Rebel Traders – Analysis Without The Hype

The Obama Administration Changed the Definition of “Jobs Saved” to Goose Up the Numbers…

We have always known that the government will put itself in the best possible light, no matter what the real story is. Most people are too busy or just simply don’t care for the facts. They only want the ‘headline’ and adopt the attitude of ‘if the government says it then it must be true’.

Recently the Obama administration has gone all out to claim that the Obama stimulus plan is working and has helped to save or create numerous jobs. There are some numbers being tossed around that would have the President, in his upcoming State of the Union address, announce that his administration has created or saved over 1.5 million jobs.

And just how will the government substantiate that claim? Start counting everyone who received federal stimulus money, even if the jobs were never in danger in the first place! That’s how.

On December 18th, 2009, the Obama administration changed the guidelines on how recipients of stimulus money report jobs saved or created. Originally, the guidance was that any entity that received federal funds would report the actual jobs that were created with the funding, or at least were saved from extinction. In other words, the jobs would have to be new or the existing jobs were slated for the chopping block.

But I guess that was not showing enough growth, so on December 18th the guidance was quietly changed (so the public does not know about it) to now count jobs as being saved, even if they were never in jeopardy.

The extremes the government will take to make themselves look good. President Obama, will you announce in the State of the Union address that your figures count jobs that were never in jeopardy? somehow I feel you will conveniently skip that part.

See Rep. Darrell Issa’s letter to the chairman of the Recovery Act Transparency Board voicing his concern on this matter:

Darrell Issa CA January 8 2010

Recent worldwide “green shoot” stats have given grounds for people to call in a rapid recovery, some even asserting that it would be “explosive”. However, a look at statistics around the globe testify rather to a more subdued economic recovery. Indeed, an investigative article by two journalists of Caijing sheds some clearer light on the economic “recovery” clamored by Chinese authorities. The few extracts posted below should incite you to read the full article…

The journey began in Jiaozhu, the largest export town in Shandong Province. Jiaozhu’s economy officially posted a 5 percent increase in exports year-on-year during the first quarter 2009, at a time when exports nationwide were plunging. But by the second quarter, the statistics confirmed that local business had slumped.

(…)

Down the coast in Zhejiang Province, the situation is just as harsh. According to a survey of major trade companies in late June by the provincial Office of Commerce, 64 percent of Zhejiang exporters reported fewer orders, 18.5 percent saw no change, and 18 percent said orders had increased from last year’s levels. Those results reflected only a slight improvement since a similar survey conducted in May.

A different picture emerged farther south in the Pearl Delta city of Dongguan, Guangdong Province, where waves of migrant factory workers left several months ago.

Wen Zhimou, deputy secretary of the Taiwanese Investment Enterprises Association of Dongguan, said it’s hard to say whether exports have substantially turned for the better in the Pearl Delta in recent months. He said many company orders follow seasonal patterns, and not all manufacturers can expect a stable flow of orders.

But Wen said the chamber’s membership roles have shrunk. Of the 3,100 Taiwanese-investor companies registered in Dongguan, up to 700 have not paid their membership fees, which could mean they’ve suspended operations.

Tough luck for those who were expecting Shanghai to continue delivering bearish signals to the rest of the world. The Shanghai index closed up by 4.79 %.

The bounce from some pretty strong sell-off was caused by repeated assurances by the financial regulators that they would continue promoting “the steady and healthy development of the market”.

At any rate, the Chinese example illustrates the debates currently taking place around the world:  continuing or discontinuing the stimulus efforts during the recovery to ease the weight on public finances.

Liu Xinhua, vice chairman of the China Securities Regulatory Commission, the industry regulator, said late Wednesday that the country would deepen reforms of the security market to promote its steady and healthy development.

(…)

Auto makers’ shares gained as investors bet on increasing car sales. SAIC Motor shot up 6.73 percent to 18.55 yuan. Chongqing Changan Automobile surged 7.44 percent to 10.25 yuan. FAW Car Co Ltd gained 8.14 percent to 17.01 yuan.

Both General Motors and Ford Motor said Wednesday that their August sales in China more than doubled compared with the same period last year, boosted by the government’s policies to stimulate car buying.

