Email From Birgitta Jonsdottir, Member of Iceland's Parliament; Mish Audio With Eric King on Inflation, Unions, Jobs, Greece, Spain, and Iceland

In response to Iceland Rejects IceSave; Does No Mean No? I am very pleased to have received an email from Birgitta Jonsdottir, a member of Iceland's Parliament.

Birgitta Writes:

Thank you all for helping getting out the other side about the situation in Iceland.
Your response is creating an unexpected wave of people starting their own "no campaigns" around the western world.

It is time the peoples from around the world put an end to the insanity played by the financial world at their cost.

All my best
Birgitta

Thank you Birgitta!

Thanks also to On The Edge With Max Keiser.

No Beans

Now if only I could get my own legislative representatives to answer emails. Melissa Bean, my representative from Illinois, has not returned any of a half dozen emails or phone calls about numerous issues.

Yet across the ocean, I can get a personal response from a member of Iceland's parliament.

Mike Breseman, a neighbor and former village president where I live said the same thing to me yesterday: no emails returned from Bean and outright arrogance from her staff on the phone.

His son Calvin, aged 13, emailed 20 congressional representatives about Cap-And-Trade and received zero responses.

Yet across the ocean, one can communicate with members of Iceland's parliament.

Melissa Bean is supposedly a "Blue Dog" fiscal conservative, yet she voted for various bailouts and the preposterous Cap-And-Trade legislation. What's up with that?

Who knows? She won't answer emails.

With thanks to Birgitta who says "Your response is creating an unexpected wave of people starting their own "no campaigns" ...

It's time to say "No Beans"

I cannot confirm this, but rumor has it that South Carolina Senator Jim DeMint or at least his staff is reading my blog. Maybe I should move to South Carolina or Iceland.

Interview With Eric King

I am pleased once again to be back on King World News with Eric King.

Mike “Mish” Shedlock is so well known for his daily writings on his financial blog. As an example, multi-billionaire Hugo Salinas Price quoted from Mish’s blog in his last interview on King World News.

In this interview Mish discusses the economy, the realities facing struggling Americans, unions, the pension shortfalls, cities & counties as well as states eventually declaring bankruptcy, the nascent recovery, forced restructuring and much more.

Eric King is a great interviewer. I invite anyone interested in a discussion on inflation, deflation, unions, pensions, and the problems in Greece, Spain, Iceland, and elsewhere to tune in.

The opening dialog just happens to be on Iceland and political arrogance. It was recorded in advance of the emails from Iceland and the discussion with my neighbor.

To play the audio please look for and click on the MP3 icon (not on the left, but in the King World News link)

Thanks Eric.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Gerald Celente Predicts "Crash of 2010"

Inquiring minds are watching an interview with Gerald Celente who warns about the pending crash of 2010.



Celente: "The crash of 2010 is going to happen as we are forecasting. All the stimulus money from around the world is drying up and what are they going to do for an encore?

We need a productive capacity. You can't print your way out of this. So whether it's China, India, the UK, Japan, at some point the stimulus game runs out and the crash happens.

The Federal Reserve or anybody else in the United States Congress isn't going to stop it from happening. They have Katrina quality rescue skills."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Chicago Fed National Activity Index Slows

Inquiring minds are reading the Chicago Fed National Activity Report for February 2010.

Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.64 in February, down from –0.04 in January.

Three of the four broad categories of indicators that make up the index deteriorated, and only the sales, orders, and inventories category made a positive contribution.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.39 in February from –0.13 in January, but for the second consecutive month, it was higher than at any point since December 2007.

February’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.



Most of the weakness in the index continued to stem from the consumption and housing category. This category’s contribution to the index was –0.45 in February, down slightly from –0.44 in January. Housing starts decreased to 575,000 annualized units in February from 611,000 in January.

Employment-related indicators also made a negative contribution to the index, contributing –0.16 to the index in February compared with –0.02 in January. Payroll employment declined by 36,000 in February after decreasing by 26,000 in January, and average weekly hours worked in manufacturing declined to 40.3 in February from 40.7 in the previous month.

The sales, orders, and inventories category made a positive contribution to the index for the sixth consecutive month. This category contributed +0.05 in February, up from +0.02 in January.

Thirty-four of the 85 individual indicators made positive contributions to the index in February, while 51 made negative contributions. Forty indicators improved from February to January, while 45 indicators deteriorated. Of the indicators that improved, 20 made negative contributions.

What is the National Activity Index?

The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

What do the numbers mean?

When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above –0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained ncreasing inflation has begun.

The recession may be over but it will not take much to move the index towards a double-dip signal.

Expect weakness with spurts of activity driven by census hiring artifacts, inventory rebuilding, and waning stimulus effects.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

China Not As Simple As Krugman Thinks; The Coming Trade War With China

Economist Stephen Roach wants to take a baseball bat to Paul Krugman for his accusations that China is a currency manipulator.



John Mauldin also took Krugman to task on March 20 in The Threat To Muddle Through.

If the Chinese allowed the renminbi to rise, would that make the USA better off? That is the contention of a cabal of critics from Senators to Nobel laureates. Paul Krugman wants to see a 25% tariff on Chinese goods. Today we examine that idea, and look at the real problems that we face. If only it were so easy. The numbers just don’t add up. The fault, dear Brutus…

What Krugman argues is that we should pay more for Chinese goods, so that we will buy less of their goods. As if we wouldn’t buy the same goods from Vietnam or Brazil or Pakistan, if those goods were cheaper than Chinese goods. For the life of me, I can’t see how substituting goods from foreign countries other than China helps our trade deficit.

Are we going to start targeting the currencies of every nation that runs a surplus with us? What about Europe? And Great Britain? Their currencies are dropping against the dollar, in the case of England rather precipitously. Are they pursuing mercantilist policies, Senator Schumer [in reference to his recent scandalous press conference]? What happens when the euro goes to parity against the dollar (and it will!) because the Europeans are having trouble getting their act together? Are we going to demand they force the euro to rise? Tell the ECB to raise rates and shove the whole euro area into an even worse recession?

Do you think Japanese businessmen believe the yen is too strong, and we should make the dollar stronger against the yen? What are we going to do in three years when the yen is at 150 on its way to 300 because Japan is getting ready to hit the wall, due to their massive government deficits? Accuse the Japanese of mercantilism and try and force them to revalue the yen?

Maybe Canada should put a 25% tariff on US goods, because their dollar has risen by almost 40% against ours in the last few years. That would teach us a lesson. It would also destroy trade and a very good relationship.

It is a dicey damn world we live in. We are coming to the end of the debt super cycle, as I have written elsewhere in this letter. It is a very perilous time. Things are going to be hard enough. We have a huge problem with deleveraging and controlling our fiscal deficits, not just in the US but in the entire developed world. Starting trade wars is the absolutely worst possible thing to do. For the US to even suggest that such a policy is reasonable is the worst possible kind of message. Where are the adults in the administration?

They are not the only one who disagrees with Krugman. I did so on March 17 in Pressure Increasing on China to Revalue Yuan; What Can Go Wrong?

Looking At Half The Equation

Krugman conveniently ignores one side of the equation.

