Bad Crash

Nothing about this looked good:



  • A police officer responding to a burglary call was injured in a traffic crash in the Logan Square neighborhood this afternoon, authorities said. The officer, whose age and sex were not released by police, was in a squad car that collided with another vehicle near Sacramento Avenue and George Street about 1:15 p.m., said Chicago Police Department News Affairs
Prayers and well wishes to the Officer only in this thread please.

Why Is It....?

A reader noticed this:
  • How come McNumbers can claim weather has nothing to do with the homicide totals, then turn around and tell everyone that an extremely mild March set the pace for a spike in Chicago murders that we never recovered from?
 Everyone knows the answer to that one:
  • Trayvon Martin
Duh.

And remember:
  • The power of the freedom of the press is a flaming sword. That it may be a servant of all the people, use it justly—hold it high—and guard it well.
Unless Rahm says don't publish it - then hold the sword somewhere behind your back and pretend no one sees anything going on. Swords are pointy and might hurt some politicians' feelings.

Happy New Year

Would like to have celebrated at this party tonight:


Happy New Year Folks - be safe.

Gold Has Longest Streak of Annual Gains Since 1920

Bloomberg reports Gold Extends Longest Streak Since 1920 on Central-Bank Stimulus.
Gold rose, capping the longest annual gain since at least 1920, on renewed concern that central banks from Europe to China will take steps to spur economic growth and as U.S. leaders near a budget deal.

Gold futures for February delivery gained 1.2 percent to settle at $1,675.80 at 1:41 p.m. on the Comex in New York, while prices for immediate delivery jumped as much as 1.5 percent. Through Dec. 28, the metal had slumped for five straight weeks as the deadline for the so-called fiscal cliff of automatic tax increases and spending cuts due to take effect tomorrow loomed. President Obama said today at a White House event that an agreement was “within sight.”

Record Average

The metal averaged a record $1,670.71 this year in New York even as it slid 6 percent since September, the biggest quarterly drop since 2004. The run of annual gains in the immediate delivery market is the longest since at least 1920. The Standard & Poor’s GSCI gauge of 24 commodities gained 0.3 percent

This year, bullion gained 7 percent on the Comex, where floor trading will be closed tomorrow for New Year’s Day. Platinum futures rallied 9.8 percent this year in New York and palladium gained 7.2 percent as labor unrest in South Africa helped curb supply. Silver increased 8.3 percent.
Amusing Irony

The amusing irony, as noted in Poison Pill and Gold Debate is that someone posting under the name "Uncle Frank" made the following accusation.

"Mish relishes chaos and financial ruin for this country so his gold holdings shoot-up in value. Everyone has an ulterior motive you know."

"Uncle Frank" is devoid of clear thinking because fiscal prudence is the one thing that would be bad for gold.

Repeating what I said earlier ....

Regardless of my personal beliefs regarding gold (that one would be prudent to buy and hold gold), I actually advocate government and Fed policies that are contrary to my recommendations.

My reasons are easily explained:

  1. Neither the Fed nor the government gives a damn about what is fiscally prudent.
  2.  
  3. Both the Fed and Congress are highly likely to debase currency, causing gold to rise, even if I think that is bad economic and fiscal policy, which of course I do.

Should Congress actually do what I advocate, I think it would not be good for gold.

I recommend governmental actions on the basis of policy merit alone, not based on my stock market positioning. I find it very sad that few others do the same.

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

China Manufacturing PMI Shows Modest Growth; Don't Expect Bounce to Last

The HSBC China Manufacturing PMI™ shows modest growth this month. The index is at 51.5 with growth above 50.
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 51.5 in December, up from 50.5 in November, signalling a modest improvement of operating conditions in the Chinese manufacturing sector. Moreover, it was the highest index reading since May 2011.



Input prices at manufacturing plants continued to increase in December, and for the third successive month. The rate of inflation eased slightly from November but remained marked overall. Average tariffs also increased during December, after remaining broadly similar in November. Output charges rose at an accelerated pace that, although modest, was the quickest in 14 months. Anecdotal evidence suggested that tariffs were raised in line with rising market demand and higher input costs.

Purchasing activity rose at a marked rate in December, the fastest since March 2011. Exactly 17% of panellists reported increased input buying. Consequently, stocks of purchases also rose. Even though the pace of stock accumulation was only slight, it was the quickest in two years. Rises in input buying and stocks of purchases were generally associated with higher new order volumes.

Comment

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

“December’s final manufacturing PMI picked up for the fourth consecutive month to a 19-month high, thanks to the faster new business flows and the end of destocking. Such a momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilise. This, plus Beijing’s reiteration of keeping pro-growth policy in place into the coming year, should support a modest growth recovery of around 8.6% y-o-y in 2013, despite the ongoing external headwinds.”
Pollyanna Outlook

I beg to differ with Hongbin Qu.

There is no reason to believe property market conditions will stabilize. Nor is there any reason to believe infrastructure construction will run at "full speed" for any significant length of time.

Indeed, should either of those happen, China's already massive rebalancing problem will just get worse.

Realistic Outlook


For a more realistic assessment on what is happening in China and why, please visit some of the above links.

This modest bounce in China PMI to a number barely above contraction is nothing to get excited about.

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

Gold, Stock Market Up as Fiscal Cliff Can-Kicking Deal at Hand

S&P 500 futures are up 24 points (1.7%) and gold is up $22 (1.3%) on news McConnell-Biden Said Close to Deal Except for Sequester
The White House and congressional negotiators have agreed to contours of a deal to avert the fiscal cliff including tax cut extensions, with the remaining sticking point being how to handle automatic military and domestic cuts, according to an official familiar with the talks.

Income tax cuts would be extended on families earning up to $450,000, the official said, with rates rising to 39.6 percent on incomes above that.

Rates on estate taxes would rise to 40 percent, on amounts above $5 million. Extensions of business tax breaks would continue through the end of 2013. There would be a permanent fix to the alternative minimum tax threshold.

The Medicare payment rate for doctors would be extended through 2013.

The contours of the possible deal would generate $600 billion toward deficit reduction. The debate over how to postpone automatic federal spending cuts remains. Democrats propose postponing it for a year, while Republicans want to allow cuts to begin taking effect with the new year.
Debate on How to Further Postpone Begins

In simple terms, Congress will achieve zero budget cuts if Democrats get their way. Republicans appear to be quite fine with that as long as military spending is not cut.

Thus, out of a trillion dollar budget deficit, Congress will have addressed a mere $60 billion a year in revenue and something close to $0 in budget cuts, allegedly avoiding a fiscal cliff but in reality creating a far bigger one a few years down the road.

Last year, before the election, Republicans could have gotten $10 in budget cuts for every $1 of additional revenue. Now they have agreed to tax hikes, getting virtually nothing in return.

The only hope for sanity is the House punts this bill a mile high, but don't count on it.

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

Wait....Rahm Lied?

  • Despite promises of staffing increases, the Chicago Police Department has fewer beat officers in patrol districts across the city than before Mayor Rahm Emanuel took office, a Chicago Sun-Times analysis of city data has found.

    Days after he was sworn into office last year, Emanuel announced the start of what he described as a major shift in how the police department assigns officers across the city. He promised to fulfill a campaign pledge by assigning 1,000 more cops to high-crime areas without reducing the police presence in other parts of the city.

    “We cannot beat crime without more officers on the beat,” the mayor said then.

    That was May 2011.

    But, as of Oct. 15, a total of 6,638 rank-and-file officers were assigned to police beats citywide, down from 6,746 beat cops at the start of 2011, according to the data obtained by the Sun-Times.

And why would that be?
  • The reason is simple: For every newly hired officer assigned to a beat during the past two years, six other sworn members of the department have retired.

    And because about 1,200 retirements have sharply depleted the payroll, rank-and-file police staffing even in some high-crime areas where new officers were added last year is again declining, the Sun-Times found.
And that's not even accounting for the Units. Anyone seen the wait time to get an ET to process a job? Eight, ten, even twelve hours isn't out of the ordinary. The Crime Lab has ceased to exist for the most part. Detective attrition must have been horrific over the past 5-plus years they didn't make a class, and the 70 currently in the Academy? They are walking into a world of shit.