The main issue for China is that it preferred tackling the crisis with a reinforcement of its investment and economy on the export side, rather than try and reorient its economy to give it some internal basis. The investment might pay off if the global economy takes off in 2010 and resumes its spending binge. However that is very unlikely given the shock and trauma caused to the US and global consumers.

Not addressing the excessive reliance by China on exports, and adding to its overcapacity could end up by giving a very volatile situation in China in 2010 with a reluctance from the global consumers to spend on Chinese “junk”. Either there will have to be another round of stimulus addressing this time the effective creation of an internal market, or China will have to contend with the armies of jobless persons left on the side by the crisis.

As economic stats and data around the world continue to give positive signs (and some mixed signs as regards some stats like joblessness), it becomes increasingly clear that government support will be necessary for the economy to recover in just about every country.

After spikes in industrial production and an inventory reduction, everybody is waiting to see whether the economy can use that “jump start” to start rolling on its own. From some weekly and monthly stats, notably rail transport, it would appear that the economic activity is starting to plateau.

The G-20 meeting taking place in London is poised to address the issue of withdrawing the stimulus. However, most of the governement’s decision-makers are conscious that bad timing might just unravel all the effects of that stimulus.

U.S. Treasury Secretary Timothy Geithner said Wednesday the Group of 20 industrial and developing nations should preserve their support for the recovery: “Our basic imperative is to make sure we have a foundation in place for a self-sustaining recovery led by private demand, and that’s going to require more work.”

Mr. Geithner said he expects his G-20 counterparts hold similar views on the timing of the exit strategies, and he emphasized the importance of coordinating the unwinding of the crisis measures. “We’re going to have slightly different views ultimately about optimal timing,” he said. He said the U.S. would outline proposals to create international standards for leverage at financial institutions.

The point being that the return of confidence is essential for a “true” recovery and that such “confidence” will be difficult to come by if the economic statistics show some serious weakening in Q4.

However, on the bright side, the OECD sees an “faster than expected” recovery. But it also did point the importance of the various stimlulus measures in having the economy recover. The more worrying part being its recommendation not to cut back on stimulus before being “well into” 2010…

“There is a recovery at hand now,” Jorgen Elmeskov, the OECD’s acting chief economist, told Dow Jones Newswires in an interview. “The worst is over, and the recovery appears now to be coming a little sooner, and possibly also marginally stronger, than three months ago.”

As a consequence of the earlier-than-expected recovery, the OECD said the rise in unemployment should ease.

But it warned that, with bank lending continuing to fall, the pace of recovery will continue to be modest “for some time to come.”

“The kind of recovery we foresee is a weakish one,” Mr. Elmeskov said. “It’s not as if as all the problems are behind us.”

The OECD said it is now less likely that further fiscal stimulus will be needed to restore growth.

But as finance officials from the Group of 20 largest economies prepare to meet in London Sept. 4-5, the OECD also warned against the premature withdrawal of stimulus.

In particular, it said the leading central banks shouldn’t be tempted into tightening policy until “well into 2010, and in some cases even beyond.”

“The numbers wouldn’t have looked this good if it hadn’t been for the stimulus both from governments and from the monetary policy undertaken by central banks,” Mr. Elmeskov said. “Substantial slack combined with the prospect for a weak recovery, implies that strong policy stimulus will continue to be needed in the near term.”

Finally, if we are to follow Roland Laskine, a trader analyzing the French market, we should expect a slew of upward revisions of earning estimates in the coming months, with the potential of pulling the market to new highs. While this hypothesis could be verified, we would first need signs of a real economic recovery to see this happening. Earning estimates revisions without strong activity is bound to cause severe disappointments on the short term.

A lot of animation going up now since the market broke levels that were predicted by Chuck as being technical tops for the market.

However, the really interesting item is considering that debate of whether we have an economic recovery or not.

There have been a number of positive signals the latter times which could indicate a recovery on the fundamental side, for the economy.

A quick review of these:

- French and German GDP have seen a boost in Q2 thanks mainly to a “cash for clunkers” effect; In Q2, the German GDP was mostly pulled by interior demand, although that may also be a clunkers effect;

- German Industrial production rose thanks again to “cash for clunkers” and stimulus plans around the world;

-  Eurozone Industrial Production rose by 3.1 % in June.