A sinking dollar is good for exports, however, given China's regulatory policies as noted in Business Sours on China, it's not at all clear exports to China would rise by much. Indeed, I suspect that China's regulatory restrictions are a far bigger impediment to trade than currency fluctuations.

Furthermore, one cannot (or at least should not) ignore what would happen to the price of imports. A falling currency is not a free lunch.

While I agree with Krugman that China would not dump US Treasuries, the idea that the U.S. has China over a Barrel is preposterous. Mutual deadly embrace with unbalanced winners and losers is more like it.

Shock Effect

Let's consider the global shock effect of a sudden large revaluation of the Renmimbi. The key is the RMB does not float. To get a 40% rise in valuation, China must buy or sell unlimited amounts of RMB against the dollar to maintain the desired price. That might mean a huge hike in Chinese interest rates to make holding the RMB attractive.

In turn, sharp interest rate hikes would likely cause a huge slowdown in China, decreasing China's demand for imports. This is yet another factor that Krugman and those crying "currency manipulator" miss.

And should the US impose a revaluation via tariffs, I would like to point out a little thing called Smoot-Hawley.

By the way, I am all in favor of a huge slowdown in China. I think China is on an unsustainable course, and the sooner and harder China slows the better for everyone in the long run.

However, the consequences of such a slowdown would be huge on the commodity exporters like Canada and Australia. Moreover, a slowdown in trade would slow global consumption.

I happen to think those are necessary adjustments along with more debt writeoffs, but believers in free lunches and Keynesian claptrap sure won't see it that way.

Hopefully this gives you a bit more of an idea as to just what might go wrong with all these simplistic "the Yuan is 40% undervalued - so label China a currency manipulator" ideas floating around.

Not As Simple As Krugman Thinks

Color me skeptical when 99% of economists think Renminbi (RMB) would soar if China floated the currency. Since when have 99% of economists ever been correct?

Baseball bats aside, China is not as simple as Krugman makes it out to be. Michael Pettis agrees as well.

Please consider How will an RMB revaluation affect China, the US, and the world?

Although Premier Wen noted again in his speech Sunday that China is “worried” about the value of its US dollar reserves, perhaps as a warning that China would counteract any US trade move by selling off USG bonds, Krugman doesn’t seem especially worried about this threat.

He may be right. Aside from the fact that it is not clear how China can dump Treasury bonds, he claims that it would only help the Fed in its quantitative easing, and would probably do far more damage to Europe (since China would presumably have to buy euros) than to the US.

The latter point is almost certainly correct. China’s selling dollars and buying something else would allow the US to get even more bang for its protectionist buck, probably at poor Europe’s expense. I would also add that the main long-term impact of dumping USG bonds might be no more than to cause a liquidation of Chinese assets at very low prices, and an equivalent transfer of wealth from China to the US (or to others likely at some point to buy cheap dollar assets).

My Comment: On that score Krugman, Pettis, and I agreed. China is not about to dump US treasuries.

Where I disagree with Krugman is with his claim that the chance of triggering a trade war is small. ...

The logic behind a prediction of trade war is almost unchallengeable, and the two countries are simply the two most visible in a world in which trade tensions must inexorably rise. Just ask the Germans and their European partners. Trade relationships will continue to get much worse, largely because the cost of trade war for high-deficit countries is so much lower than for high-surplus countries, and there seems to be no real attempt on either side to tone down aggressive actions or rhetoric. We seem to be caught in a downward spiral, and the longer it goes on the harder it is for anyone not to participate.

My Comment: On that score I sided, in advance with Pettis.

To return to the People’s Daily article, I think many in China have argued that a revaluation of the RMB may have a significant effect on China’s trade surplus without having an equivalent effect on the US trade deficit. The same would be true of tariffs on Chinese goods. In either case, say many in Beijing, China loses, but the US doesn’t gain, so why is the US so determined to force this outcome?

I think this claim is probably correct. An RMB revaluation in itself might not have as big an impact on the US deficit as many think.

My Comment: Again I sided in advance with Pettis.

By the way if China is forced to revalue the currency too quickly, it will have to enact countervailing policies — lower interest rates, suppress wages, increase credit and subsidies — to protect the economy from falling apart, and these will exacerbate other imbalances that may be even worse than the currency misalignment.

My Comment: Once again I sided with Pettis.

Will a decline in China’s trade surplus cause the US trade deficit to decline?

Not necessarily. Beijing has pointed out many times that a contraction in the Chinese trade surplus does not necessarily mean an equivalent contraction in the US trade deficit. All it requires is an equivalent contraction in the rest of the world’s net trade deficit. This could easily happen with an improvement in the trade balances of Vietnam, Mexico, Korea or anyone else, enough fully to absorb the reduction in China’s trade surplus. In that case, the US trade balance does not improve, and the US gets none of the employment benefit of the RMB revaluation. China will simply import fewer jobs from abroad and some other countries will import more, or export fewer, jobs.

Remember that if the RMB revalues, this is the same as if all the currencies of the rest of the world depreciate. This will cause a shift in the rest of the world so that households will see a small reduction in their real income, and non-Chinese producers in the tradable goods sector will see a small increase in their competitiveness vis a vis the rest of the world (largely because Chinese producers becomes less competitive). This will reduce non-Chinese consumption and increase non-Chinese production, and the distribution of these changes among different countries, including the US, will depend on a vast array of factors.

Of course the cynic in me says getting a global solution will prove impossible. Each country that benefits in the short term from stonewalling on any aspect of the complex adjustment process will do so. So I guess that just leaves trade war. This is the year of the Tiger, after all.

Michael Pettis is the only person I know who writes posts as long as I do. This exacerbates my problems in commenting on them. Rest assured there is much more in the article to read. So do yourself a favor and read it.

When it comes to choosing sides, I would rather find myself on the side of Pettis than Krugman. In this case, I landed solidly with Pettis, Stephen Roach, and John Mauldin.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Investors Chase Risk in Junk Bonds at Fastest Pace Ever

Inquiring minds are reading Junk Bonds Selling at Briskest Pace Since 2007.

Companies are selling high-yield, high-risk bonds at the fastest pace since credit markets seized up in 2007 amid signs the economic recovery is gaining momentum.

Renault SA, the second-largest French automaker, Pittsburgh-based U.S. Steel Corp. and other speculative-grade borrowers issued $24.2 billion of high-yield notes in March through last week, putting this month on course to be the busiest since June 2007, according to data compiled by Bloomberg. Sales are up from $16.2 billion in all of February.

“Investors are much more sanguine about risk than they were just a few months ago and are taking on more to get a higher yield,” said Paul Owens, a credit analyst at Liontrust Investment Services Ltd. in London, which had the equivalent of $1.8 billion under management as of Dec. 30. “Companies have reported decent results,” bolstering bond sales, he said.

Issuance of non-investment grade bonds is running at the highest since companies sold $34 billion of the debt in June 2007, after slowing last month amid concern that sovereign budget deficits would stifle growth. The securities are rated lower than BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service.

Investors are pouring cash into junk-bond funds at the fastest pace on record as corporate defaults decline, according to EPFR Global.

A Return To Normal?