If you live in a "quiet" part of town, run the numbers for your midnight shifts. There is no police protection during the hours of darkness. Or the Airports? Some nights they are running a single car - one cop covering an airport the size of three or four suburbs.

But remember, crime is down. If the police don't show up, it never gets reported, therefore, it never happened.

Good Work Officers

Closed, Cleared by Arrest? A rare enough occurrence lately:
  • Two people were in custody after a man was believed shot to death in the Washington Park neighborhood this evening and suspects fleeing the scene caused a traffic crash on the Dan Ryan Expressway, authorities said.

    Officers patrolling the area either heard or saw a man shot in the 200 block of East 51st Street about 5:10 p.m., and followed suspects in a vehicle onto the Dan Ryan Expressway, said Chicago Police News Affairs Officer Daniel O'Brien.

    [...] After police began their pursuit, the suspects are believed to have caused a crash on the Dan Ryan Expressway, O'Brien said. Illinois State Police were notified about 5:27 p.m. of a two-car crash in the northbound local lanes at 43rd Street that was related to the pursuit, a state police master sergeant said. No one suffered life-threatening injuries in the crash, he said. Fire Department spokesman Kevin MacGregor said no one was taken to a hospital from the site of the crash.
Great job to all involved.

Messy Weekend

The Christmas spirit must have been flowing heavily - two dead, eight wounded over the weekend. And we're not even sure if that counts the arson that killed one, severely burned two children and left the arsonist dead as well.

Arson deaths are still murders, right? Because we know they mess with the vehicular homicide numbers constantly, with "hit and run" deaths being counted various ways.

Bears Toast

  • The Bears could spend between now and wild-card weekend counting the reasons they will be sitting at home with 10 wins.

    A defensive meltdown in Week 13 against the Seahawks and a brutal loss at Minnesota the following week are good places to start. Their time will be better spent, however, compiling ways they can improve in 2013 after a second-half collapse could not be saved by road wins over the lowly Cardinals and Lions at the end of a season that began with great promise.


  • Questions will persist about the future of Smith, who has an 81-63 regular-season record in nine seasons, until Emery announces his plan. It will be interesting to see what role Chairman George McCaskey takes; most believe it was his call to fire GM Jerry Angelo a year ago.
With any luck, both the Bears and the CPD will be looking for new head coaches shortly.

Poison Pill and Gold Debate

In Ho Hum - Fiscal Cliff Deal Stalls - Republicans Offer More and More Concessions; Poison Pill Nonsense I stated ...

"The real poison pill is allowing Social Security and Medicare costs to escalate unabated. Does anyone in either party want to admit the truth? ... the best hope still remains that all compromises fail."

The above thought prompted Uncle Frank to respond in a comment "Mish relishes chaos and financial ruin for this country so his gold holdings shoot-up in value. Everyone has an ulterior motive you know."

Ulterior Motives?

Since I get accused of this sort of thing quite frequently, please let me point out a few things:

  1. Gold has been sinking, as it should, if Congress is fiscally prudent.
  2. Government Should be Prudent
  3. Government Won't Be Prudent

Should Congress be fiscally prudent (and the fiscal cliff is not close to being fiscally prudent),  I would change my stance on gold in one second flat.

Nonetheless, should Congress fail to address the Fiscal Cliff, I would expect the exact opposite of what Uncle Frank suggests.

In short, regardless of my personal beliefs regarding gold (that one would be prudent to buy and hold gold), I actually advocate government and Fed policies that are contrary to my recommendations.

My reasons are easily explained:

  1. Neither the Fed nor the government gives a damn about what is fiscally prudent. 
  2. Both the Fed and Congress are highly likely to debase currency, causing gold to rise, even if I think that is bad economic and fiscal policy, which of course I do.

Thus the accusations of Uncle Frank, and countless others before him are 100% baseless. Should Congress actually do what I advocate, I think it would not be good for gold.

I recommend governmental actions on the basis of policy merit alone, not based on my stock market positioning. I find it very sad that few others do the same.

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

Addendum: In the second to last paragraph, I stated "Should Congress actually do  what I expect ...". The correct word is "advocate" as should be obvious by the preceding discussion. The word was changed. 

"Wine Country" Economic Conference Hosted By Mish
Click on Image to Learn More

Ho Hum - Fiscal Cliff Deal Stalls - Republicans Offer More and More Concessions; Poison Pill Nonsense

Republicans have offered more concessions including an agreement to hike taxes on those making as little as $400,000 (up from the $250,000 sought by Obama). They also backed down on a proposal to slow the growth of Social Security benefits.

They may as well throw out the white flag at this point. While I do not know if they reach a compromise today, it appears Senate Republicans are willing to do more than they should.

The fact remains this is a pathetic effort by both parties to rein in unsustainable budgets.

Please consider Fiscal deal stalls as clock ticks to deadline
Efforts to prevent the economy from tumbling over a "fiscal cliff" stalled on Sunday as Democrats and Republicans remained at loggerheads over a deal that would prevent taxes for all Americans from rising on New Year's Day.

One hour before they had hoped to present a plan, Democratic and Republican Senate leaders said they were still unable to reach a compromise that would stop the automatic tax hikes and spending cuts that could push the U.S. economy back into recession.

"There are still serious differences between the two sides," said Senate Democratic leader Harry Reid.

Progress still appeared possible after the two sides narrowed their differences on tax increases and Republicans indicated they would withdraw a contentious proposal to slow the growth of Social Security retirement benefits.

The two sides were close to agreeing to raise taxes on households earning around $400,000 or $500,000 a year - higher than Obama's preferred threshold of $250,000 - several senators told reporters.

Republicans aim to pair any tax increase with government spending cuts to benefit programs that are projected to grow ever more expensive as the population ages in coming decades.

But their proposal to slow the growth of Social Security benefits by changing the way they are measured against inflation met fierce resistance from Democrats. Obama included the proposal, known as "chained CPI," in an earlier proposal, but many of his fellow Democrats remain opposed.

'POISON PILL'

"We consider it a poison pill - they know we can't accept it. It is a big step back from where we were on Friday," a Senate Democratic aide said.
Poison Pill Nonsense

The real poison pill is allowing Social Security and Medicare costs to escalate unabated. Does anyone in either party want to admit the truth?

Apparently not, but that is hardly news to anyone with an eighth-grade education in math.

As the bargaining continues, it will be up to the House to reject whatever nonsense the Senate comes up with, because if not in December, the Senate will come up with something in January at the current rate of Republican concessions.

Every compromise to date leaves the US worse off than if the fiscal cliff happens. Thus, the best hope still remains that all compromises fail.

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

Online Education and College Degrees at Far Lower Prices is the Future; Virtual Classrooms to Reach 1 Billion People

I received an interesting email from "James in Arizona" today. James offers this comment on online education.
Greetings from Arizona, Mish,

I ran across this website while exploring various online options for my daughter (in high school, but she’s very computer savvy, so I’m looking for options to expand her interests/basis). It is EdX, an online education group started by Harvard and MIT, but other universities are joining.

Hopefully this online education program will finally put a torpedo in the expense of college.

Have a wonderful New Year, and thanks so much for the effort you put forth on your blog, and educating those like me.

James in Arizona
Virtual Classrooms to Reach 1 Billion People



The above video is a disappointing infomercial, but the courses available are genuine.

Here is a sample of free courses offered in the link above.

  • Foundations of Computer graphics
  • Circuits and electronics
  • Artificial intelligence
  • Software as a service
  • Quantum Mechanics and Quantum Computation
  • Introduction to Solid State Chemistry


The classes are free but unfortunately you do not get credit hours for them. Eventually you will.

The cost of education will come down for the simple reason it has to. The price of college education is not only ridiculous, but unsustainable.

The plunge in education costs will likely not happen soon enough to help James' daughter but it most certainly will help those with much younger kids.

If you do have kids in high school now, please encourage them to sign up for some of those classes to get a head start.

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

Chicago v New York

  • New York Mayor Michael Bloomberg was crowing.

