almost as high under Truman as under Obama and then that socialist Eisenhower ruined eerything.  Also notice that even the Eisenthower through Carter and Clinton ratio was much higher than the extraordinarily low ratio under Reagan and Bush Sr.

Of course the new record in after tax corporate profits divided by the consumer price index for all urban consumers is even more impressive.


Angrybear readers know that GDP grows faster under Democrats and so should not be surprised at how much more horribly real corporate profits tend to do under Republicans.



Only The Paranoid Survive

You all know my motto: Just because you’re paranoid doesn’t mean they’re not out to get you. We are at an interesting junction here and I am seeing signs that point toward possible short term shenanigans on the horizon. Let me show you what I mean:

This is the setup – after a two week short squeeze the E-Mini has bumped into another volume hole and apparently is in the process of gathering strength to overcome it. After all we are heading right into the annual EOY Santa Rally, right?

Except that the VIX has been creeping upward all day. And the rate of ascent does not match the sideways action we are seeing in the spoos, so something is definitely up.

Also noteworthy is my VIX:VXO chart – the latter is a measure of implied volatility calculated using 30-day S&P 100 index at-the-money options. So basically ATM vol is on the rise in comparison with vol across the option chain. In plain English this means we may be seeing a short term shake out next week.

That puts me in a bit of a bind as I’m long the E-Mini right now with a stop below the 100-day SMA. For now I will keep that trade in place but my I will advance my stop below the 100-hour SMA now.

Meanwhile our GOOG trade is still looking pretty good – we got a great entry near the SMA and my stop is still below. If we get a shake out next week that one may be retested, so be prepared for that.

Here’s a little freebie to appease the leeches: AMZN has been riding up hard and is now painting an inside period two days after an outside period. You know what to do and I think both directions are good to go come Monday. If you are confused about the rules then please check our cheat sheet.

A few more goodies before we’ll call it a week:

More charts and non-biased commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.

Please login or register for Zero Data Feed (non-recurring) or Zero Data Feed (recurring) or ES Gold (non-recurring) or ES Gold (recurring) or geronimo/ES (recurring) to view this content.

Before I let you go another friendly reminder that you can now also follow my posts on Google+, so please add me to your circle if you haven’t already. That’s it – now it’s Hefeweizen time! Have a great weekend everyone – I’ll see you Sunday.

Cheers,

Important New Legal Principle

Yesterday the General Court of the European Union ruled ECB right not to disclose Greece-related documents.
The European Central Bank was right to refuse access to documents on the economic situation in Greece to a journalist in 2010, because disclosure would have undermined the public interest, the General Court of the European Union ruled.

"Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece," the court ruled on Thursday.
New Legal Principle

Eurointelligence offered this interpretation of the ruling:

The European Court has thus established an important legal principle. If you claim to act in the public interest, you can break the law. And the definition of the public interest is of course, a political one.

Unfortunately, that is quite an accurate assessment. The ruling can be appealed the the European Court of Justice within the next two months, but I do not have high hopes for a different result.

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

The Real Trust Fund Fiction

Kevin Drum explains that the surplus in the Social Security Trust fund allowed taxes on the wealthy to be cut, and that it's only fair that taxes on the wealthy should go back up to repay the money in the Trust Fund that was used to finance lower taxes. If it's not paid back, then it is, plainly and simply, a raid by the wealthy (through tax cuts) on the funds working class households are relying upon, and are counting on -- they held their end of the bargain and paid more into the system that it needed for decades -- for their retirements:

No, the Social Security Trust Fund Isn't a Fiction, by Kevin Drum: Charles Krauthammer is upset that Dick Durbin says Social Security is off the table in the fiscal cliff negotiations because it doesn't add to the deficit...
What Krauthammer means is that as Social Security draws down its trust fund, it sells bonds back to the Treasury. The money it gets for those bonds comes from the general fund, which means that it does indeed have an effect on the deficit. That much is true. But the idea that the trust fund is a "fiction" is absolutely wrong. ...
Starting in 1983, the payroll tax was deliberately set higher than it needed to be to cover payments to retirees. For the next 30 years, this extra money was sent to the Treasury, and this windfall allowed income tax rates to be lower than they otherwise would have been. During this period, people who paid payroll taxes suffered from this arrangement, while people who paid income taxes benefited.
Now things have turned around. As the baby boomers have started to retire, payroll taxes are less than they need to be to cover payments to retirees. To make up this shortfall, the Treasury is paying back the money it got over the past 30 years, and this means that income taxes need to be higher than they otherwise would be. For the next few decades, people who pay payroll taxes will benefit from this arrangement, while people who pay income taxes will suffer.
If payroll taxpayers and income taxpayers were the same people, none of this would matter. The trust fund really would be a fiction. But they aren't. Payroll taxpayers tend to be the poor and the middle class. Income taxpayers tend to be the upper middle class and the rich. ... When wealthy pundits like Krauthammer claim that the trust fund is a fiction, they're trying to renege on a deal halfway through because they don't want to pay back the loans they got.
As it happens, I think this was a dumb deal. But that doesn't matter. It's the deal we made, and the poor and the middle class kept up their end of it for 30 years. Now it's time for the rich to keep up their end of the deal. Unless you think that promises are just so much wastepaper, this is the farthest thing imaginable from fiction. It's as real as taxes.