The Bloomberg article said this is a sign markets are returning to normal.

Really?

Was chasing risk in summer of 2007 normal?
How well did it work out?

Let's not confuse the willingness of the greater fool to finance global junk at the highest rate ever with "normal". Instead I would advise focusing on corporate real estate, credit card defaults, and especially housing starts. The latter typically leads normal recoveries.

Music Still Playing

But hey, everyone likes a party. Let's party like it was summer of 2007 again.

I have the perfect quote to match. It's from July 2007 - Quotes of the Day / Top Call

Chuck Prince: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".

The Music Stopped for Chuck Prince On November 2, 2007 when his last dance was a two-step out the door.

Rest assured things will "get complicated" again. I just wish I could tell you when.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Inflation Issuance Hits Record $200 Billion; Predictably Wrong Hyperinflation Calls; Ducks in a Row

Concerns about global inflation are once again picking up. Please consider the Financial Times article Inflation-linked issuance to hit record $200bn

A record $200bn issuance of new inflation-linked bonds from the US, Europe and the UK is forecast this year as governments seek to finance ballooning budget deficits.

Investors have become increasingly worried about the dangers of rising prices in the longer term, boosting demand for inflation-linked bonds. This follows the actions of central banks, which have pumped vast amounts of money into the financial system in the past year.

Investor appetite has also been boosted because so-called linkers are seen as a safe and stable asset class, attractive to investors who remain worried about the economic outlook.

The market has performed well in the past year. US Treasury inflation protected securities (Tips), the best-performing index-linked bonds last year, gave a total return of more than 10 per cent, according to Bank of America Merrill Lynch indices.

Barclays forecast that the US Treasury will issue $80-85bn of Tips this year and as much as $125bn in 2011.

China To Determine Dollar’s Fate?

Still others are concerned that China holds key to dollar’s fate

In July of 1997, when the Bank of Thailand was forced to devalue the baht, few analysts anticipated that the move would lead to contagion affecting other countries in south-east Asia and that it would eventually spread to Korea and Taiwan.

Within six weeks of the baht’s devaluation, the Indonesian rupiah was in freefall, going from 2,300 to the dollar to well over 10,000. The computer systems of some Japanese banks crashed as they were not programmed to handle a move from four digits to five.

Fast forward a few years to the current economic situation, and the question is whether the US dollar will suffer a similar fate to the rupiah.

The week of March 8, the US dollar had its worst week since January, suggesting to economists at JPMorgan that the end of the dollar rally may well have arrived. Until now, one reason the dollar has held up well is that so many countries tie their currency to the dollar, most notably China. In April, the US Treasury will have to tell Congress whether China has been manipulating its currency against the backdrop of an increasingly strident debate between the two countries.

China may also slow its purchases of US Treasuries.

Most officials take the view that China would be cutting its own throat if it were to sell Treasuries, or even reduce its purchases significantly. But countries, like individual investors, are not always rational. ... If China decided after all that it would be damaging its own coffers less than the US, the dollar could be in for a period of much greater weakness.

Implosion Prediction Madness

Articles like the above are easy to demolish. Yet, because they are so commonplace, they also offer evidence that economic pundits have no idea what is going on or how things even work.

For example, let's flashback to Aug 14 2009 when Jim Sinclair announced 85 days to go! for the dollar to crash in The Motivation Behind The Countdown.

China as spokesman for the BRICs has publicly stated their desire for the institutions of a Super Sovereign Currency. This is not an intended as an immediate substitute for the dollar as a reserve currency but rather an alternative in new commitments.

It is my understanding that the BRIC countries, not China alone, have given the US until early November to deliver.

As a result of the above I see 81 days left for the US dollar.

I commented on the above prediction a couple weeks later in Countdown To Dollar Implosion Madness

Predictably Wrong

Maybe something happens in November, maybe not, but this dollar implosion countdown based on unnamed sources regarding impossible to believe demands and a trade chart interpreted ass backwards is more than just a bit silly. Yet, every day someone asks me about it, thus this reply.

The thing about these kind of predictions is how predictably wrong they have all been.

Based on interpretations of the Commitment of Traders Reports (COT) we have see a couple countdowns to running out of gold and or silver on COMEX by various people. Those never happened. We have seen "gold to the moon" hyperinflation calls based on backwardation. Those never happened, either.

There is also a bunch of hype going around right now about bank holidays and a devaluation of the dollar vs. all major currencies coming up this Autumn. The across the board dollar devaluation idea is potty because the US dollar floats. There is nothing to devalue it to. And even if there was, Europe and Japan do not want stronger currencies and would not go along. For that matter the US would not want to do it either fearing a market crash. Yet, the theories persist.

If something does happen in November, it will not be because some blogger knows something. It will be happenstance.

But for those counting, it's about 70 days. I can hardly wait.

A quick check of my calendar shows that November 2009 has come and gone. So has December 2009, January 2010, and February 2010. March 2010 will soon be gone as well.

Sinclair posted the following chart with this comment:

"I find this simple chart so ominous I had to send it. Decelerating year-over-year inflows and outflows across the board. Stick your head in the sand if you like, but string this trend out a little longer and you’re going to have flight from the dollar."




Simple Math

The US runs a trade deficit with China. That means China will accumulate US assets. China does not have a choice in the matter; it is purely a mathematical function. When the US runs a deficit, mathematically someone must run a surplus.

China runs a surplus and buys US Treasuries. When the US deficit slows, China's buying of treasuries slows.

On March 11, in US 30-Year Treasury Bond Direct Bidders See Value, Step Up To The Plate And Buy I cautioned that falling demand from indirect bidders (foreign buyers such as China, Japan) was not a sign of weakness.

A Very Good Auction

In contrast to what many think about treasuries ready to blow up because of falling foreign demand, I repeat what I have been saying all along: US demand will pick up.

That aside, it is also important to point out that indirect bidding is related to trade deficits. When the trade deficit is high and rising, foreign buyers step up treasury buying as a purely mathematical function of parking inflows, although there is nothing that forces the buyers to go that far out on the yield curve.

Renewed Deflation

On the March 11 Auction, indirect bidders fell to 23.9% yet yields were lower than expected. This shows US demand is more than adequate.

Hmmm. What is it the bond market sees that the equity market doesn't? Why have yields been consistently contained on the upside?

I will tell you in two words "renewed deflation".

Surprise Agreement With Paul Krugman

On two recent occasions I have been in agreement with Paul Krugman, once on the U.S dollar, and once on inflation.

Paul Krugman - March 20, 2010:America Is Not Indonesia

Urk. The FT publishes yet another dire warnings about the dollar piece — as news, not opinion! — comparing the US dollar to the Indonesian rupiah before the 1997-8 Asian crisis: ....

I shouldn’t have to explain this. There have been many, many papers trying to assess the possibility of an Asian or Argentine-style currency crisis for the United States; all of them run up against the simple fact that large foreign-currency indebtedness was central to these crises, and we just don’t have that problem.

Did the author of this article talk to anyone who has studied past currency crises? Obviously not.

Of course the dollar could crash for other reasons. However, there is certainly no credible case at the moment no matter how hard people try to fabricate stories.