-  Chinese Industrial production is up, mainly thanks to the Chinese stimulus plan;

- Japanese exports are up, pulled forward by Chinese demand.

- US Rail traffic has been up.

- US PPI are low (which gives an additional possibility for the economy to grow without being strangled).

- US and German consumers and businesses have expressed confidence in a recovery in relevant studies (although the US consumers also expressed “anxiety” as to being able to wait out the recovery with their dwindling cash). We still need to see the consumer confidence studies of today.

- Consumer staple goods companies have had good results;

1° A Keynesian “recovery”?

Now let us look into detail into these news and what they mean.

A Keynesian policy as already several time explained aims at “relaxing” the economic machine by introducing government-pushed influx of money into the economy in the hope that this influx of cash may be spent and develop on other sectors. Sometimes it “pulls forward” future demand… Sometimes, it creates a need in persons that may not have taken the step without the additional support. At any rate, the effects are present in the economy. The question is whether the effects will transmit to other sectors and whether confidence will carry through, or whether the beneficiaries of the aid will not simply hoard the cash in prevision for harder times. Supply-side theoreticians maintain that stimulating the demand is meaningless.

The interesting part about the Keynesian policy is also that it is heavily dependent on a return of the confidence in the economy. And we will see further how this comes to play.

2° German Industrial Production: Leading indicator or false signal?

German industrial production has risen, but most of it was linked to car production, although a non-indifferent part was also linked to industrial production for external clients. Germany is a big producer of machinery, hence a vanguard of leading indicators, in that investment decisions are generally an indication of a recovery. Here of course, the stimulus plans abroad have had their importance.

This , of course, brought up an increase of 3.1 % of industrial production in the eurozone.

The main issue being that many analysts question the viability of this recovery with regards to the markets for the products manufactured by these investment tools.

“Our general view is that we’re skeptical that it’s going to be sustainable,” said Dominic Bryant, an economist at BNP Paribas. “Without some sort of strong consumer demand from somewhere in the world, where’s the end buyer for all the products that the investment goods will make? That’s not really clear. The U.S., U.K., Spanish consumer are going to be in depression for years.”

We will have a conclusive answer to this question only with Q3-Q4 numbers.

3° Chinese Production:  it does not solve the Chinese internal issues.

Chinese industrial production has been making wonders if you should believe Chinese numbers alone.  Yet, considering the influx of money and the Chinese export numbers, yes, the production has recovered some, although Y/Y it should still be disastrous. In addition, China still has issues with providing jobs for its population. No mystery in those conditions, that their government is taking additional measures to protect against riots. Here again, stronger exports are needed.

As most of the Chinese production is known as “junk” and they have been gearing their economy for additional demand with investment expenses, overcapacity is now going to be an issue.

4° Japanese exports: again, industrial production on the forefront.

Chinese numbers are always viewed with a lot of skepticism, except when they are bad, I joked in an earlier post… However, they are confirmed by other numbers, like for instance, Japanese exports of cable and copper wire which are at their highest since November, despite being down 21 % Y/Y.

These exports managed to raise the Japanese GDP to 3.7 % growth on an annual basis on Q2.

5° US Industrial production and GDP up, rail traffic up, confidence in a recovery and low PPI:  what do they say?

The attempt is here to try to focus on the supply side and on infrastructure, with the hope of starting off an essential cyclical sector. An essential concept, often forgotten by critics of government investment stimulus and similar plans is that of a supply-side recovery. In that respect, it is postulated that pushing forward production may by itself trigger the following demand and that recessions are often caused by inefficient economies.

In this economic theory, it is postulated that what actually drives demand is the production and supply of goods, and not the demand. In short, it is the exact reverse of the demand-side theoretician that populate most of the media. Quite ironically while pushing the demands of most conservative advocates for tax cuts, this also supports some level of Keynesian interventionism.

Their argument is quite interestingly made in a recently published article:

Consumers rarely lack incentives to spend, but producers sometimes lack incentives to produce (i.e., after-tax profits). Households postpone buying new homes or cars when firms are laying off workers and stock prices are falling. Improving the “incentive to production” generates the income and wealth to finance consumer spending.

