NEW$ & VIEW$ (30 April 2012)

Slowing Growth Stirs Recovery Fears

ECONOMY-p1Gross domestic product grew at an annualized rate of 2.2% in the first quarter, down from 3% at the end of 2011. The deceleration reflected sharp cutbacks in government spending and weaker business investment and came despite an unusually warm winter, which many economists said likely provided a mild economic boost.

Consumer spending, by far the biggest piece of the economy, accelerated in the first quarter, and the moribund housing sector also showed signs of improvement.

Barron’s Alan Abelson noted this interesting point:

(…) the big driver was what the Bureau of Economic Analysis dubs motor vehicles (…), production of which hiked first-quarter GDP by 1.12 percentage points, more than double the rise they provided in last year’s fourth quarter. However, as Neil Dutta, who scans the economic scene for Bank of America Merrill Lynch, observes, at least half the strength in auto output can be traced to the recovery from Japanese supply chains.

Warm Weather Brings Early Spring to Economy, but Lift Is Likely to Ebb

The January-to-March quarter was the nation’s warmest three-month start since at least 1895, with an average temperature of 42.01 degrees Fahrenheit—six degrees warmer than the long-term average, according to the National Oceanic and Atmospheric Administration. The warm winter has shaken up everything from bird migrations to allergy season, as well as the ebb and flow of economic output.

Consumers went out shopping on days when the cold usually kept them in, construction projects continued with minimal delay and a dearth of snowstorms led to fewer missed work days. While some of these effects cancel out others—beaches opened early this year, while ski resorts prematurely stopped the lifts—a number of economists say the unusually mild weather was on net an economic plus.

A number of industries and companies credited the weather with boosting business. Farms started planting season early, according to the Federal Reserve’s beige book report, which examines economic conditions around the country. Retail-sales data for March showed notable growth in the category that includes home-improvement and gardening stores, as consumers got a jump-start on spring renovations. In an earnings conference call Thursday, Vulcan Materials, a maker of crushed stone and other construction materials, said good weather helped lift its first-quarter results.

Punch   Ben Bernanke last week:

“The size of the Fiscal Cliff is such that there’s no chance the Fed could have any ability whatsoever to offset that effect on the economy.”


Lightning  Data Deepen Spain’s Gloom

Spain’s economy contracted for the second quarter in a row and the country’s banking sector suffered a widespread credit downgrade, piling further pressure on the government.

Spain’s statistics institute INE said Monday that gross domestic product contracted 0.3% in the first quarter from the fourth. On an annual basis, GDP contracted 0.4%, INE added. In the fourth quarter, GDP had fallen 0.3% on a quarterly basis, but grew 0.3% on an annual basis.

Meanwhile, Standard & Poor’s, which last week downgraded Spain’s sovereign rating by two notches, said the country is “very unlikely” to meet its budget deficit reduction targets.

In addition, S&P Monday said it is taking negative rating actions on 16 Spanish banks, including a raft of downgrades that represent the latest blow for an industry already weakened by a four-year property bust.

Lightning  Vulnerable banks under the spotlight
Spanish foreign minister likens Europe to the Titanic

“This is like the Titanic,” he told state radio. “If there’s a sinking here, even the first-class passengers drown.” In Spain, the Germans are considered the wealthiest passengers aboard the eurozone ship.

Mohamed El-Erian: Spain needs reform and European help

In slashing Spain’s credit rating to BBB+ and retaining a negative outlook, S&P cited its forecast that the Spanish economy would contract by 1.5 per cent in 2012 (rather than expand as previously anticipated), the budget deficit would exceed 6 per cent of gross domestic product (compared to a government deficit target of 5.3 per cent), and the country’s debt-to GDP would rise steadily to almost 90 per cent by 2015.

Just kidding   This difficult reality explains why Spain is experiencing the worrisome combination of high borrowing costs, a slowly shrinking bank deposit base, capital outflows, and an increasingly binding internal credit crunch. This is a scary combination. It systematically withdraws oxygen from a real economy that is already struggling mightily; and it worsens in to a vicious cycle unless pronounced progress is made in three critical areas.

Lawrence Summers Europe needs growth not austerity

Unfortunately, Europe has misdiagnosed its problems and set the wrong strategic course. Outside Greece, which represents only 2 per cent of the eurozone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product five years ago with ratios well below Germany. Italy had a high debt ratio but a very favourable deficit position. Europe’s problem countries are in trouble because the financial crisis under way since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems.