Paul Krugman - March 18, 2010: Stagflation Versus Hyperinflation

I’m a bit late to this, but Mike Kinsley has an odd piece in the Atlantic in which he confesses himself terrified about future inflation, even though there’s no hint of that problem in the real world. He’s not alone: there are a lot of voices predicting imminent hyperinflation in 2009, make that 2010 (and yes, I am keeping a record). ...

Kinsley seems to be confusing the logic of the natural rate argument, which says that expected inflation gets built into price-setting, so you need an accelerating inflation rate to keep unemployment below the NAIRU, with the very different logic of hyperinflation, which is about people fleeing money.

Meanwhile, for those predicting hyperinflation, my question would be: what is it about the United States now that looks different to you from Japan in say, 2000? Big budget deficits and high debt? Check. Huge expansion in the monetary base? Check. And yet Japan’s GDP deflator has fallen 9 percent since 2000.

I believe Krugman is correct on these issues, but horribly wrong on his views on China.

Moreover, I disagree with Krugman most of the time, especially his Keynesian cures that I believe will wreck the economy.

That said, I am a proud member of the shrinking group of people not on Krugman's hyperinflation list. Indeed, I was calling for the US to follow the footsteps of Japan long before it became somewhat fashionable to do so.

Inflation? Where Is It?

Want another opinion?

Please consider Inflation? Where?

Please click on the above link to see a stunning set of charts that Dave Rosenberg put together. The charts show that talk of strong inflation of any kind is complete silliness, let alone hyperinflation.

Here are my comments on Rosenberg's charts.

Bear in mind, I do not believe that prices constitute inflation or deflation. Rather I stick to my viewpoint that inflation is a net expansion of money supply and credit, with credit marked to market.

That last part "credit marked to market" is crucial. There is no doubt credit is collapsing. However, as a result of the Fed's heroic efforts that have kept zombie banks and zombie corporations alive, the mark to market valuation of credit (debt on the books of banks) has risen.

I cannot prove that because the Fed and the Financial Accounting Standards Board (FASB)have postponed mark-to-market accounting. However, I am willing to admit there has been inflation since March 2009 on the basis of how financial stock are reacting.

At some point however, the stock market will start reacting to actual fundamentals, and at some point investors will stop believing nonsense about the nascent recovery. At that point liquidity will turn, marked to market valuations of debt will again nose-dive, and stocks will take a nasty turn with it.

In the meantime, those who continually tell me that price is what matters need to look at 14 out of 18 charts and tell me they signal deflation or impending deflation, because by their measure they do.

Mr. Bond — Shaken, Not Stirred

Please consider the following commentary from the March 18 Breakfast With Dave.

Chart 5 shows the net speculative short position in the long bond — from the latest Commitment of Traders report (each contract is $100,000 face value). The net short position as of last week was 107,382 contracts, the high end of the range.



So, perhaps this explains why bonds refuse to sell off — anyone who can sell them already has. What is truly striking is that even though Treasuries were among the best performing asset classes of the past decade, the noncommercial accounts spent 80% of that time being short the bond market. Yikes!

As an aside, the net speculative position (futures and options) on the S&P 500 is now long 205,000 contracts.

Seasonal Jobs Will Revert To Mean

Here is one more chart to ponder.

I expect reversion to the mean in unemployment based on a chart I posted in BLS Seasonal Adjustments Gone Haywire; 11% Unemployment Coming by May?

Unadjusted Unemployment Minus Seasonally Adjusted Unemployment



click on chart for sharper image

Ducks In A Row

• Speculators are betting massively against treasuries
  
• Speculators are betting massively on equities.
• Mutual fund cash levels are at or near record lows.
  
• The Fed is starting to withdraw stimulus and wind down its lending facilities.
• Congress is reluctant to increase fiscal stimulus.
  
• On the jobs front, meaningless census hiring will likely get all the economists all excited about the nascent recovery. Yet the census jobs are temporary and will be gone by July.
• The above chart suggests a seasonal reversion to the mean in unemployment just in time for the mid-term elections. Those elections are guaranteed to bring about a much more conservative Congress.

The ducks are all in a row now for an economic downturn. Expect economists to be surprised. Don't you be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Inflation? Where?

Inquiring minds are taking a good hard look at a series of charts posted by Dave Rosenberg in Friday's Breakfast with Dave

Consumer Inflation


Restaurants



Home Improvements



Apparel



Movies



Telecom



Books and Newspapers



Grocery Stores



Autos



Electronics



Personal Care Pharma



Dave Rosenberg writes ...

There is much more underlying deflation pressure today — core at 1.3% with the CRB having run up more than 40% since February 2004 really tells you something about Corporate America’s ability to pass on cost increases and deliver top-line growth.

Moreover, it looks like the trend in core inflation is going to head even lower because the three-month pace is close to 0% and the six-month trend is down to 0.814% (to the third decimal) which took out the June 2003 nearby low of 0.939%. The last time the six-month trend was this low was back in August 1965, but the difference being that CAPU rates were closer to 90% and the jobless rate was around 4% back then, so there was far less spare capacity in the labour and product markets. Deflation remains the primary trend. The only question for investors is when the equity market figures out that this is not conducive to pro-growth pro-risk strategies.

Rosenberg posted 18 charts representing various prices. Prices above zero and rising are hospital services, delivery services, drug pricing, and airlines.

One has to wonder how much of the hospital and drug pricing is manipulation to get health care passed. Regardless, the score is 14-4.

Bear in mind, I do not believe that prices constitute inflation or deflation. Rather I stick to my viewpoint that inflation is a net expansion of money supply and credit, with credit marked to market.

That last part "credit marked to market" is crucial. There is no doubt credit is collapsing. However, as a result of the Fed's heroic efforts that have kept zombie banks and zombie corporations alive, the mark to market valuation of credit (debt on the books of banks) has risen.

I cannot prove that because the Fed and the Financial Accounting Standards Board (FASB)have postponed mark-to-market accounting. However, I am willing to admit there has been inflation since March 2009 on the basis of how financial stock are reacting.

At some point however, the stock market will start reacting to actual fundamentals, and at some point investors will stop believing nonsense about the nascent recovery. At that point liquidity will turn, marked to market valuations of debt will again nose-dive, and stocks will take a nasty turn with it.

In the meantime, those who continually tell me that price is what matters need to look at 14 out of 18 charts and tell me they signal deflation or impending deflation, because by their measure they do.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Unemployment Bet: Mish vs. Bryan Caplan at the Library of Economics and Liberty Blog

Last week I was at a Economics Bloggers Forum in Kansas City sponsored by the Kauffman foundation.

Paul Kedrosky at Infectious Greed, Mark Thoma at Economist View, Former President of the Dallas Fed Bob McTeer , Michael Mandel, former chief economist for BusinessWeek, Bryan Caplan at the Library of Economics and Liberty Blog and a group of about 20 others were at the conference.

I gave my views on the unemployment rate and most thought I was too pessimistic. Bryan Caplan proposed a bet and you can find it here: Unemployment Bet: Mish vs. Bryan Caplan.