    "The number of murders this year will be lower than any time in recorded city history," Bloomberg said Friday in a statement announcing that homicides in the city this year had fallen to 414 — the fewest since it started keeping such statistics in 1963.

    About the same time Friday, Chicago police were trying to get the message out that their city hadn't actually recorded its 500th homicide this year, as was being reported. A few hours later, they had to backtrack and acknowledge that, yes, in fact, "the city has seen its 500th homicide for 2012."

    That's right: There were more homicides this year in Chicago than in New York, a city with three times the population. That means Chicagoans were proportionally 3.7 times more likely to be homicide victims than New Yorkers were in 2012
McCarthy watch is in full swing.  Remember, when Rahm says he has full confidence in Garry and no plans to replace him, 72 hours is the over/under.

Cop Beaten

  • A South Side police officer had his head smashed against the pavement and briefly lost consciousness after he and his partner tried to stop someone fleeing an area where police were investigating a shots fired call Friday night.

    Tony Williams, 43, of the 2700 block of East 77th Street in Chicago, was charged with aggravated battery to a police officer and felony resisting arrest.

    Police said Williams slammed one officer's face into the ground several times after he and both officers fell to the ground about 7:06 p.m. Friday, with Williams landing on top of the officer whose face he is accused of smashing.
Cop should be ok.

Remember, this is normal behavior in this neighborhood. It's expected even. Any word on a "reverend" sponsored march in support of the Police that are the victims of this behavior day in and day out?

Officer Lewis Reward up to $40,000

  • The reward for information related to the death of a Chicago police officer last year has been increased, Police Superintendent Garry McCarthy announced today.

    The Chicago Police Memorial Foundation is offering $40,000 for information leading to an arrest and conviction, as police continue to search for at least one other individual they believe was involved in the fatal shooting of Officer Clifton Lewis on Dec. 29, 2011.

    The reward previously had been set at $33,000.
 $40-grand ought to shake something loose. 

Last Chance for Bears



Still a chance they might back into a playoff spot, and thereby gain the chance to fail on national television.

Latest odds have Bears by 3. If they manage to eke out a win against Detroit, then they have to hope the Packers don't play all their second stringers against the Vikings.

Obama Issues Executive Order Granting Pay Raises to Congress, the Vice President, Judges; Any Raise is Too Much; Congress Approval Rating is 18%

Congress has done such a beautiful job handling the fiscal cliff and debt ceiling that president Obama felt it mandatory to issue an Executive Order Giving Biden, Congress Pay Raises
President Barack Obama issued an executive order to end the pay freeze on federal employees, in effect giving some federal workers a raise. One federal worker now to receive a pay increase is Vice President Joe Biden.

According to disclosure forms, Biden made a cool $225,521 last year. After the pay increase, he'll now make $231,900 per year.

Members of Congress, from the House and Senate, also will receive a little bump, as their annual salary will go from $174,000 to 174,900. Leadership in Congress, including the speaker of the House, will likewise get an increase.

Here's the list of new wages, as attached to President Obama's executive order

"A new executive order has been issued providing for a new pay schedule beginning 'on the first day of the first applicable pay period beginning after March 27, 2013,'" reports FedSmith.com. "The pay raise will generally be about 1/2 of 1%."
Congress Approval Rating is 18%

The latest Gallup poll taken December 19, 2012, shows Congress Approval Remains at 18% During Fiscal Cliff Debate
Eighteen percent of Americans approve of the job Congress is doing, as leaders continue to work toward a solution to the looming fiscal cliff. That approval rating is unchanged from last month, but remains low from a historical perspective.



Republicans' approval of Congress fell slightly to 14% from 16% in November, while Democrats' approval increased slightly to 21% from 19%. The resulting seven-point partisan gap in approval of Congress is the largest measured since June 2011, with the exception of the 16-point gap prior to the election in October of this year.
Any Raise is Too Much

I happen to think any raise is too much.

Perhaps Obama thinks 18% approval is a stunningly good achievement following the brilliant Congressional handling of fiscal cliff issues, the smooth handling of healthcare, and the always steady handing of the budget deficit and debt ceiling.

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

499 + 1 = 499

An open post to discuss the ongoing manipulation and falsification of crime statistics by the Streetlight Marksman.

See the "It's a Miracle" from yesterday for continuing discussion about the overt reclassification going on with crime numbers by McCompStat.

This jackass is a failure on so many levels, and now he's not even bothering to hide the number manipulation.

Quiet Down Peasants!

  • With gangland shootings becoming an every-day occurrence in Chicago, the Board of Commissioners in surrounding Cook County is trying anew to tackle the deadly problem -- with another tax.

    But already, some are questioning whether the move is more about making a statement than addressing the violence.

    Under the new law, Cook County is charging an additional $25 tax on every handgun sold inside county lines.

    Gun shop owner Fred Lutger said this fee targets legal gun buyers, and not the gangsters responsible for many of Chicago's homicides.
Well, you know Preckwinkle wouldn't want to actually tax gangbangers. They don't have jobs, they don't have futures, and they have a lot of guns, so it wouldn't make sense to ask them to come up with money.

But Joe Schmo taxpayer? Get the money from him.

Of course, Econ 101 comes into play here - something Preckwinkle never studied:
  • Opponents of the law, though, warn that the tax could backfire -- by driving buyers and even businesses out of Cook County.

    Preckwinkle said she would be "astonished" if businesses actually left Cook over the tax.

    But County Commissioner Tim Schneider said: "I think we're astonished many times when businesses leave the county, but they do."

    Cook County has been down this road before. There is a tax on bottled water -- one of the highest sales taxes in the country. An increase in the cigarette tax fell dramatically short of projected revenue because tobacco store owners hoarded up the tax stamps before the increase went into effect.
Not to mention the thousand of people who just end up going over the border into Indiana or surrounding counties.  Moron politicians.

    St. Baldrick's Registration Open

    Time to let the hair grow out a bit:
    • Registration is open for all three 2013 CPD St. Baldrick's locations so start letting that hair grow! Just go to THIS LINK RIGHT HERE and choose from the Academy, Area South for 022 and Area North for 025. Follow the link on the left "participate in this event" and you will be walked through the registration process whether it's your first year or you're returning. Any questions don't hesitate to reach out to me, chromedome1269@sbcglobal.net. Our event is on Friday, March 22, 2013 from 0700 - 1700 hours and we're hoping to break a record for the number of participants this year so please invite a friend or family member to join you.

      Thanks,

      Bill O'Reilly
    Let's see if we can beat last year.

      It's a Miracle!

      The dead have risen!!!

      Or at least one of them has.

      Sort of:
      • Hours after Chicago police listed the shooting death of a West Side man as the city’s 500th homicide of the year, the department backtracked and said the city has yet to reach the grim milestone.

        Superintendent Garry McCarthy had told the Tribune Thursday afternoon that the homicide count stood at 499. Hours later, Nathaniel T. Jackson, 40, was gunned down outside a store in the Austin neighborhood and the department confirmed Friday morning that his death was the 500th homicide. Mayor Rahm Emanuel released a statement noting that "Chicago has reached an unfortunate and tragic milestone."

        But then the department issued its own statement calling reports of the tally inaccurate, saying the number remained at 499.  Asked for clarification, a spokeswoman for the superintendent said one of the homicide cases from earlier this week has been reclassified as a death investigation.
      Of course, the real reason can be found in our comment section:
      • Nope time to update again scc.... It appears gmac shit a brick at the morning phone conference with all of the commanders and demanded we stay under 500... Then poof, [someone] offered the supt a case that could be reclassified to a death investigation... So now the dept officially came out and said we are at 499. This was info from a commander who was on the morning call but has now been confirmed via the statement and story by the tribune this afternoon... Yep it's all legit
      What a joke.

      Hey media? You're being lied to. Again. And you're lapping it up like ice cream. Why don't some of you "investigative reporter" twits ask how many "death investigations" are currently open? We'll bet more than a dozen. And here you have the some exempt member offering to reclassify a murder. And not a single media type touches the fact that the FBI won't accept Chicago stats, and for good reason.

      Here's a Pulitzer gift wrapped for you morons and years worth of material pointing directly at the Machine and the Combine and every other crooked pol out there.  But you don't want to rock the boat?