Unfortunately, those who view such facts dimly through the prism of demand-side economics are habitually inclined to see no way out of recession. The consumer is responsible for over 70% of GDP, they remind us endlessly. Yet unemployment will keep climbing for a year or more, supposedly slashing incomes of the jobless and making others too fearful to spend. To make matters worse, they say, people are saving more (horrors!) and borrowing less.

The fundamental error behind this familiar mantra is what I call “the demand-side fallacy.” It involves confusing the use of income (consumer spending and saving) with the source of income (profitable business).

(…)

Even on their own terms, demand-siders’ skepticism about the incipient recovery is inconsistent with the curiously unreported fact that real disposable personal income has increased since last August. Real DPI increased at 2.7% annual rate in the fourth quarter and 6.2% in the first. Regardless of rising unemployment (a lagging indicator), real consumer buying power is going up not down. That rarely mentioned good news, in turn, is largely due to lower inflation–a welcome cyclical phenomenon demand-siders often decry as deflation. People respond well to bargains, including discounting California’s overpriced homes.

This implies that news like a low PPI are positive for the economy, because the deflation allows to maintain a lax monetary policy, hence avoiding to strangle the nascent recovery. However, this also means that injecting money into the economy is also a useless manner of tackling the issues.

And this being said, practical and effective stats such as rail traffic, Industrial production and GDP show that there is some momentum on the recovery side. Until when this momentum will last and whether it will last or self-perpetuate is a question to be answered in the next quarters.

6° The consumer situation is stabilizing

Sure, I’m going to have a lot of hate mail for saying that… But nonetheless, some aspects of the consumer economy are getting better, with deleveraging following its flow, banks restricting credit, and credit card delinquency slighltly improving.

There appears also to be a mutation in the consumer attitude, where Americans are realizing that they cannot live beyond their means. That could lead to deep and profound mutations with regards to the manner the economy is organized on a global basis. This still remains to be verified, and the coming months will tell us more about the savings rate and thirst for credit.

7°Consumer staples giants are holding their own

P&G, Unilever and other companies have adopted a mixture of strategies to face the recession. P&G, for instance, increased its prices by 5 %, Unilever and Danone chose to lower prices and privilege volume, while bettering their cost profiles through adapting their production tools and profiting of the lower prices of commodities.

On the whole, these companies resist quite well in the recession by finding new ways of facing a decline in demand.

Conclusion: positive signs, but a lot of dangers ahead

While these numbers confirm the overall positive signs of recovery in worldwide economy, there are caveats. The huge shifts from one quarter to another confirm the stimulus effect and its gigantic nature at the global level. However, these are also one-off effects, due to expire in the short-term, should the economy not manage to get back to an autonomous growth.

In that respect, there are many obstacles on the road ahead. We might quote the huge leverage still at work in the US banking system and unemployment as lagging threats on the health of the US economy.

And that is where the all-important aspect of confidence comes up. As we have seen, one of the main needs for the economy to pick up is probably to recover confidence. Confidence to invest and confidence to make decisions involving the future, which is quite a hard thing to do in a recession. Hence the need for the governments to communicate and spin off good news, to encourage a recovery in confidence.

At the very least, if we get a confirmation that the economy is jump-started, we could be in for a very slow and protracted recovery. Time will tell, but for now, due to the unforeseen elements of the current crisis, we are treading on uncharted territories. The biggest challenge for the economy: not to fall into one of the multiple bogs hiding black swans on the “road to recovery”.

And the greatest of these bogs will probably be having to deal with the huge debt the world has accumulated to stimulate its way out of the recession.

In an interesting development,  the Financial Times reports this morning that Chinese exports have overtaken German ones.

China exported 521,7 Bn $ during H1, compared to 521,6 Bn $ for Germany during the same period. The comparison in exports stops there because, unlike China, most of the German production is focused on capital goods and heavy equipment.  The expenditure on these materials are generally considered by economists as advanced indicators for an economic recovery as they are indicators of a return of confidence in businesses.

China’s exports narrowly edged ahead of those from Germany in the first six months of the year, new figures showed on Monday, in a fresh sign that the latter’s status as the world’s leading exporter is at risk.