On the fiscal crisis panel, Mish predicted high unemployment for the next ten years. This provoked a lot of heat but little light. Over dinner, though, Mish and I hammered out the following bet:

If the official initially reported U.S. monthly unemployment rate falls below 8.0% for any month between now and June, 2015, I win $100. Otherwise, Mish wins $100.

Mish based his pessimism on the implausibility of rapid job growth in construction and other key sectors. I saw this as misleading "near" reasoning - and took the "far" road instead. My position: During the last big recession in the Eighties, the unemployment rate fell about 1 percentage-point per year after the peak. So while full recovery is indeed about five years away, it would be very surprising if unemployment stayed at 8% or more for three years, much less five. Where will the new jobs appear? If I knew that, I'd probably be investing in them instead of blogging about my bets!

I highly doubt the employment growth in the 80's is the correct model, nor is the recovery following the 2001 recession.

The latter had the benefit of a housing boom followed by a commercial real estate boom, neither of which is coming. In the 80's there was still a transition from one parent working households to two parent working households and that transition enormously increased the credit buying power of households. Given that the consumer is 70% of the economy and given the 90's had an internet boom creating amazing numbers of jobs, such comparisons are prone to huge errors.

Let's not forget that interest rates fell from 18% to zero and that the Fed is zero-bound constrained now.

It is also crucial to take into consideration attitude changes and demographics. The pendulum swung as far as it could go to risk taking and consumption. The pendulum has now just started to swing back towards saving.

Look at the rampant overcapacity. Do we need more Wal-Marts, Pizza Huts, nail salons, Home Depots, Lowes, etc., etc.? I suggest not. While firing pressure may abate, beyond inventory rebuilding and a flattening economy, there is little room for hiring unless some technological revolution occurs.

Finally, I think a double dip recession is highly likely, and the redistribution efforts of the Obama administration will damper job creation for years to come. Small businesses, have extra incentive to not hire, and banks are lending responsibly for the first time in decades.

What Can Go Wrong and Right?

There is always a chance that some new technological revolution will happen to undermine my pessimistic scenario. Certainly a development in clean energy could create a massive number of jobs. There is also a chance of an advancement in the medical field that would do the same.

I am sure something good will eventually happen, it always does, but I doubt it will be that soon or even if it does happen soon, that it will create huge jobs in the United States as opposed to elsewhere.

Finally, there is a chance that Congress goes completely ape with jobs programs. However, fiscal conservatives like Chris Christie are taking governorships. Christie's efforts are long term beneficial of course, but short term it will take jobs out of the public sector.

Moreover, there is little appetite now for more stimulus programs, and it is a near certainty that the next Congress will be more conservative, with an outside chance Republicans re-take the House. Again, this is long-term beneficial, but the short-term pain for a couple of years could be immense.

One wild card in this mess is free trade. If free trade advocates win the day, that would create jobs. However, it is far more likely an all out trade war with China develops in light of increasing calls to label China a currency manipulator. Please see Pressure Increasing on China to Revalue Yuan; What Can Go Wrong? for details.

An actual war as opposed to a trade war is certainly another wild-card. War in the Mid-east could easily disrupt the supply of oil and have lasting negative effects. Then again, peace could break out. That would help create jobs.

Simplistically, Europe has had high structural unemployment for decades, Obama's socialistic policies are taking us down the same path, there is rampant overcapacity everywhere, and government interference and higher taxes will not create lasting jobs.

Barring the wild cards of technological breakthroughs, global peace, and expanded free trade, there is no reason to believe unemployment will follow models nearly every economist expects.

Implications being what they are, this is not a bet I really care to win.

Downloadable Spreadsheet

In case you missed it I have a spreadsheet you can download and graph your own projections.

Please see ...

• Mish Unemployment Projections Through 2020
• Mapping Unemployment - You Make The Call

The top link contains my base assumptions about demographics etc., as well as the spreadsheet. The second link contains some "what if" by John Mauldin and I.

I will revise that sheet and make it on a quarter by quarter basis because I have some Fed and Moody's projections on that basis.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Sunday Funnies 2010-03-21: All In

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Hatch Says It's "Nuts" To Think Health Care Issue Resolved On Monday; House Majority Leader Says Bill Is Constitutional

A flurry of news reports abound as President Obama puts on a full court press to pass legislation no one really wants except the President and those who have been bribed. Let's take a look at a handful of articles.

Democrats About Six Votes Short on Health Care, Officials Say

March 19 (Bloomberg) -- Democrats need about six more votes from House members to pass a U.S. health-care overhaul, Obama administration officials said today.

White House and Democratic leaders aim to collect those votes from a pool of about 14 to 15 undecided lawmakers to get to the 216 votes needed to pass the measure, according to the officials, who spoke on condition of anonymity.

Obama has met or called about three dozen lawmakers in the last five days and has cleared his schedule today for more last- minute appeals, including a campaign-style rally in nearby Fairfax, Virginia.

Obama postponed a five-day foreign trip to Indonesia and Australia to remain at the White House this weekend to ensure passage of a $940 billion bill that is of “paramount importance” to his presidency, spokesman Robert Gibbs told reporters yesterday.

House Leaders Work to Alleviate 11th-Hour Medicare Concerns

March 19 (Bloomberg) -- House Democratic leaders worked to defuse an 11th-hour rebellion by more than a dozen lawmakers angry that hard-fought increases in Medicare reimbursements for local hospitals were removed from health-care legislation.

“My state is getting screwed,” said Representative Peter DeFazio, an Oregon Democrat. “They have to fix it. I’m a ‘no’ vote unless they fix it.”

Lawmakers representing health-care providers in 17 states are affected by the change, he said. As House leaders corral votes in favor of the legislation, DeFazio said “there are a number of people who may be miscounted at this time.”

House leaders, trying to round up 216 votes to pass revisions to the Senate bill, are working to craft a provision on the Medicare payments that would survive parliamentary challenges by Republicans when the measure is debated in the Senate.

‘Legitimate Concern’

Asked about the issue at a press conference, House Speaker Nancy Pelosi told reporters “we do want the language to be closer” to the House measure, which satisfied lawmakers “who have a legitimate concern about the reimbursement to their states being unfair.”

“We are working on that language,” the speaker said.

A provision to change the Senate version was removed from the legislation yesterday, shortly before House leaders unveiled changes, DeFazio said. It was deleted because Senate staff members told House leaders it might run afoul of parliamentary challenges by Senate Republicans, DeFazio said.

To pass muster, every provision must reduce the deficit under budget reconciliation procedures being deployed to enact the most comprehensive redesign of the health-care system in five decades.

Lawmakers are trying to rewrite the provision to win a favorable ruling from the Senate parliamentarian.

House Bill on Healthcare Is Constitutional, Hoyer Tells CNBC

March 19 (Bloomberg) -- The U.S. House bill on health care that is slated to come to a vote this Sunday is constitutional and should withstand legal challenges, Majority Leader Steny Hoyer told CNBC.

“There’s little doubt in my mind that this bill and its provisions are in fact constitutional,” Hoyer, a Maryland Democrat, said today.

Hoyer said with a “bill of this magnitude,” legal challenges are likely. “That’s the American system that people have an opportunity to say, ‘Look, what you did was not appropriate.’”