      Here's a little nugget - Chicago passed 500 over two weeks ago if you add in the death investigation totals.

      Mercy! Isn’t a Late Day Selloff Illegal?

      I hope you are as outraged as I am by this late-day stock market action.

      S&P 500 Futures 10-Minute Chart



      Since when is a late day selloff legal? And for an entire hour with six consecutive red candles!

      And in the month of December too! What happened to my Santa Rally? I demand a Congressional inquiry.

      Goodness! I was sure such action was illegal. Clearly, it should be illegal, and I thought it was already.

      It's no wonder Fiscal Cliff legislation failed. Republicans and Democrats alike forgot to pass circuit-breaker provisions to halt (or better yet prevent) market declines late in the day, as well as this late in the year.

      Please call your Senators and Representatives today, demanding their immediate attention on this matter.

      After all, everyone knows that jobs and fiscal prudence are irrelevant. It's the stock market that's vital to the economy.

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

      European PMI Retail Sales Collapse: Near-Record Drop in Italy Retail Sales; French Retail Sales Drop 9th Consecutive Month; Germany Retail Sales Back in Contraction

      Inquiring minds are noting the expected (at least in this corner) collapse in European retail sales as measured by PMI indices in Italy, France, and Germany, the three largest Eurozone economies.

      Earlier today I took a look at France. For details, please see France Economic Implosion Underway; French Retail Sales Contract 9th Consecutive Month as Cost Inflation Surges.

      This article will look at Germany and Italy, the first and third biggest eurozone economies.

      Italy

      The Markit Italy Retail PMI® shows Steep downturn in high street spending continues in December.
      Key points:

      • Near survey-record year-on-year fall in retail sales
      • Rate of job losses fastest since July
      • Business sentiment weakens to series low



      Summary:

      Italy’s retail sector remained in a steep downturn in December, with sales dropping sharply according to both monthly and yearly measures. Gross margins decreased amid a further rise in average wholesale prices, while firms cut employment and purchasing activity in line with lower sales. The month also saw business sentiment hit a record low.

      December data pointed to another sharp month-on-month drop in Italian retail sales. This was signalled by Italian Retail PMI® registering 36.8, up from November’s seven-month low of 35.5 but slightly below its average over the year as a whole of 37.2. The latest decrease in high street spending was the twenty-second in consecutive months, and attributed by panellists to greater tax burdens, weak consumer sentiment and media scaremongering.

      When measured on a year-on-year basis, the decline in retail sales was one of the most marked since data collection began in January 2004. In fact, only in December 2008 and May 2012 have faster annual rates of decline been recorded.

      Comment:

      Phil Smith, economist at Markit and author of the Italian Retail PMI®, said: “2012 surpassed 2008 as the worst year in the survey’s history, with the PMI showing sharp monthly contractions in high street spending throughout and never once climbing above its pre-2012 historic average. The series measuring year-on-year changes in sales hit a record low back in May and came close to that mark in the latest survey period as consumer spending power was weakened further amid added tax pressure. Firms persistent attempts to boost sales through discounts have proved largely fruitless over the past 12 months, such has been the extent of the downturn in demand among Italy’s households.”
      Germany

      The Markit Germany Retail PMI® shows Retail PMI hits lowest level for eight months.
      Key points:

      • Moderate reduction in sales since the previous month
      • Actual sales fall short initial expectations for December
      • Job creation was maintained




      Comments:

      The seasonally adjusted Germany Retail PMI dropped to 47.6 during December, from 50.2 in November, signalling a moderate month-on-month contraction in like-for-like sales. December’s index reading was below the long-run series average (49.8) and pointed to the sharpest pace of contraction for eight months. Reports from retailers in Germany suggested that strong competition, unfavourable weather conditions and unexpectedly low consumer footfall had all contributed to lower sales.

      December sales disappoint compared to targets

      German retailers signalled that actual sales at their stores fell short of prior expectations in December, continuing the trend of weaker than expected sales for the ninth month running. Moreover, the degree to which sales failed to reach initial targets was the most marked for any December since that recorded in 2009. Meanwhile, expectations for sales in the month ahead were the weakest since December 2009, with some retailers suggesting that earlier than planned promotional discounting will have a negative influence on like-for-like sales in January.

      Margins squeezed again

      Operating margins in the German retail sector declined again in December, thereby extending the current period of contraction to 25 months. Anecdotal evidence suggested that lower margins reflected strong competition and a sharp rise in average cost burdens during the month.
      Italy Implosion Continues

      Note that high street spending is in its twenty-second consecutive month of contraction.

      Also note (and laugh at) the blame placed on "media scaremongering".

      Germany Back in Contraction

      German retail spending is back in contraction and this time I expect it to stay there, while laughing at the blame placed on "unfavourable weather conditions and unexpectedly low consumer footfall".

      Signs point to a full-blown eurozone recession that is worsening nearly every month.

      Germany cannot possibly be immune from this and indeed I blasted the IMF for proposing just that on January 9, 2012 in Dimwit Comment of the Day: Christine Lagarde, IMF Director says "Europe May Avoid a Recession This Year"

      "The idea Germany may avoid a recession is silly enough. The idea Europe may avoid a recession is downright idiotic."

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

      Four Strikes Is An Out; Obama Proposes Last Minute "Mini Deal" Essentially Scrapping All Cutbacks, While Adding Milk Lobby Bonus

      The one thing I am always afraid of in budget negotiations is that virtually nothing is done, or worse yet, something counterproductive is done.

      Obama's latest Fiscal Cliff "Mini-Deal" Proposal is exactly the kind of counterproductive nonsense I am talking about.

      Assuming the above Atlantic Wire article is correct ...

      1. The deal would delay or replace the vast majority of spending cuts called for in the automatic sequester.
      2. The deal would extend unemployment benefits
      3. The deal would stop planned cuts to Medicare reimbursements
      4. Out of the blue, and probably an attempt to buy farm-state votes, the deal purportedly would include a "milk fix" that allegedly would avoid a dairy market catastrophe created by the failure to renew the farm bill


      Four Strikes Is An Out

      I am against all four ideas and it's hard to say which one is worse. Certainly we need to scrap all farm subsidies, not put back those that have been scrapped.

      Hopefully the House punts this ball a mile high, or better yet, let's hope this does not clear the Senate in the first place.

      Purportedly the deal would only be for 60-90 days which would in all likelihood do nothing but allow further watering down of the proposal in yet another can-kicking exercise at that time.

      Since the market is not blasting higher on this preposterous idea, it's safe to assume this deal is Dead-on-Arrival in the House, if it were to get there.

      As I have said on numerous occasions, the best offer on the table is to let the alleged "fiscal cliff" happen.

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

      France Economic Implosion Underway; French Retail Sales Contract 9th Consecutive Month as Cost Inflation Surges

      Inquiring minds are noting the expected (at least in this corner) collapse in European retail sales as measured by PMI indices.

      The spotlight for this post is France, the second largest Eurozone economy following Germany.

      The Markit France Retail PMI® shows French retail sales fall for ninth consecutive month.
      Key points:

      • Sales fall at sharper pace on both monthly and annual measures
      • Purchasing costs rise at strongest rate in ten months
      • Stocks of goods for resale decline at faster pace



      Summary:

      French retailers reported another month-on-month decline in sales during December – the ninth in succession which is a survey record. Sales were also down on an annual basis, and fell well short of retailers’ plans. Gross margins remained under considerable pressure, partly reflecting a strong and accelerated rise in purchasing costs.

      The headline Retail PMI® slipped to 46.8 in December, from 48.8 in November. The latest reading was indicative of a solid rate of contraction. Anecdotal evidence suggested that a difficult economic climate and low customer footfall had contributed to the drop in sales.

      Actual sales at French retailers once again disappointed relative to previously set plans in December. The degree of undershoot was the greatest since August. Survey respondents are also pessimistic regarding the one-month outlook for sales.

      Factors expected by retailers to boost sales over the coming three months include cold weather, new product launches and promotions. Those factors expected to depress sales include a weak economy, depressed consumer confidence and increased taxes.