China exported goods worth $521.7bn (€364.9bn, £318.1bn) in the first six months of this year, while Germany’s total was $521.6bn, the Geneva-based World Trade Organisation reported.

Such export figures are closely followed in Germany, Europe’s largest economy, which has national elections next month.

Sales of its industrial products have largely powered the economic growth in recent years, and throughout the economic crisis the government of Angela Merkel, chancellor, has strongly defended the country’s export-driven economic model.

Germany has long been braced for the much faster-growing Chinese economy to assume its “world export champion” title.

However, the likely value of German and Chinese exports for the full year remains uncertain and will depend heavily on exchange rate movements in coming months. A strong euro would help flatter Germany’s figure. Germany’s export businesses have also shown signs of reviving in recent months.

“It is too close to say for the whole year and who knows for next year,” said Patrick Low, the WTO’s chief economist.

Germany’s exports were badly hit by the collapse in global confidence that followed the failure of Lehman Brothers investment bank last year.

But signs of a strong recovery have emerged. In June, the latest month for which data are available, German exports leapt by 7 per cent compared with the previous month. Nevertheless they were still 22.3 per cent lower than a year before.Chinese exports have followed a similar pattern.

The surge in exports helped explain why Germany was able to report a rise in gross domestic product in the second quarter, compared with the previous three months – meaning it emerged from recession ahead of the US, the UK and most of the other large European economies.

In turn, Germany’s rebound is helping lift the overall performance of the eurozone. Eurozone industrial orders surged by 3.1 per cent in June compared with the previous month, according to data on Monday from Eurostat, the European Union’s statistical office.

This comes as well in the wake of European statistics indicating a recovery in industrial production for June 2009: new orders for Capital Goods grew by 5.6 % in the Euro zone compared to the month of May 2009.

Nonetheless, this should not hide the continued degradation in the intermediate goods and durable consumer goods. And the further fact that most of these exports and orders were caused by internal stimulus.

Even in China, there stays cause for concern:the Chinese Prime minister warned that the lax credit policy would continue as long as the recovery is not firmly established, weak corporate profits testifying to continuing issues:

Premier Wen Jiabao has warned that the country still faces uncertainties despite signs of economic recovery, saying the government will maintain its macro economic policies.

In a statement on the government’s website, www.gov.cn, Wen said Beijing will ensure a sustainable flow of credit and a “reasonably sufficient” provision of liquidity to support an economy that is facing fresh difficulties.

Chinese Premier Wen Jiabao shakes hands with an enterprise chief during an enterprise meeting in Qingtian County, Lishui City, east China’s Zhejiang Province, on Aug. 22, 2009. Wen Jiabao inspected Zhejiang from Aug. 22 to 24. [Xinhua]

“There are still a lot of unstable and uncertain factors ahead and the economic situation ahead is still very grave, although both the world economy and the national economy are now making positive changes,” Wen said during an inspection tour to Zhejiang province from Saturday to Monday.

China has shown increasingly positive signs of economic performance, but the country’s economic recovery is still uncertain, Wen said.

“We can clearly see that the foundations of the recovery are not stable, not solidified and not balanced. We cannot be blindly optimistic,” he said.

The effects of some government measures might fade, while others will take time to show results, Wen said, who gave no other details of potential problems.

Beijing will stick to policies meant to boost domestic demand, maintain easy credit and promote efficiency, the statement said. The government is in the midst of a two-year, 4 trillion yuan ($586 billion) stimulus plan that is meant to insulate China from the global downturn by boosting domestic consumption.

Wen’s comments echoed his repeated recent warnings against complacency and assurances that Beijing’s stimulus spending and easy credit would continue. But they clashed with increasing optimism from financial analysts who say China is emerging from its economic slump.

China’s economic growth accelerated in the latest quarter amid Beijing’s huge stimulus spending but authorities have called for continued vigilance. They say weak corporate profits show that a recovery is not fully established.

During his visit to the coastal province, Wen inspected some private firms, a movement to boost the confidence of small- and medium-sized private companies.

President Hu Jintao said on July 23 that the country would maintain its macro economic policies, a week after the country reported a rebound in growth in the second quarter.