The Real Trust Fund Fiction

Kevin Drum explains that the surplus in the Social Security Trust fund allowed taxes on the wealthy to be cut, and that it's only fair that taxes on the wealthy should go back up to repay the money in the Trust Fund that was used to finance lower taxes. If it's not paid back, then it is, plainly and simply, a raid by the wealthy (through tax cuts) on the funds working class households are relying upon, and are counting on -- they held their end of the bargain and paid more into the system that it needed for decades -- for their retirements:

No, the Social Security Trust Fund Isn't a Fiction, by Kevin Drum: Charles Krauthammer is upset that Dick Durbin says Social Security is off the table in the fiscal cliff negotiations because it doesn't add to the deficit...
What Krauthammer means is that as Social Security draws down its trust fund, it sells bonds back to the Treasury. The money it gets for those bonds comes from the general fund, which means that it does indeed have an effect on the deficit. That much is true. But the idea that the trust fund is a "fiction" is absolutely wrong. ...
Starting in 1983, the payroll tax was deliberately set higher than it needed to be to cover payments to retirees. For the next 30 years, this extra money was sent to the Treasury, and this windfall allowed income tax rates to be lower than they otherwise would have been. During this period, people who paid payroll taxes suffered from this arrangement, while people who paid income taxes benefited.
Now things have turned around. As the baby boomers have started to retire, payroll taxes are less than they need to be to cover payments to retirees. To make up this shortfall, the Treasury is paying back the money it got over the past 30 years, and this means that income taxes need to be higher than they otherwise would be. For the next few decades, people who pay payroll taxes will benefit from this arrangement, while people who pay income taxes will suffer.
If payroll taxpayers and income taxpayers were the same people, none of this would matter. The trust fund really would be a fiction. But they aren't. Payroll taxpayers tend to be the poor and the middle class. Income taxpayers tend to be the upper middle class and the rich. ... When wealthy pundits like Krauthammer claim that the trust fund is a fiction, they're trying to renege on a deal halfway through because they don't want to pay back the loans they got.
As it happens, I think this was a dumb deal. But that doesn't matter. It's the deal we made, and the poor and the middle class kept up their end of it for 30 years. Now it's time for the rich to keep up their end of the deal. Unless you think that promises are just so much wastepaper, this is the farthest thing imaginable from fiction. It's as real as taxes.

Restaurant Performance Index indicates contraction in October

From the National Restaurant Association: Restaurant Performance Index Fell to its Lowest Level in 14 Months as Operator Optimism Plunged
The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.5 in October, down 0.9 percent from September. In addition, October represented the first time in 14 months that the RPI fell below 100, which signifies contraction in the index of key industry indicators.

“Although restaurant operators overall continued to report positive same-store sales in October, their short-term outlook for sales growth and the economy is decidedly more pessimistic,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Nearly two out of five restaurant operators expect business conditions to worsen in the next six months, which is double the proportion that expect conditions to improve.”

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 99.3 in October – down 0.6 percent from a level of 99.9 in September. While same-store sales remained positive in October, declines in the labor and customer traffic indicators outweighed the performance, which resulted in a Current Situation Index reading below 100 for the third time in the last four months.
Restaurant Performance Index Click on graph for larger image.

The index declined to 99.5 in October, down from 100.4 in September (below 100 indicates contraction).

Restaurant spending is discretionary, so even though this is "D-list" data, I like to check it every month.

Rothschild: How He Got So Rich?

It may have been Meyer Rothschild, the German banker and patriarch of the legendary House of Rothschild who, when asked how he got so rich, attributed his success to two things. He said he always bought when there was blood in the streets - panic, chaos - when despondency gripped the markets. (in old man Rothschild case, investing amid the turbulence of the Napoleonic wars, the blood was as likely to be literal as it was to be figurative.) And he always sold "too soon". He did not wait for the enthusiasm to peak. He always knew when to get out, and he got out in time with all his money. - in Adventure Capitalist

Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.

David Beckworth Correctly Says That the Hard-Money Austerians Are Not Entitled to Their Own Facts

He's looking at you, William Poole, David Warsh, Allan Meltzer, Arnold Kling, John Taylor, Michael Panzner, Mickey Levy, and others…

David Beckworth:

Macro and Other Market Musings: The Fed, The Budget Deficit, and The Facts: My last post generated some heated push back from the hard-money types. That post showed the Fed sill has about the same share of treasuries, 15%, as it did before the crisis. Thus, the large run up in public debt over the past four years has been funded mostly by individuals, their financial intermediaries, and foreigners. The Fed has not been the great enabler of the government deficits as claimed by the hard-money types. This fact seems to have been very uncomfortable for them because they largely ignored it.  Instead, they quibbled with my definition of debt monetization and resorted to ad-hominen attacks. 