      Latest data indicated that French retailers’ gross margins remained under strong pressure in December. Margins have declined in every month since February 2008.

      Wholesale prices faced by French retailers continued to increase in December. The rate of inflation accelerated to the sharpest since February. Panellists reported that suppliers had generally raised prices in order to pass on higher raw material costs.
      France Economic Implosion Underway

      Retail sales in France fell for the 9th consecutive month, a new record. Deterioration is marked as well as expected.

      Because of the sharp rise in inflation, things are even worse than they look at first glance of the PMI numbers.

      The horrendous policies from president Francois Hollande and his socialist cronies including ridiculous tax hikes and inane rules on firing workers are going to cause massive heartburn (to put things mildly).

      I have to laugh at the comment by Markit that "low customer footfall had contributed to the drop in sales". Nearly as amusing, note that retailers expect "increased sales because of cold weather."

      For further reading, please consider economically insane proposal by French president Francois Hollande "Make Layoffs So Expensive For Companies That It's Not Worth It"

      Given that any clear-thinking person should quickly realize that if companies cannot fire workers they will be extremely reluctant to hire them in the first place , it should be no surprise to discover French Unemployment Highest in 14 Years (And It's Going to Get Much Worse).

      In France, Government spending amounts to 55% of total domestic output. For discussion, please see Hollande's Honeymoon is Over; 54% of Voters Unhappy; Unions Promise "War" in September.

      Looking ahead to 2013, I Expect things in France to get worse at an accelerated pace.

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

      Japan Manufacturing PMI Downturn Accelerates; Output and New Orders Suffer Sharpest Contractions for 20 Months; Cheaper Yen Cannot Save Japan

      The Markit/JMMA Japan Manufacturing PMI™ shows Downturn of manufacturing sector accelerated during December.
      Key points:

      Output and new orders register sharpest contractions for 20 months
      Employment, purchasing and stocks all continue to be cut
      Output charges lowered further as input prices remain unchanged



      Summary:

      Latest data from Markit/JMMA indicated that the performance of the Japanese manufacturing sector continued to deteriorate in December. Output, new orders and employment all fell compared to one month ago while margins remained under pressure as output charges declined amid ongoing price competition.

      After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) registered a level of 45.0 in December. Down from 46.5, the PMI subsequently posted a 44-month low.

      Output continued to decline markedly, with the sharpest contraction again seen in the capital goods producing sector. Total manufacturing production has now fallen for seven months in a row, with the latest reduction the sharpest seen since April 2011.

      Falling volumes of incoming new business was the primary factor driving manufacturing output lower in December. As was the case with output, the fall in new order volumes was the steepest since April 2011, although the rate of decline was considerably sharper than seen for production.

      New export order volumes also continued to fall in December, with companies reporting that demand from Chinese and European markets remained sluggish. The fall in orders from abroad was the steepest since July, with investment goods producers recording the steepest reduction.
      Cheaper Yen Cannot Save Japan

      Nearly every day someone sends me an email stating Japan's manufacturing and export machine will pick up with a falling yen.

      Will it? Why?

      Japan is in an economic war with China over disputed islands so that part of Japan's export business is dead, and will remain dead.

      In isolation, a falling Yen will help Japanese exports to Europe. However, Europe is in a severe, as well as worsening recession, so a falling Yen alone will not revive sales.

      In the US, car buyers are not as in love with Japanese cars as they once were, and the US has its own share of problems in a weakening if not outright recessionary economy.

      Finally, a falling Yen will exacerbate Japan's energy problems as Japan is totally dependent on imports to meet its energy needs. 

      Japan wants inflation, but this is a strong case of "be careful of what you ask, because you may get it". Inflation is likely to destroy Japan, the real question is "when".

      For more on Japan, please see


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

      "Wine Country" Economic Conference Hosted By Mish
      Click on Image to Learn More

      500 for Sure Now

      • The fatal shooting of a 40-year-old man Thursday night on the West Side appears to have pushed Chicago's 2012 homicide toll to 500, the first time the city has had that many killings in four years.

        The slaying came hours after the Chicago Police Department said the city was one homicide away from the 500 mark for the year.

        The victim was standing outside a convenience store around 9 p.m. at Augusta Boulevard and Lavergne Avenue in the city's Austin community when he was shot in the head, police said. He was pronounced dead at John H. Stroger Jr. Hospital of Cook County at 12:18 a.m., a spokesman for the Cook County medical examiner's office said.
      So a big congratulations to Rahm Emanuel and Garry McCompStat. You've proven beyond a shadow of a doubt that the number of police officers has a direct correlation to the amount of blood running through the street gutters of Chicago. All your spouting off about "properly utilizing the officers we have" and "highest per capita" statistical nonsense? Bullshit. And sitting idly by while the media and reverends crucify officers and allowing years worth of incompetent "merit" promotions run amok throughout the Department? If it wasn't part of some Grand Plan to destroy the Chicago Police Department, that was the consequence anyway.

      Note for next year: An old saying is, "What goes up, must come down." Chances are about even that the rate will fall a bit next year and we fully expect that Laurel and Hardy will take credit for it via some manner - statistical manipulation, new programs, increased hiring, etc. What no one will say is perhaps the shitheads will be running low on targets. After the "Crack Wars" of the 80-90's sorted out the street corners, everyone calmed down a bit.

      500?

      • Chicago on Wednesday logged its 500th homicide of the year—the first time the city has reached that threshold since 2008, according to a RedEye analysis of preliminary police data.

        A man was shot to death Wednesday in an alley east of California Avenue and south of 54th Street, the Tribune reported.

        Chicago homicides are up 15 percent this year compared to the same period last year, according to RedEye data. Homicides were up 60 percent in March compared to 2011 but the rate has slowed since then.
      Here's what McDoofus is hanging his hat on though:
      • Eighteen homicides have been logged so far this month; 37 homicides were logged in December 2011, RedEye data shows.
      The "official" Department count has us stuck at 498 or 499. For some reason it's always been just below the RedEye tracker this year, so we can only assume something got reclassified somewhere.

      Anyone know where the discrepancy is at? Or what? Because there was another website counting that had us at 526 or so, but they included police shootings and possibly vehicular homicides, too from what we heard.

      499.....

      • A man died after he was shot at least four times – including in the face and chest – in a Gage Park neighborhood alley Wednesday night on the Southwest Side, authorities said.

        Frederico Martinez, of the 5400 block of South California Avenue, died from gunshot wounds he suffered near his home, according to the Cook County Medical Examiner’s office.

        Police said he was Chicago's 499th homicide victim of the year.
      The Tribune has all the requisite crying and moaning about how he was just about to turn it around after 30-plus years, 20 of it bangin' in the 'hood.

        Upgrading Charges

        ASA facing upgraded charges for drunken antics:
        • The Cook County prosecutor charged with biting a worker outside a Lakeview lingerie store is about to be in even more trouble.

          Her misdemeanor battery case was dropped today, but FOX 32 News has learned the Attorney General plans to file new, more serious charges against Sarah Naughton in the next several days. Naughton's misdemeanor battery trial was scheduled for today, but was dropped after a last minute move by the Attorney General's office, which is handling the case since Naughton works for the Cook County State's Attorney's office.
        And wonder or wonders, a Chicago aldercreature is sticking his nose into this one, trying to help out the unfortunate drunken prosecutor:
        • The story gets even more bizarre, with a voicemail Thomas got from Ald. Tom Tunney (44th Ward) just days after Naughton's first appearance in court.

          After making some small talk about a local construction project impacting Thomas's store, Tunney says this:

          "The world is too small and I've got a friend of mine that I went to high school with is an attorney for that Taboo Tabou case with the state's attorney. It's really a delicate situation for the young woman, and I understand that you've been at court with Fox News or something like that." Tunney said on the voicemail "My only suggestion is, let's try to help the person. She obviously had a bad night. We don't need to continue her (to hurt her) dignity about this issue. So, let the court do what the court's supposed to do, and please, we don't need to have the theatrics around this issue. It doesn't help your business."
        The store owner had Tunney on tape.  Amazing what passes for intelligence around these parts some days.

          Lock Congress Up Until They Deal?

