TOC Transcript 2-9-12
Chris Martenson: Welcome to off-the-cuff with Mish and Chris where we talk about the events of the week that caught our attention informally and without a script. I am, of course, Chris Martenson, proprietor of Chris Martenson.com and Mike or Mish Shedlock is founder of the blog Mish’s Global Economic Trend Analysis, as well as partner at Sitka Pacific Capital. Welcome, Mish.
This is another edition of off-the-cuff and if I were going to title this one, it would have to be “Doesn’t Add Up.” There are all kinds of things out there that I am looking at today that just do not add up. There is economic data, which I consider good and hard. It is not really squaring up with a lot of other data, mainly survey data. On the one hand, things look like they are recovering in the survey data. On the other hand, you get hard data and it says the opposite. What are we to believe?
Mish Shedlock: Well, that is just it. I mean, you can look at… The one hard number that did come in is the ISM number. The employment number on the ISM number did come in good and perhaps that explains the payroll number last month. That is the payroll establishment survey number. It certainly does not explain the unemployment rate. Even Bernanke was talking about that today, saying that 8.3% understates labor weakness and boy, does it ever understate the labor weakness. Because I did a critique of that a few days ago and if we just go with Bernanke’s assumptions on the economy ought to be adding about a hundred and twenty five thousand jobs a month just to stay even, we would have an unemployment rate of about 10.6%. If we went along the existing trend before the recession, it would be more like 11.5%. And then, we look at things like, oh, the Baltic Dry Index, which went down – what – thirty-three consecutive days. It actually went up yesterday or something. I am not sure what it did today. Down thirty-three days in a row to a new all-time record low. So what is that saying? And what do federal tax incomes receipts say? They do not support this recovery either.
So we have got a lot… Oh, and gasoline usage. So we have got gasoline usage on one hand. We have got the Baltic Dry in another. We have got federal tax receipts. All of those are hard data. We can balance that with an unemployment rate that magically went down to 8.3%. I do not know.
Chris Martenson: Well, I have got another piece of data for you, which is internodal traffic, that I really like to track, which is all of the truck body containers and TEUs that get tossed on trains. It is a pretty good measure of things going from ports and midland to economic centers. So that has been down pretty heftily, as well. And around the Baltic Dry Index, I heard that it actually dipped into negative territory, at least in a couple instances where a shipping company was actually kicking a little money back to a company that was shipping something.
Mish Shedlock: Yes. Yes, I actually saw that the other day and just did not have time to report on it. However, that is one of those things that actually concern me. When people are emailing me – and I have gotten more emails over Baltic Dry over the last week and a half than any other specific single topic – I always wonder hmm, you know, are too many people watching this thing?
Chris Martenson: That one, for me, is a bit of a canary, meaning it is a sensitive indicator species, in part because there was this extraordinary ship building boom that happened in the 2005, ‘06, ‘07, ’08 timeframe when times were good. Of course, those ships did not come online until last year or this year. So there is overcapacity. But that overcapacity – like a canary – it forms a weak place for early economic weakness to sort of show its head earlier, I think.
Mish Shedlock: It has. Speaking of the United States here, your shipping volume, container volume here on the trucking index, that ties in with the charts that I put up from reader Tim Wallace. I am going to have an update on those probably on Friday, looking at actual quarter by quarter returns to eliminate some of the gyrations that you see and weekly data, which can change wildly from week to week just based off a holiday being in a different spot than it was a year ago, for example.
So these quarter-by-quarter things will smooth those lines out. And it shows exactly the same thing that those other charts that I posted from him showed, except I think in a clearer fashion that people will be able to see a lot more easily and understand easily, rather than looking at things the way I have described them in the past as percentage decline from peak usage. This is just – what are we using when – compared to the same quarter last year, the year before, the year before that, the year before that, all the way going back to 1992. And these trends are going to be very clear. You can see the rebound and you can see a subsequent recent plunge in gasoline usage that really is not explainable. I mean, gas mileages in cars did not change dramatically in the last year. One year to explain this drop in gasoline usage.