Treating symptoms rather than causes is usually a good way to make a patient worse. So it is in Europe. Its financial problems stem from lack of growth. In any financial situation where interest rates far exceed growth rates, debt problems spiral out of control. The right focus for Europe is on growth. In this context increased austerity is a step in the wrong direction.

Europe: A shift in the political wind  The signs increasingly point to leaders putting a bigger emphasis on growth

Easier said than done!

Thumbs down  Hedge funds bet against eurozone LTRO questioned by growing numbers:

(…) their bets against the bonds of “core” eurozone countries – not just France, but Germany and the Netherlands too – represent a new, deeper level of bearishness on the single currency area’s prospects.

Storm cloud  Dublin cuts growth forecast for year

Eurozone slowdown blamed for lower export growth

German retail sales see modest rise in March  German retail sales rose less than expected in March, preliminary data showed on Monday, raising concerns about the support that private consumption can provide for the German economy in a period of flagging global demand.

The notoriously volatile retail sales indicator was up 0.8 percent in March on a monthly basis in real terms. On an annual basis, however, retail sales rose 2.3 percent. Month-on-month sales in February were revised upwards, but still posted a fall of 0.9 percent after rising fuel prices hit spending hard.

Pointing up  Lightning  So, let’s see: German retail sales were -1.2% MoM in January, -0.9% in February and +0.8% in March. That’s -1.3% in Q1. Isn’t this -5.3% annualized?

High five   Recall Markit’s April retail PMI for Europe posted in the April 27 New$ & View$ (I did not see this important data mentioned anywhere else!):

imagePlunging to its second-lowest level on record in April, the PMI hit 41.3, down from 49.1 in March. The latest figure signalled the largest monthly fall in retail sales across the single currency area since the depths of the global financial crisis in November 2008 (40.6).

The rate of contraction in Germany was the fastest since April 2010.

Storm cloud   Household saving rate up to 13.7% in the euro area and to 11.8% in the EU27

This is old stuff since it relates to Q4’11. Still, it shows how bad the trend was before it got really bad…

In the fourth quarter of 2011, the gross saving rate of households was 11.8% in the EU27, compared with 11.2% in the third quarter of 2011. In the euro area, the household saving rate was 13.7% in the fourth quarter of 2011, compared with 13.5% in the previous quarter.




In the euro area, the household saving rate increased due to a larger fall in real final consumption expenditure (-0.7%) than in real gross disposable income (-0.4%). Real income decreased due to nominal income increasing at a slower pace (+0.3%) than consumption prices (+0.7%).



Euro area inflation estimated at 2.6%

Euro area annual inflation is expected to be 2.6% in April 2012 according to a flash estimate issued by Eurostat, the statistical office of the European Union. It was 2.7% in March.

Storm cloud   German workers launch strikes over pay
Engineers seeking 6.5 per cent increase

IG Metall’s campaign follows a 6.3 per cent pay increase over two years secured for 2m public sector workers last month by Ver.di, the services union, after weeks of stoppages.

Late on Saturday, Deutsche Telekom, the German telephone company, agreed a 2.3 per cent pay rise for 17,000 staff this year, plus two increases of 2.1 per cent each in 2013.

Thumbs up  Thumbs down  French Campaign Heats Up

Polls show the last dash has done little to alter voting intentions, with Mr. Hollande, who led the pack in the first round of the presidential election on Apr. 22, still holding a comfortable lead over his rival. According to pollster LH2, the Socialist would win the second round of the election with 54% of the vote, down from 56% in the previous poll, conducted April 19, with Mr. Sarkozy picking up 46%.

Confused smile  Sarkozy Win Rests With Anti-Europe Voters

Pointing up   Dublin loses momentum on Yes vote
Weak growth and austerity hit EU plebiscite campaign

Dublin’s campaign to ratify the eurozone fiscal discipline pact is failing to build momentum against a backdrop of weakening economic growth and a wider European debate about austerity, with almost one-in-five Irish voters still undecided.

An opinion poll on Sunday showed 47 per cent of likely voters saying they will back the treaty, 35 per cent saying they will vote No, and 18 per cent as undecided how to vote in the May 31 referendum.

“There is a realistic chance of a No vote because enough people are talking about this as a vote against austerity. The government has not taken ownership of the campaign,” said Dr Jane Suiter, lecturer in government at University College Cork.