          Stocks staged a late day rally because the Senate is prepared to kick the can down the road, avoiding any chance of fiscal sanity this year or next.

          Whether or not the House will go along is another matter, but unfortunately Speaker Boehner calls House back to Washington on Sunday
          The House of Representatives will reconvene on Sunday evening, just less than 30 hours before the United States reaches the fiscal cliff.

          House Speaker John Boehner, R-Ohio, notified lawmakers that the House would come to order at 6:30 p.m. ET on Sunday in hopes of averting the end-of-year combination of tax hikes and spending cuts that constitute the fiscal cliff.

          The lawmaker on Thursday's call told NBC News that any Senate plan Boehner puts on the House floor (of which there is no guarantee) would only receive as few as 40 Republican votes, making Democratic help necessary.

          "If the Senate will not approve these bills and send them to the president to be signed into law in their current form, they must be amended and returned to the House," Boehner told Republicans Thursday, according to a source on the call. "Once this has occurred, the House will then consider whether to accept the bills as amended, or to send them back to the Senate with additional amendments. The House will take this action on whatever the Senate can pass -- but the Senate must act."
          Flagpole Rally S&P 500 Futures



          The moment I saw that second green candle and volume spike on the S&P 500 futures I knew a deal was in the works even though I could not find any news for a half hour.

          Magic Number is 60

          MarketWatch reports Senate Republicans open to new cliff deal
          Senate Republican Leader Mitch McConnell said late Thursday that Senate Republicans are open to any White House proposal to avert the fiscal cliff.

          Reid urged the House to pass a Senate bill extending Bush-era tax cuts for those earning $250,000 a year or less. The Nevada Democrat said the House is being operated under “a dictatorship of the speaker.”

          A spokesman for House Speaker John Boehner said in response: “Senator Reid should talk less and legislate more.”

          Even in the Democratic-controlled Senate, Obama’s preferred bill faces an obstacle: Sixty senators are required to break a filibuster, and Democrats control 53 seats.
          Easy Escape for Senate Republicans

          The magic number may be 60, but I do not expect any filibusters in the Senate.

          The easy escape route is to pass the buck. In this case the Senate is likely to pass anything, hoping to avoid the blame, while placing a burden on the House to do something fiscally responsible.

          Let's hope the House rejects whatever watered-down proposal that comes out of the Senate.

          Lock Congress Up Until They Deal?

          MarketWatch Columnist Rex Nutting says On fiscal cliff: Don’t negotiate, let’s legislate.
          The United States doesn’t have a fiscal problem. Or an economic problem. It has a political problem. The workings of the government are so gummed up that we’re in danger of falling into a recession that’s completely avoidable.

          I think it’s high time we locked the members of Congress in a room and told them that we’ll let them out when they reach a deal.
          Economic Folly of Recession Avoidance

          The idea the US does not have a fiscal problem or an economic problem is of course total nonsense.

          That said, I am of course totally sympathetic towards the idea the US also has a political problem. Indeed, I am even willing to say the political problem is largely responsible for the economic and fiscal problems.

          Where Nutting crosses the line into economic folly is the idea Congress needs to avoid a recession. Quite frankly, that is a nut case proposal, and no solution at all.

          The US is in this mess because every step of the way, the Fed and Congress acted to avoid recessions. Greenspan in particular fueled a housing bubble holding interest rates too low too long to "help" the economy out of a dot-com bubble bust largely of the Fed's making.

          Now, Nutting wants to lock Congress in a room until they come up with a deal to avoid a recession.

          Instead, I propose fiscal sanity. I propose we lock Congress in a room until they come up with a proposal that will balance the budget within five years.

          Either Nutting is wrong or I am. And here's a hint, if I'm wrong about anything, it's that five years is too long.

          Nutting proposed nothing more than another can-kicking exercise that will never end. I suggest it's time for an honest economic discussion on what the country can or cannot afford.

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

          Social Trap in Spain: Mortgage Nightmare; Why Spain (or Germany) is Guaranteed to Leave Euro

          Looking for a synopsis of the problems facing Spain? A summary of bullet points I gathered from the Spiegel article Evictions Become Focus of Spanish Crisis shows just how hopeless the situation is.

          • There were a record number of evictions in 2012, foreclosures are expected to increase in 2013.
          • Some 400,000 eviction proceedings have been opened in Spain since 2007, with roughly half of the families involved having already lost residential properties due to foreclosures. That means Spain is only half-way through the crisis.
          • There are now 1.7 million Spanish households in which not a single family member still earns a salary.
          • 4 million people have lost their jobs since 2007
          • 27 percent of the population lives below poverty level
          • Evictions now affects pensioners, who have used their own homes as collateral to take out loans for their sons and daughters
          • A joint study by UNICEF, Oxfam and Doctors Without Borders concluded that the country will need over 20 years to regain the standard of living it attained in the prosperous, pre-crisis years.
          • In the Catalonia region, unemployment is 26 percent
          • Youth unemployment is over 50%

          Social Trap

          Spanish Prime Minister Mariano Rajoy has issued a moratorium on foreclosures for "extreme hardship" cases. The definition of "extreme hardship" is "families with two children and an annual income of less than €19,000, more than half of which has to be used for mortgage payments." Single parents with children under the age of three also qualify.

          Notice that the hardship rule still requires over half of income to go to mortgage payments. Meanwhile interest accrues indefinitely.

          There is no way for these families to ever pay back debts accumulated at or near the height of the bubble.

          If there are evictions people are thrown out on the street. If there are no evictions, then there is no way for banks to sell the properties to someone who is able to afford mortgage payments.

          Euro Trap

          In mid-December, Spain received nearly €40 billion ($53 billion) from the European Stability Mechanism (ESM) to restructure its ailing banks. Yet every day Spanish banks acquire more properties not marked-to-market.

          Moreover, moratoriums delay the process as interest accrues.

          The longer Spain tries to stay on the euro, the deeper Spain goes into debt to the rest of the EU. This is what happened to Greece, and the result was the rise of "Golden Dawn" a neo-Nazi group.

          Constitutional Crisis

          There are no sign of Nazism in Spain. However, Pro-Referendum Parties Won 87 of 135 Seats in Catalonia and a constitutional crisis is brewing as Catalans wish to secede from the rest of Spain.

          Every day, bad debts mount at Spanish banks.

          Catch 22 of Sorts

          On December 19, I reported Loan Default Rate Hits 11.23% in Spain, a New Record; Construction Defaults Hit 26.4%; Credit Plunges 5%

          Can anyone tell me how Spain can possibly exit their trap that does not involve Germany pouring vastly more money into Spain?

          The only way I can come up with is default with Spain leaving the Euro.

          Sooner Spain Leaves the Euro the Better for Everyone

          Note that the ECB, IMF, and the rest of Europe (including Spain), threw money at Greece, turning a relatively small problem into a much bigger one. As Greece has shown, the sooner a country leaves the Euro, the better off everyone will be.

          So when does Spain, or Germany come to its senses? Either one will do.

          In the meantime, politicians will kick the can for as long as they can, making the situation messier and messier along the way.

          Pick Your Poison

          The bottom line is Germany will pony up (and by pony up I mean "give" not lend) massive amounts of money to Spain, or Spain will have no choice but hard default.

          1. Ultimately, a charismatic politician in Spain will blame Germany, blame the euro, and pledge to default. That politician will be elected.
          2.  
          3. Alternatively, a charismatic politician in Germany will get tired of making handouts to the club-med states and promise to put Germany back on the Deutschmark. That politician will be elected.

          This is a clear case of pick your poison, and Germany will take a hit one way or another. Timing is the only uncertainty

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

          Michael Pettis on China Reforms, Ponzi Schemes in Wealth Management Programs, Rebalancing Implications

          Here are portions of a email from Michael Pettis at China Financial Markets on the unsustainable nature of China's growth, Ponzi schemes in wealth management programs, and the implications of China's rebalancing efforts. By permission ...
          As analysts wrack their minds over specific debt problems in China and how they are to be resolved, I think we must remember to look not at specific debt issues but rather at the way the overall system operates.