Chris Martenson: No, and the refining capacity did not go away and refiners operate in very low margin. So of course, they operate at high volume – as high as they can – and that means that we have a surplus of gasoline, which means what do you do when you are not using as much and you are still cranking it out. Well, you export it. So we have been exporting more and more refined petroleum products, and those got all twisted around. You would not believe the number of emails I got from people saying hey, the United States is now a net petroleum exporter. Like no, no, no. No, no, I realize that that was really misconstrued heavily and not explained well in the media, but let’s be clear about something. We are still importing a lot of petroleum. Refined petroleum products we are exporting more of and the reason for that is because we are not using them.
Mish Shedlock: Yes, exactly. So that is economic weakness, not economic strength. And it also explains why gasoline prices are a lot lower than they might otherwise be with crude prices being around a hundred bucks.
Chris Martenson: Yes, that is exactly right. And you know, there was a lot of fanfare and glee this week talking about how consumer credit hit a new sort of surprising upside tick to the high, I think it was up twenty-plus billion on a week over week basis. And this was trumpeted out, of course, yay, consumers are borrowing again. When I scratched at those numbers a little bit, of course, it turned out to be mostly of the non-revolving credit variety, which mainly turns into student loans. Guess what? It is no surprise that in a weak economy, more people are going to school and borrowing to do so.
Mish Shedlock: Yes, that is what I was going to ask you. I mean, the very first time I saw that, there was a shocking rise and it came about because they reorganized student loans now into consumer credit. And all the sudden, there is big jump. And this goes back about a year and a half or two ago – I lose track of time – but my God, you know, what is happening? And you dig under and you see it is student loans. Now, we see student loans going up again. What does that mean? You know, more people, more students are more desperate for money taking out loans they cannot pay back, that is what it means.
Chris Martenson: Yes, absolutely. But of course, Obama had a nice sound byte or two in the speech about, the State of the Union speech, about how we are going to control economic costs in education. Very unclear how that is going to get done at this point because as somebody who is a parent of a seventeen-year-old, I can tell you tuition goes up every year. Every year, I have been tracking it and I am still waiting for a break in that…
Mish Shedlock: I think the trend is going to break, but in what timeframe and how I do not know. But it will not break if they continue to keep throwing more money at the problem. The only way to get that to break is to stop feeding the beast.
Chris Martenson: Well, the beast is going to need more money, of course. And how do you get more money? Well, one thing is the United States just laid out its plan to curb overseas tax dodges. You know, this has been simmering for a while with the UBS fiasco, I guess from about a year and a half ago. I am losing track of time, too. But anyway, the Treasury Department on Wednesday comes up with this new global regulatory system, right? Which is going to prevent Americans from dodging taxes and now if you have offshore assets that are fifty thousand or more, there is another form you have to disclose. Of course, there is already a Treasury form for individual accounts of ten thousand…
Mish Shedlock: So you are saying to forms now here…
Chris Martenson: At least.
Mish Shedlock: …and this applies to individuals, of course, not corporations, right?
Chris Martenson: Oh no, this is US individual taxpayers, of course. And so this is… I am thinking fifty thousand dollars, if that is your assets, what could the taxes be on those assets? I do not know, pick a number. A third or something? Whatever, cut it in half to make it easy – twenty-five thousand.
Mish Shedlock: Why should the taxes be anything? The taxes should be on gains. But no, I believe what they have done is saying, whether you have got gains or not, aren’t you eligible for really huge fines just for not disclosing?
Chris Martenson: Oh yes.
Mish Shedlock: You have got these assets whether you have paid your taxes on them or not.
Chris Martenson: Yes. No, no, no, no, no. It is a very bad, do not, you must disclose. You know, fill the forms out. Make sure your accountant knows about them. And so I just want to contrast this. So I think it was just last year that Google, Inc. was – lovely company, love them, use them every day – but they are – and perfectly legally, I am not, this is not an anti-Google thing. But I just want to contrast something here. So it was discovered that they had basically lowered their taxes by 3.1 billion over the prior three years using a technique where it is called the Double Irish, I believe is one name, there was a Dutch Sandwich. So what they are basically doing there is they, I think what it is, is they take the profits, they ran them through Ireland, I believe, and then the Netherlands and then they land in Bermuda and something like that, right?
Mish Shedlock: Yes, yes, yes, that is exactly it, yes.
Chris Martenson: Yes, something like that. And so 3.1 billion is what they avoided. How many fifty thousand dollar accounts do you have to catch in order to equal one Google?