Given these responses, it is probably too much to hope for further meaningful engagement with them.

But in the event some are still listening, here are some additional points…. [S]afe asset yields across the globe have been falling for the past four years… in… Canada, Germany, Japan, the United States, and the United Kingdom. U.S. monetary policy cannot explain this worldwide phenomenon…. The Fed only holds about 32% of long-term treasuries and the long decline began well before Operation Twist. The similar decline among all these different long-term government interest rates only further undermines the view that Fed is enabling the low U.S. treasury yields. A much simpler explanation for the low interest rates is the ongoing economic slump that keeps the demand for safe assets elevated…. [E]ven if the Fed were responsible for the low yields it has failed to generate upward inflationary pressures. For four years hard-money types have been warning about inflation exploding.  This has not happened and indicates that treasury yields are not being held below their natural rate level…. [S]hould the Fed preemptively raise interest rates, as some have suggested, it would not spark a recovery but choke the already weak economy.

Fourth, the hard-money types have overlooked the safe asset shortage problem that has emerged over the past few decades and its implication for U.S. treasuries. Over this time the global economy has grown much faster than its ability to produce safe assets…. This means the demand for U.S. debt is higher than would otherwise be the case. It also means for the world financial system to operate smoothly it needs the U.S. government to run budget deficits.  A failure to do so will only drive safe asset yields lower and intensify the the problems associated with low interest rates….

[D]ebt monetization… occurs when monetary policy causes the stock of money assets to unexpectedly exceed the real demand… inflation will [then] be higher than anticipated and erode the real burden of the public debt…. [F]or there to be debt monetization it is not enough to say the Fed is purchasing treasury assets…. For all these reasons, I find it hard to stomach the claims of folks who say the Fed is enabling the large budget deficits….

I agree we need a conversation on what the Fed should be doing, but before we can even do that we need to have our facts right.  Here is hoping this post is a push in that direction.

David Beckworth Correctly Says That the Hard-Money Austerians Are Not Entitled to Their Own Facts

He's looking at you, William Poole, David Warsh, Allan Meltzer, Arnold Kling, John Taylor, Michael Panzner, Mickey Levy, and others…

David Beckworth:

Macro and Other Market Musings: The Fed, The Budget Deficit, and The Facts: My last post generated some heated push back from the hard-money types. That post showed the Fed sill has about the same share of treasuries, 15%, as it did before the crisis. Thus, the large run up in public debt over the past four years has been funded mostly by individuals, their financial intermediaries, and foreigners. The Fed has not been the great enabler of the government deficits as claimed by the hard-money types. This fact seems to have been very uncomfortable for them because they largely ignored it.  Instead, they quibbled with my definition of debt monetization and resorted to ad-hominen attacks. 

Given these responses, it is probably too much to hope for further meaningful engagement with them.

But in the event some are still listening, here are some additional points…. [S]afe asset yields across the globe have been falling for the past four years… in… Canada, Germany, Japan, the United States, and the United Kingdom. U.S. monetary policy cannot explain this worldwide phenomenon…. The Fed only holds about 32% of long-term treasuries and the long decline began well before Operation Twist. The similar decline among all these different long-term government interest rates only further undermines the view that Fed is enabling the low U.S. treasury yields. A much simpler explanation for the low interest rates is the ongoing economic slump that keeps the demand for safe assets elevated…. [E]ven if the Fed were responsible for the low yields it has failed to generate upward inflationary pressures. For four years hard-money types have been warning about inflation exploding.  This has not happened and indicates that treasury yields are not being held below their natural rate level…. [S]hould the Fed preemptively raise interest rates, as some have suggested, it would not spark a recovery but choke the already weak economy.

Fourth, the hard-money types have overlooked the safe asset shortage problem that has emerged over the past few decades and its implication for U.S. treasuries. Over this time the global economy has grown much faster than its ability to produce safe assets…. This means the demand for U.S. debt is higher than would otherwise be the case. It also means for the world financial system to operate smoothly it needs the U.S. government to run budget deficits.  A failure to do so will only drive safe asset yields lower and intensify the the problems associated with low interest rates….

[D]ebt monetization… occurs when monetary policy causes the stock of money assets to unexpectedly exceed the real demand… inflation will [then] be higher than anticipated and erode the real burden of the public debt…. [F]or there to be debt monetization it is not enough to say the Fed is purchasing treasury assets…. For all these reasons, I find it hard to stomach the claims of folks who say the Fed is enabling the large budget deficits….

I agree we need a conversation on what the Fed should be doing, but before we can even do that we need to have our facts right.  Here is hoping this post is a push in that direction.

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