          I have argued many times in the past six years that the Chinese growth model has reached the point (perhaps well over a decade ago) where growth was almost necessarily driven by an unsustainable increase in debt. This meant, I suggested, that while it might be hard to predict where the next debt problem would crop up, it was very easy to predict that debt problems would continue to crop in one sector of the economy after another.

          We need to remember this as we consider financial risks in China. One of the big stories this month of course was the failure of the Zhongding Wealth Investment Centre, the borrower against a Wealth Management Program (WMP) issued at a Shanghai branch of Huaxia Bank.

          According to an article in the South China Morning Post, [Huaxia scandal spotlights China's Ponzi crisis] "dozens of depositors lost their multimillion-yuan investments in a "wealth management product" (WMP) sold at a Shanghai branch of Huaxia Bank. The sorry saga was a rude reminder that Ponzi schemes thrive on the mainland, where millions of residents still believe that banks are the safest havens for their lifelong savings."

          The reason this particular story is important is not because the transaction is large enough to make much of a difference, but rather in what it tells us about risks in the financial system. The first point is that we have no idea what is really going on in this already large and rapidly growing part of the Chinese financial system, but whatever we can see looks pretty ugly.

          In my October 29 newsletter I referred to a recent article that discussed this problem, an opinion piece by Xiao Gang, the Bank of China’s CEO, in China Daily. In this piece he describes the shadow banking system and the role of wealth management products:

          It is difficult to measure the precise amount and value of WMPs. Fitch Ratings says that WMPs account for roughly 16 percent of all commercial bank deposits, while KPMG reports that trust companies will soon overtake insurance to become the second-largest sector in the Chinese financial industry. According to a report by CN Benefit, a Chinese wealth-management consultancy, sales of WMPs soared 43 percent in the first half of 2012 to 12.14 trillion yuan ($1.9 trillion).

          There are more than 20,000 WMPs in circulation, a dramatic increase from only a few hundred just five years ago. Given that the number is so big and hard to manage, China's shadow banking sector has become a potential source of systemic financial risk over the next few years.


          Particularly worrisome is the quality and transparency of WMPs. Many assets underlying the products are dependent on some empty real estate property or long-term infrastructure, and are sometimes even linked to high-risk projects, which may find it impossible to generate sufficient cash flow to meet repayment obligations.

          I went on to say in my newsletter:

          There are three big questions with WMPs, as analysts are increasingly recognizing, each of which Xiao discusses, perhaps a little more politically than I do, in his piece. First, we don’t know the size of the market. Second, we have no idea of whether or not the assets backing these products are money good – in fact the bankers themselves who sell WMPs are almost never able to explain what asset is behind the WMP. Third, we have no idea of the transmission mechanism between potential problems in WMPs and the banking system.

          The key point we must remember is that whatever Beijing does about WMPs, this will not resolve the underlying debt problem. Growth in China is currently dependent on an unsustainable increase in debt. If one avenue for this growth in debt is cut off, we will simply see the debt rise somewhere else. Economic growth in China requires rapid growth in investment. This growth in investment is increasingly misallocated on projects that will not generate the increases in real productivity needed to cover the cost of capital. Since these investments are funded at least in part by debt, debt must rise in one part of the system or another as long as GDP growth rates exceed 4-5%.

          In China, in other words, high growth is no longer compatible with a strengthening balance sheet. If China is growing at a rate that approaches or exceeds this level, it is probably a safe bet that debt is rising faster than debt servicing capacity.

          The good news is that the current leadership seems very clear about the need to implement reforms, and also understands that this is going to be politically a difficult process.

          As an article in the People’s Daily put it: No easy path in sight for China's economic future

          "Reform is exciting, but it is also full of difficulties and challenges. Xi said in Guangdong that China must squarely face difficulties and challenges, strive for the best results and firmly seize the initiative. This deserves consideration by the entire Party and society."

          These expected, and exciting, “difficulties and challenges” are, I suspect, the things we should be most concerned about in our attempts to understand the pace of reform. The history of developing countries suggests that most countries fail in the reform and adjustment process precisely because the sectors of the economy that have benefitted from the distortions are powerful enough to block any attempt to eliminate those distortions.

          Certainly not everyone in China is confident that Beijing will be able to force through the reforms that are widely accepted as necessary without a serious fight. There were two interesting and related articles in this week’s South China Morning Post that may indicate the degree of worry.

          The first article tells you much of what you need to know in the title (“China's rich and skilled leave in record numbers”). It goes on to say:

          More than 150,000 Chinese became permanent citizens in major immigrant countries including the United States, Canada, Australia and New Zealand last year, topping the world’s list of overseas migration in absolute numbers, a recent report revealed. The Centre for China and Globalisation (CCD) and Beijing Institute of Technology (BIT) School of Law jointly released their findings in the Chinese International Talents Annual Blue Book's International Migration Report (2012) on Monday, according to media reports.

          …Another report by Hurun Research Institute and Bank of China in 2011 found that 14 per cent of China’s high-net-worth individuals had either emigrated or were in the process of doing so. In addition, 46 per cent were considering permanently moving overseas through various immigrant investor programmes with real estate, foreign currency deposits and stocks being the primary areas of investment.

          US Citizenship and Immigration Services (USCIS) declared that 41 per cent of total EB-5 Immigration Investor Programme applicants were Chinese while the Australian Department of Immigration and Citizenship reported that 61.5 per cent of applicants for the Business Skilled Migration Programme were Chinese.


          We have known for a while that Chinese with the means to do so are increasingly opting to move abroad. There are many reason for this, of course, but China is still growing much faster than the rest of the world, even if some of us don’t fully accept the official numbers, and so for people to look for opportunities abroad suggests at the very least that either some of these people seriously doubt the sustainability of China’s current growth and expect it to come crashing down, or that they are worried about political uncertainty and the possibility of difficulty ahead. Or both.

          The second article, China 'top source' of world's tainted money, also by the South China Morning Post, involves data from a completely different source and for completely different purposes, but it may broadly be telling the same story. The article is based on a very interesting study conducted by Global Financial Integrity on illicit capital flows around the world. The article summarizes their study as:

          Some 150 developing countries, led by China, have been the source of flows of tainted money totalling US$5.9 trillion over 10 years through 2010, Global Financial Integrity, a research and advocacy group in Washington, DC, said.

          Flows of illicit money from tax evasion, crime and corruption in the developing world have roared back to pre-financial crisis levels, topping nearly US$859 billion in 2010, near the all-time high of US$871 billion in 2008, it said. In 2009, following the global financial crisis, the figure dropped to US$776 billion.

          China tops the list of developing countries sending illicit money abroad, either to offshore havens or to financial institutions in developed countries, GFI said in a study. In 2010, illicit money out of China totalled US$420 billion, the report said, and exceeded US$2.7 trillion for the decade ending in 2010 - nearly half that period’s total for all developing countries


          For comparison’s sake, Malaysia came second, with over $64 billion in 2010 and $285 billion for the decade. Mexico was in 2010, with over $51 billion in illicit flows, and $476 billion for the decade. The study acknowledges that it does not include cash transactions, so actual illicit flows are probably higher, maybe even significantly higher.

          The full ranking of 71 countries shows, among other things, that illicit capital flows from China are roughly equal to the sum of illicit capital flows from the next fifty countries. I haven’t been able to adjust the numbers for GDP size (larger economies should on average have larger illicit outflows), but when you consider that the next fifty countries include Mexico, Malaysia, Russia, India, Indonesia, Poland, Brazil, Turkey, Argentina, Hungary and forty others, I think it is pretty safe to say that China’s ranking as number 1 is not just a function of its being the largest developing economy in the world.

          As a share of GDP, in other words, Chinese illicit outflows seem easily to exceed the average for all developing countries. Mexico’s GDP, for example, is roughly one-seventh the size of China’s, and yet for all its drug money, its illicit flows were only one-eight those of China. This means that the Chinese business and political elite export illicitly a larger share of the Chinese economy than the combination of the Mexican business and political elite and their drug cartels.