Polls suggest that Sinn Féin is now the second-most-popular party in Ireland and the biggest opposition party. This time last year, Sinn Féin attracted just 10 per cent support in polls, suggesting its anti-austerity stance is proving popular with the public.


Fringe Parties Tap Into Greek Anger

GREEKVOTERight-wing economist Panos Kammenos and left-wing lawyer Fotis Kouvelis are poles apart ideologically. But they are currently among the most popular party leaders in Greece, and their parties have sprung from nowhere to challenge Greece’s political establishment and the austerity policies that many Greeks blame for deepening their country’s economic crisis.

Between them, Mr. Kammenos’s Independent Greeks and Mr. Kouvelis’s Democratic Left could win around 20% of the vote. Their rise is cutting deeply into support for Greece’s two mainstream parties—the conservative New Democracy party and the center-left Socialists, known as Pasok—that share power in a fractious coalition government.

Greeks’ growing support for the far left and far right means governing the restless country and implementing the massive extra spending cuts that the European Union wants to see will be harder than ever.

 Austerity Fever Brings Down Romania’s Government


Bowl  Storm cloud  Food inflation feared as soya prices soar  Latin America weather and China imports blamed

The price of soya beans is heading towards the record high set during the 2007-08 food crisis, which is set to reignite fears of runaway global food inflation.

Soya’s wide range of use as feed for cows, sheep, pigs and poultry – and as a source for oil used in foodstuffs such as biscuits and cakes – means its high price could trigger food inflation fears.

Soyabean prices have risen more than 10 per cent in the past month to hit a peak of $15.09 a bushel on Friday, the highest in four years. Other sources of edible oil, including rapeseed and canola, have also reached levels last seen during the 2007-08 food crisis.


Amazon Softens Stance on Taxes Inc. reached an agreement with Texas officials Friday to begin collecting sales taxes in the state starting in July and appears to be backing away from its long-held opposition to tax collection in states where it has warehouses and other facilities.

With the deal, the Seattle-based company is on track to collect sales taxes in 12 states, which make up about 40% of the U.S. population, by 2016. Amazon currently collects taxes in five states. Since 2011, it has reached agreements with seven other states, including Texas, to begin tax collection over the next four years.

Amazon now appears willing to charge taxes on its sales in exchange for building new warehouses that will allow it to cut shipping times and costs to customers.

The Texas sales-tax deal will be the first to kick in, with a California agreement following in September. Amazon’s pacts with the five other states go into effect between 2013 and 2016. Other states are currently negotiating similar arrangements.


Is Natural Gas a Flaming Buy?  The news about natural gas is awful—exactly the type of conflagration that value investors love.

The market is so awash in natural gas, according to many analysts, that there could be no space left to store the stuff in the entire U.S. by this autumn unless demand surges or producers seal their wells.

At today’s depressed prices, gas is roughly 50 times cheaper. “That discount is enormous and unsustainable,” he says. “If you look to the future of the U.S., the free market will turn natural gas into the answer for this country’s energy problems.”

Left hug Red heart Right hug The Trust MoleculeBroken heart

Why are some people are trustworthy while others cheat and lie, some generous and others coldhearted louts? Part of the answer may lie in the hormone oxytocin. Paul J. Zak on the new science of morality. (From “The Moral Molecule” by Paul J. Zak, to be published May 10 by Dutton, a member of Penguin Group (USA). Copyright © 2012 by Paul J. Zak.)

Research that I have done over the past decade suggests that a chemical messenger called oxytocin accounts for why some people give freely of themselves and others are coldhearted louts, why some people cheat and steal and others you can trust with your life, why some husbands are more faithful than others, and why women tend to be nicer and more generous than men. In our blood and in the brain, oxytocin appears to be the chemical elixir that creates bonds of trust not just in our intimate relationships but also in our business dealings, in politics and in society at large.

More strikingly, we found that you don’t need to shoot a chemical up someone’s nose, or have sex with them, or even give them a hug in order to create the surge in oxytocin that leads to more generous behavior. To trigger this “moral molecule,” all you have to do is give someone a sign of trust. When one person extends himself to another in a trusting way—by, say, giving money—the person being trusted experiences a surge in oxytocin that makes her less likely to hold back and less likely to cheat. Which is another way of saying that the feeling of being trusted makes a person more…trustworthy. Which, over time, makes other people more inclined to trust, which in turn…

Well, that didn’t seem to work for Madoff, did it!

(…) no matter what some denizens of Wall Street profess, principal is not, and never has been, a synonym for principle. (Alan Abelson)


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