The stakes are so high for President Barack Obama that he postponed until June a planned five-day trip to Guam, Indonesia and Australia to remain at the White House this weekend to lobby wavering lawmakers to support the 10-year, $940 billion bill in the last two days.

Obama Rallies Democrats Who Predict Health Passage

March 20 (Bloomberg)

President Barack Obama rallied House Democrats to back health-care legislation that he called “the toughest insurance reforms in history” as party leaders said they would have the votes to pass the overhaul tomorrow.

“We have been debating health care for decades,” Obama told lawmakers today at the U.S. Capitol. “It is time to pass health-care reform for Americans, and I am confident you are going to do it.”

The legislation requires Americans to get insurance, offering government aid and new purchasing exchanges to help. Insurers such as Indianapolis-based WellPoint Inc. would get millions of new policyholders, while being required to accept all customers, even with pre-existing conditions.

Representative Dan Lipinski, an Illinois Democrat, said he’s switching his vote to “no” because of the abortion issue. New York Representative Michael Arcuri, who voted for the original House bill, said he’s now a “no” because the new measure doesn’t do enough to control costs. Massachusetts Representative Stephen Lynch is also switching to “no,” the Boston Herald reported.

‘Yes’ Votes

On the other side, Democrats John Boccieri of Ohio, Allen Boyd of Florida, Bart Gordon of Tennessee, Dennis Kucinich of Ohio, Suzanne Kosmas of Florida, Betsy Markey of Colorado and Scott Murphy of New York all now plan to vote “yes” after voting “no” in November, according to statements from the lawmakers or their offices.

Hatch Says It’s ’Nuts’ to Think House Vote Ends Health Issue

March 20 (Bloomberg) -- Republican Senator Orrin Hatch said Democrats in the U.S. House of Representatives are “nuts” to think tomorrow’s vote on health-care legislation will resolve the issue.

If the measure passes, Senate Republicans have enough votes on at least two points of order to alter the measure and send it back to the House for a second round of votes, Hatch said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend.

“If those people think they’re only going to vote on this once, they’re nuts,” Hatch said as House Democratic leaders rounded up support before the scheduled vote on President Barack Obama’s top domestic priority.

The senator from Utah also said the approach Democrats are using to pass the legislation in the House may be unconstitutional because the House and Senate aren’t voting on “exactly the same language.”

Business Groups Press Lawmakers to Oppose Health-Care Measure

March 19 (Bloomberg) -- Business groups led by the U.S. Chamber of Commerce today urged lawmakers to oppose the Democratic-backed health-care legislation, as the House headed for a showdown vote this weekend.

The Chamber, the nation’s largest business group, the National Association of Manufacturers and the National Retail Federation told lawmakers in letters that their health-care votes will be highlighted in annual scorecards sent to members before the November election.

The bill is “fundamentally flawed” and would impose job- killing mandates and penalties on businesses and increase taxes, the Chamber said in a letter to members of the House of Representatives. The group said Congress must “start over.”

“The measure would drive up labor costs to the point of forcing job losses,” the National Retail Federation said in its letter. “A ‘transparent procedural ploy’ for passing the package would harm Congress’s reputation.”

Caterpillar: Health Bill Would Cost Company $100 Million

Caterpillar Inc. said the proposed overhaul of the U.S. health-care system could increase its costs by $100 million, signaling disquiet in corporate America about the controversial plan.

In a letter Thursday to House Speaker Nancy Pelosi (D., Calif.) and House Republican Leader John Boehner (R., Ohio), Caterpillar urged lawmakers to vote against the plan "because of the substantial cost burdens it would place on our shareholders, employees and retirees."

The company said the potential extra costs would primarily come from provisions to tax the federal subsidies the company now receives for providing prescription-drug benefits to retirees and their spouses.

Since the Medicare drug program was enacted in 2003, Caterpillar and more than 3,500 companies that already provided drug benefits for retirees have received tax-free subsidies from the federal government as an incentive to maintain their drug programs.

The subsidies average $665 per person covered under a company-sponsored prescription program, according to benefits consultant Towers Watson, which recently completed a study on the health-care legislation's effects.

Watson Towers estimates federal taxes on the drug subsidies would amount to $233 per person receiving drug benefits under such programs.

McDevitt estimates that a company with 25,000 retirees on subsidized drug benefits could see its 2010 earnings reduced by $70 million.

Business executives have long complained that the options offered for covering 32 million uninsured would result in higher insurance costs and hinder economic growth. Opponents of the legislation have stepped up their attacks in recent days as the House moves closer toward a vote on the Senate version of the health-care legislation.

A letter Thursday to President Barack Obama and members of Congress signed by more than 130 economists predicted the legislation would discourage companies from hiring more workers and would cause reduced hours and wages for those already employed.

States Say We Don’t Need No Stinkin’ Health Reform

If Democratic leaders ever get a health-care overhaul through Congress, they could find themselves only halfway through the slog.

While no arm is left untwisted, no parliamentary maneuver ignored on Capitol Hill, state legislatures have been busy themselves passing laws to defeat whatever package emerges.

Idaho wants no part of any overhaul dreamed up in Washington. Neither does Virginia or Arizona, their legislators say.

“The citizens of our state won’t be subject to another federal mandate or turn over another part of their life to government control,” Idaho Governor Butch Otter declared this week when he became the first governor to sign into law a so- called Health Freedom Act.

The Idaho law says every Idahoan is free “to choose any mode of securing health-care services without penalty.” It then instructs the attorney general to go to court to make that happen.

Already, the law has legal problems of its own. Idaho Attorney General Lawrence Wasden points out that the state constitution gives him the job of deciding whether to go to court and when. No mere statute can change that.

And Wasden isn’t ready to declare his position.

“If Congress does pass legislation, we will review it and determine at that point whether we can bring a lawsuit that has merit,” says Wasden spokesman Bob Cooper.

Virginia’s Route

Virginia’s legislature went a different route. Without telling the attorney general how to do his job, the lawmakers passed a bill that says no Virginia resident “shall be required to obtain or maintain a policy of individual insurance coverage.”

Even advocates say that amending the constitution is a legally preferable route to passing a mere statute.

The Arizona legislature has already gone the amendment route and passed a proposal that will appear on the ballot in November.

But that isn’t law yet. And if you put those three all together, they don’t add up to much of a roadblock at this point.

Gaining Momentum

So advocates point to their movement’s momentum. Beyond the three states, some 30 to 35 others have bills pending, they are quick to say.

There is a long road between dropping a bill in a hopper and attending a signing ceremony. And then, whatever state efforts get that far would have to survive a federal court fight.

“The ivory tower folks will tell you, ‘No, they’re not going anywhere,’” Otter told reporters. “But I’ll tell you what. You get 36 states, that’s a critical mass. That’s a constitutional mass.”

That number approaches the 38 states it takes to ratify an amendment to the U.S. Constitution. Otter is getting ahead of himself, given that his own attorney general, a fellow Republican, has already said he may or may not try to enforce the new law.