          One of the most interesting paragraphs in the study, for me, concerned trade invoicing:

          Trade misinvoicing is the preferred method of transferring illicit capital from all regions except the MENA region where it accounts for only 37 percent of total outflows for the decade ending 2010 (Chart 6). In declining order of dominance, the share of trade misinvoicing in total outflows by region is Asia (94.0 percent), Western Hemisphere (84.0 percent), Africa (65.0 percent), and developing Europe (53.0 percent). Large current account surpluses of countries in the MENA region driven by crude oil exports entail larger outflows through the balance of payments. In the case of Europe, the relatively large unrecorded outflows from the Russia’s balance of payments dominate regional outflows.

          This creates, for me, a real and very obvious problem with understanding China’s trade figures. According to the study, illicit money out of China totaled US $420 billion in 2010. The study also claims that in Asia nearly all of the illicit money flows (94%) occur through mis-invoiced trade, which suggests, of course, that the trade numbers can be seriously distorted. If capital is being secretly taken out of the country through trade, exports are likely to be under-reported, imports are likely to be over-reported, and the real trade surplus is almost certainly larger than the reported trade surplus.

          How much does this illicit capital flow impact China’s real trade account? Here is a January 2011 Xinhua article on China’s 2010 trade account:

          China's foreign trade last year jumped 34.7percent year on year to more than 2.97 trillion U.S. dollars while its trade surplus fell 6.4 percent to 183.1 billion U.S. dollars, the General Administration of Customs (GAC) said Monday.

          The country's exports grew 31.3 percent year on year last year to 1.58 trillion U.S. dollars while imports surged 38.7 percent to 1.39 trillion U.S. dollars, said the GAC. "China's foreign trade is, in general, heading towards a balanced structure," said the GAC in a statement on its website. The trade surplus accounted for 6.2 percent of all foreign trade last year, down from 8.9 percent in 2009 and 11.6 percent in 2008.


          It is clear that these illicit capital flow numbers are pretty significant in relation to the trade numbers. China’s trade surplus in 2010 was reported to be $183 billion, but GFI claims that Chinese illicit capital flows (I assume that most if not all represents outflows, or even net outflows) for the year were $420 billion, most of which may have been recorded as higher exports or lower imports.

          Even if these numbers are way off, they still suggest that China’s real trade surplus may have been substantially higher than reported, with much if not most of the money parked offshore for safekeeping. Among other things these numbers also suggest that the sluggish import growth of the past year, which smart people like Andy Xie insist are among the many numbers that are not compatible with the high official growth rates claimed by the government, may be even lower than reported.

          Obviously I am not the first person to complain about the opacity of Chinese economic data and the difficulties we often have in reconciling one set of numbers with another, but I think it is important to note that while opacity may not be a terrible problem during the optimistic up-cycle (in fact hazy data give us more leeway to daydream pleasant things), it can suddenly become a huge problem during the pessimistic down-cycle, when they don’t even constrain our nightmares. What is worse, an increase in opacity, which we are clearly seeing in the financial system, is usually a herald of bad tidings. When the economy starts to get bad, often the first impulse for many is to massage or hide the data.

          I don’t think this is the end of this story. The market hasn’t yet priced in the amount of rebalancing China has yet to go through, and so it has also not priced in either the full reduction in hard commodity demand or the extent of rebalancing on China’s export competitiveness. I expect a lot more of the same story in 2013 and 2014.
          Mike "Mish" Shedlock
          http://globaleconomicanalysis.blogspot.com

          Michael Pettis is one of six speakers an an economic conference I am hosting on April 5, 2013, in Sonoma, California. I consider Pettis as one of the world's leading experts on China and on global trade issues.

          Click on the image below for conference details.

          "Wine Country" Economic Conference Hosted By Mish
          Click on Image to Learn More

          Not One, But Two Police Shootings

          The weather certainly hasn't stopped people from shooting at each other, what with one dead and thirteen wounded over the weekend. It hasn't stopped assholes from pointing guns at police either:
          • Police shot an armed man who allegedly pointed a gun at them early Wednesday, shortly after the man also pulled a gun on his stepfather at an Englewood home, according to a police union official.

            It was the second police involved shooting in a 24-hour period.

          • The other police involved shooting occurred several hours earlier when police fired shots at a car after a motorist tried to run over at least one officer during a traffic stop.

            No one was injured in that shooting, police said.
          In the first shooting, the offender is in critical condition. No hits in the second shooting. Guns recovered at both scenes. Well done Officers.

          Swiping Rumors Gain Traction

          Here we go again:
          • Fingerprint Swipe will be sprung on ALL City Employees very soon. Be ready, it's here, and it will save the City Millions, by docking You for being late and leaving early Rahm is hard just thinkin about it, and it's gonna be sprung on you all with NO notice, and FOP, etc; cannot do anything about it, it's totally legal and in use all over the country, and Rahm's buddies will make a fortune maintaining the System.
          This keeps popping up every year.  And every year it falls apart.  The issues are legion.  The hand scanners don't work.  The non-functional ID cards number in the hundreds, if not thousands.  As there is a disciplinary process already in place for tardiness (progressive SPAR discipline), we don't think the city can unilaterally dock your pay without running afoul of the Contract.  And we have little doubt that there are going to be large issues with people staying 7.5 minutes late for various legit reasons that will be checking the "money box" each and every day.  The blizzard of paperwork ought to be impressive.

          The city can't maintain the GPS system in any sort of working order, the in-car cameras are out of service at least as often as they are working and today, we got a letter that the OEMC nerve center that is supposed to be watching the video system is completely unmanned.  All those thousands of blue-light cameras?  No one is watching a single one and haven't been for weeks.  The working ones are set on "pan-and-scan" and the broken ones just sit.

          Let's see how this plays out.

          Gift That Keeps Giving

          • In an annual ritual that has become as predictable if not as joyous as a New Year’s Eve countdown to midnight, Chicago drivers again will have to dig a little deeper to pay to park at meters in 2013.

            Loop rates will go up 75 cents to $6.50 an hour as part of scheduled fee increases included in Mayor Richard Daley’s much-criticized 2008 lease of the city’s meters to Chicago Parking Meters LLC.

            Paid street parking in neighborhoods near the Loop will rise 25 cents and reach $4 an hour. Metered spaces in the rest of Chicago also will increase by a quarter per hour, to $2, according to the company.
          Still one of the greatest rip-offs in Chicago history. We have avoided downtown like the plague for years and things like this just make it easier to look to the 'burbs for things to do.

          US Hits Debt Ceiling Limit on December 31; Geithner Unveils Treasury Plan to Buy More Time

          On December 31 the US will once again hit the debt limit and Treasury Secretary Tim Geithner is working on an emergency plan to deal with the situation.

          Here's the kicker. If the Fiscal Cliff hits (which it likely will), the increased tax revenue and spending cuts would automatically buy the Treasury some time.

          Please consider Geithner's plan to buy time under debt ceiling.
          The Treasury on Wednesday announced the first of a series of measures that should push back the day when the government will exceed its legal borrowing authority as imposed by Congress by around two months.

          Without any action, Treasury said the government is set to reach its $16.4 trillion debt ceiling on December 31.

          To cut government spending and delay bumping up against the debt ceiling, the Treasury will suspend issuance of state and local government series securities -- known as "slugs" -- beginning on December 28.

          Investments in a government employee pension fund will also be suspended, along with some other measures, although Treasury did not give dates for when these other measures will begin.

          "These extraordinary measures ... can create approximately $200 billion in headroom under the debt limit," Treasury Secretary Timothy Geithner wrote in a letter to congressional leaders.

          Normally, these measures would buy the Treasury about two months time before hitting the debt ceiling, Geithner said in the letter. But a series of planned tax hikes and spending cuts due to take effect in early January could give Treasury further time if they take effect as scheduled, he said.
          True Fiscal Cliff

          The true Fiscal Cliff is years down the road and will be similar to the crisis about to hit Japan in 2013 or 2014. The way to address the problem is to balance the budget, exactly the opposite of what Obama and nearly everyone in Congress other than Ron Paul and Rand Paul want to do.

          The term "Fiscal Cliff" as currently used is simply preposterous. The ultimate irony is the alleged "Fiscal Cliff" happens to be the most fiscally responsible plan currently under discussion.

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

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