What A Mess

I am confident President Obama will buy the six votes he needs. That is the way the system works. I am less certain that the House reconciliation bill passes Senate challenges. If not, expect to see the bill back in the House at least once. Should that happen President Obama may need to convince 6 more representatives to sign on. Is that doable? At what cost?

There will not be a vote on Monday unless Pelosi thinks she has the votes. However "think" and "have" are likely but not necessarily the same thing. All it would take is a couple of representatives to decide to torpedo the legislation or simply get cold feet.

That said, the most likely outcome is President Obama will buy the votes he needs. It will be much more difficult the second time if the Senate sends it back because of procedural rules so the House better get it right the first time.

Next week, we will see who is "nuts" and who isn't. Meanwhile, a bill that 37 states and the majority of the US do not want is about to be rammed through Congress by a President willing to buy out anyone and everyone who is against it.

Payback time is November.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Victory for Bloomberg in Freedom of Information Lawsuit with Fed

Chalk up another victory for Bloomberg in its ongoing legal battles with the Fed over Freedom of Information.

Please consider Federal Reserve Must Disclose Bank Bailout Records.

The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.

The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.

The U.S. Freedom of Information Act, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”

Tripartite Test

In its opinion today, the appeals court said that the exception applies only if the agency can satisfy a three-part test. The information must be a trade secret or commercial or financial in character; must be obtained from a person; and must be privileged or confidential, according to the opinion.

The court said that the information sought by Bloomberg was not “obtained from” the borrowing banks. It rejected an alternative argument the individual Federal Reserve Banks are “persons,” for purposes of the law because they would not suffer the kind of harm required under the “privileged and confidential” requirement of the exemption.

In a related case, U.S. District Judge Alvin Hellerstein in New York previously sided with the Fed and refused to order the agency to release Fed documents that Fox News Network sought. The appeals court today returned that case to Hellerstein and told him to order the Fed to conduct further searches for documents and determine whether the documents should be disclosed.

“We are pleased that this information is finally, and rightfully, going to be made available to the American public,” said Kevin Magee, Executive Vice President of Fox Business Network, in a statement.

Balance Sheet Debt

The Fed’s balance sheet debt doubled after lending standards were relaxed following Lehman’s failure on Sept. 15, 2008. That year, the Fed began extending credit directly to companies that weren’t banks for the first time since the 1930s. Total central bank lending exceeded $2 trillion for the first time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009.

“It’s gratifying that the court recognizes the considerable interest in knowing what is being done with our tax dollars,” said Lucy Dalglish, executive director of the Reporters Committee for Freedom of the Press in Arlington, Virginia.

“We’ve learned some powerful lessons in the last 18 months that citizens need to pay more attention to what’s going on in the financial world. This decision will make it easier to do that.”

The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York).

This is a victory for common sense over secrecy. The Fed does not want an audit nor will it honor reasonable requests for information. The irony is Bernanke promised more transparency. Bernanke's actions prove what a lair he is. Expect more delays as the Fed will fight this.

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

In response to High Tech Research Moves From U.S. To China, I received this Email from Mark N. ...

Hello Mish,

Great article about High Tech research moving to China.

This, unfortunately, fits in with my personal observations.

Many of my daughter's friends who are graduating college this year plan on beginning their careers in other countries.

The schools they are graduating from include Harvard Business School, MIT, Colorado School of Mines, St. John's College and Stanford.

They will be starting their careers in New Zealand, France, South Africa, Canada, Brazil and England. Even my daughter's job choice will probably have her traveling to Italy and Germany on a regular basis.

It was startling to see that many bright young people so willing to leave this country. I don't know how many of those young men and women will actually retain their U.S. citizenship. Some really didn't seem to care one way or the other.

From my conversations with them, it is my understanding that they are very aware of what is happening in this country, as well as the world, and just wish to keep their options open.

This anecdotal observation, combined with conversations with other parents and articles that I've read, leads me to believe that the U.S. is about to encounter a "brain drain" of the next generation.

Very concerned about the ramifications of current U.S. policies and humbly yours,
Mark

Blog Comments Of Note

Malencid Writes:

In my science department 20 years ago the graduate students were 80% American, 20% foreign, mostly European and Japaneese. They all returned to their countries of origin. The INS was on their case 10 days after graduation. Today the ratio is 85% Chinese 15% Americans. None of the Chinese I've known ever return to China. All the support is ultimately coming from grants awarded to the Principal Investigator. These funds are all Federal.

Fedwatcher Writes:

This is Great Depression II papered over by programs created in Great Depression I so that the government's GDP figures hide the fact. Wake Up America! Silicon Valley's lust for indentured servants, H1-Bs, has morphed into the mechanism to transfer Silicon Valley to China and India.

The train has left the station and anyone paying on an $800,000.00 mortgage on a $1,000,000.00 Silicon Valley house will in as little as five years see themselves 50% underwater and their wages declining.

We need to immediately give a green card to every H1-B worker and end the H1-B program. If we need them, why should we ask them to leave? We either need them or we don't need them. As for foreign hard science Masters candidates, a green card, as for foreign hard science PhD candidates, a fast track to citizenship. But let us end this "indentured servitude" that harms the American worker and the H1-B worker. I don't want them to leave, I want them to be free to stay and not be exploited. This would take away the corporation's ability to cheat and game the system. Many of the successful start-ups in Silicon Valley were started by former (that is green card carrying) H1-Bs who latter became citizens.

The incentives today are for them to go "home" and start businesses there. We need to reverse that trend. For those of you not familiar with Applied Materials, they are the ones who make the secret sauce that transforms a silicon wafer into a product that drives technology. There are two firms that hold the keys to this kingdom: Applied Materials and KLA-Tencor. Now with Applied Materials moving to China, we have at most 5 years to fix things before it is "Game Over".

Hang10-In-Panama Writes:

I'll offer a few observations that have provided some context for me during a 20 year career as an engineer and corporate executive.

1 - I'm an American-born/raised, formally trained engineer (Registered Professional Engineer in Mechanical Engineering [FL]), trained at a top 10 engineering college here in the US. Many of the graduate students at the school I attended (casual observation suggests a majority) were either Indian or Chinese nationals, who were:
* very bright
* hard working
* multilingual
* self-motivated
* willing to travel wherever in the world their services were required
* did not have any sort of entitlement attitude - they worked strictly in a meritocracy

2) In my career of more than 20 years, I have worked with a number of individuals who were outstanding engineers (mostly field engineers as opposed to research engineers) who had no "formal" college-level engineering training. They were simply people with high levels of intellectual curiosity, and innate mechanical aptitude.

3. At present I'm engaged in systems-oriented work, and am working here in the US with two gentlemen from India who speak 4 languages, have Master's Degrees in Computer Science, are willing to travel away from their families for months at a time, do outstanding work (nights/weekends included) and are eager for the opportunity to apply themselves. All this for $32/hr US, which is roughly $64K/yr US (excluding benefits).

My personal response to the changing landscape is to have learned a foreign language (Spanish in my case), and gravitated towards work in areas that are less susceptible to globalized wage equilibrium. Specifically, those areas that outsourcing can't easily overcome, as the competitive advantage is related to geographic proximity. Things like domestic transportation/distribution optimization and strategic inventory management. Even so, there are large regulatory headwinds in even these areas that are a competitive disadvantage (ever try managing hazmat and/or CARB related items in California?)...

The next few years will be very interesting to watch in terms of where production and technical talent migrate, and more telling, what portion of the flux is driven by regulatory and bureaucratic considerations.

Should make for good fun watching from the sidelines as an expat in Panama...

Meanwhile Back In The U.S.

Here is an article that typifies job hunting at its finest. Please consider Scores of job seekers vie for 75 positions

A line of hopeful job applicants snaked Friday through the parking lot of a grocery store that will open May 7 in Thousand Oaks. Throughout the morning, a steady stream of people kept arriving in the hope of finding work at Sprouts Farmers Market, which has taken over the former Circuit City location at Lynn Road and West Hillcrest Drive.

“I expect we’ll have about 1,000 to 1,200 applicants if it keeps up like this,” predicted Norv Rivera, who is overseeing the two-day job fair held all day Friday and again today from 9 a.m. to 2 p.m.

Rivera, the California human resources manager for the Arizona-based Sprouts, said that in the current slow economy, applicants are coming from all walks of life, with only about 15 percent having any direct retail experience.

“We have folks coming from the construction industry. We had an actor come by, and there are a lot of folks coming in from non-retail backgrounds,” he said.

There are many interesting anecdotes in the above story offering strong evidence that Brain Drain and underemployment are both rampant.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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High Tech Research Moves From U.S. To China

Goodbye Silicon Valley, hello Xi’an China. Applied Materials will do new cutting edge research on solar panels in Xi’an.

Please consider China Drawing High-Tech Research From U.S.

XI’AN, China — For years, many of China’s best and brightest left for the United States, where high-tech industry was more cutting-edge. But Mark R. Pinto is moving in the opposite direction.

Mr. Pinto is the first chief technology officer of a major American tech company to move to China. The company, Applied Materials, is one of Silicon Valley’s most prominent firms. It supplied equipment used to perfect the first computer chips. Today, it is the world’s biggest supplier of the equipment used to make semiconductors, solar panels and flat-panel displays.

In addition to moving Mr. Pinto and his family to Beijing in January, Applied Materials, whose headquarters are in Santa Clara, Calif., has just built its newest and largest research labs here. Last week, it even held its annual shareholders’ meeting in Xi’an.

It is hardly alone. Companies — and their engineers — are being drawn here more and more as China develops a high-tech economy that increasingly competes directly with the United States.

A few American companies are even making deals with Chinese companies to license Chinese technology.

Xi’an — a city about 600 miles southwest of Beijing known for the discovery nearby of 2,200-year-old terra cotta warriors — has 47 universities and other institutions of higher learning, churning out engineers with master’s degrees who can be hired for $730 a month.

On the other side of Xi’an from Applied Materials sits Thermal Power Research Institute, China’s world-leading laboratory on cleaner coal. The company has just licensed its latest design to Future Fuels in the United States.

The American company plans to pay about $100 million to import from China a 130-foot-high maze of equipment that turns coal into a gas before burning it. This method reduces toxic pollution and makes it easier to capture and sequester gases like carbon dioxide under ground.

Future Fuels will ship the equipment to Pennsylvania and have Chinese engineers teach American workers how to assemble and operate it.

Small clean-energy companies are headed to China, too.

Locally, the Xi’an city government sold a 75-year land lease to Applied Materials at a deep discount and is reimbursing the company for roughly a quarter of the lab complex’s operating costs for five years, said Gang Zou, the site’s general manager.

The company has taken measures, including sealing its computers’ ports here, to prevent the easy use of flash drives to record data. Employees are not allowed to take computers from the building without special permission, and an elaborate system of computer passwords and electronic door keys limits access to certain technological secrets.

But none of that changes the sense that tectonic shifts are under way.

When Xie Lina, a 26-year-old Applied Materials engineer here, was asked recently whether China would play a big role in clean energy in the future, she was surprised by the question.

“Most of the graduate students in China are chasing this area,” she said. “Of course, China will lead everything.”

Applied Materials, a Silicon Valley company that supplies equipment used to manufacture semiconductors and solar panels, built its newest research lab in Xian, China.



Click here for a Slideshow On China’s Role in Clean Energy

There is much more in the article and slideshow that is worth a look. Here is one key sentence from above "Xi’an has 47 universities and other institutions of higher learning, churning out engineers with master’s degrees who can be hired for $730 a month."

Think that is not deflationary?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Battle in EU Erupts Between Germany and France Over the "Club Med" Nations and Germany's Export Policy

The Club Med nations (Spain, Greece, Portugal), are in a horrible economic bind. France, hoping to be a white knight, hopped into the fray. France is upset that Germany's export policies will force deflation on the Club Med group. Germany essentially says tough luck.

With that backdrop please consider Angela Merkel defies IMF and France as anger rises over German export surplus.

German Chancellor Angela Merkel has defied France and the IMF, refusing to modify Germany’s strategy of export reliance or boost growth to help alleviate the deep crisis sweeping Southern Europe.

"Where we are strong, we will not give up our strengths just because our exports are perhaps preferred to those of other countries," she told the German Bundestag.

"The problem has to be solved from the Greek side, and everything has to be oriented in that direction rather than thinking of hasty help that does not achieve anything in the long run and merely weakens the euro even more," she said.

Instead she called for EU treaty changes so that serial violators of EMU rules could be expelled from the euro, and insisted Germany would stick to its own path of hairshirt austerity.

The tough words came as the IMF’s chief Dominique Strauss-Kahn said it was time for Berlin to rethink its single-minded pursuit of exports, warning that both Germany and China need to play their part in rebalancing the global system rather than relying on huge structural surpluses. "This must change. Internal demand must be strengthened with more consumption," he told the European Parliament.

French finance minister Christine Lagarde infuriated Berlin earlier this week by suggesting that Germany’s relentlesss wage squeeze was making it impossible for Club Med states to claw back lost competitiveness within monetary union, forcing them into a deflation policy that must ultimately rebound against everybody.

Charles Dumas from Lombard Street Research said the Club Med states and Ireland cannot deflate wages below German levels without causing havoc to their economies, so the EU policy creates a profound bias towards a deflationary slump for the whole system.

"The Germans are not very good at arithmetic. If they want to run surpluses near $200bn (£130bn), others must run deficits near $200bn. It is not appropriate that Germany’s dismal growth performance be exported to the whole of Europe, but that is what is going to happen," he said.

"There has been this massive self-righteousness in Germany. They have been leeching off the demand of countries for the last decade, and now they too are going to suffer until they change their ways.

Who's The Leech?

Are Germany and China the leeches, or did Greece, Spain, and Portugal spend themselves into a mess? I suggest the latter.

The US is in the same boat as well, and is threatening to label China a "currency manipulator". The remedy is not so easy as I explained in Pressure Increasing on China to Revalue Yuan; What Can Go Wrong?

Judging from the arguing, things are starting to go massively wrong in the EU as well. Look no further than German Chancellor Angela Merkel calling for EU treaty changes so that serial violators of EMU rules could be expelled from the euro.

These are signs the global recovery is toast. When this matters to the stock market is anyone's guess.

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