Mish Shedlock: I will let you do that math on that. But meanwhile, I will throw another question at you. Didn’t GE actually get money back based off of… I believe GE got money back, as if they lost money or something by sheltering all of these gains overseas. It is actually quite preposterous. Now, bear in mind, I do not think corporations ought to pay taxes at all. But assuming that they do, you certainly do not want a lower rate overseas than you have in the United States. Wal-Mart is paying something like – I am going to make up a number here and this might be wrong – but I am going to say something like 30% or 25%. Meanwhile, Google is paying an effective rate of what, 3% or 4%?
Chris Martenson: 2.4%.
Mish Shedlock: What was that?
Chris Martenson: 2.4%.
Mish Shedlock: 2.4%, okay. And GE is paying negative percent. So that is how skewed this thing is. We are actually, our tax policy is encouraging corporations to move not only jobs overseas, but their cash overseas, all their profits overseas. It is absolutely ass-backwards. Let’s assume you say okay, Mish, you are crazy, we cannot set corporate tax rates to zero. But let’s at least have them lower in the United States than overseas so that we can encourage formation of jobs and bringing of capital back into the United States instead of doing these tax holidays like we have been doing.
Chris Martenson: You know, this is actually probably an incendiary idea that you are proposing, but I like it and I am swayed by it. Because I was just reading about how in Greece just how impossible the business environment there is – from formation to the bribes you have to pay to the actual laws that are on the book, the regulations – such that their innovation index is like at zero on a possible scale. And so of course, they do not have productivity gains, they do not have innovation going. They have got a very moribund manufacturing and creativity environment. And so all of this gives you a lackluster economy, of course. These are not hard things to appreciate, I do not think, that people will play according to what incentives are in place. And so you just described that there is an incentive – and I understand it completely – for corporations to say where can I possibly preserve most of my capital through legal and effective means? Those are available to corporations and other individuals with very large resource bases, which is why I get a little annoyed to find that when Washington does move, it tends to move against the little guy.
So here is the Treasury Department saying if you have got fifty grand, we want to know all about it. Like okay, but I do not think you are really chasing the whole dog. I think you are chasing the tip of its tail here.
Mish Shedlock: Yes, that is exactly correct, Chris.
Chris Martenson: So I do not know if you can stand it, but Greece. Can you take one more thing about Greece? I mean, we have had three rumors a day. And when you and I were talking about what we were going to talk before this started, you caught me being at least twelve hours behind in the news cycle. I thought the ECB had still agreed to take a haircut on its bonds because of what I read this morning but whoops, I was off.
Mish Shedlock: No, the only reason why I know about it is I caught a headline late in the day that says that now that the ECB says that they really did not agree to take a haircut. But who knows? I might be behind the times and maybe they have already really worked this out. However, it is clear that they are talking about it, although I think they deny talking about it.
And speaking of denials, these things are really kind of funny. It is clear that everyone has been talking about what happens if Greece leaves the euro. And all these people who have been in pure denial over this last year that these discussions are even taking place. I think the reason why the market is not reacting to any of this stuff is because all the Is are dotted and all the Ts are crossed and we are just ready and waiting for Greece to exit. And what really clinched it in my mind – and I am so sick of Greece that I did not even write about it in my blog – is we finally have an official denial. I do not know if you saw this, but I was just laughing my head off yesterday. Angela Merkel came out and said Germany is not trying to push Greece out of the euro. And I looked at that and I said my God, an official denial. This is absolutely what Germany is trying to do, and now we have the official confirmation of it in the form of a denial.
Chris Martenson: Well, can you help me understand something then? So of the restructuring that I understand, they have agreed to about a 50% haircut and then the average coupon on these new bonds is likely to be in the vicinity of 4% or slightly less. Who is accepting that deal?
Mish Shedlock: I cannot figure that out. Someone asked me that today. I did not know the answer to that. But I did know – and I just gave up looking. I am just so sick of Greece. But just for fun yesterday, I went to look and see what the Greek one-year bond rate is and it hit 527%. I do not know if you realize that it is up to the 500% level. So the question now is when does it hit the 600% level? That is how ridiculous this all is.
Chris Martenson: And of course, by thirty years it falls to 4%. That makes perfect sense. Of course, why didn’t I think of that before? Of course it does not make sense. That is crazy. So I do not know who is taking that. So there must be some back door deal that I do not understand that guarantees those bonds in the event of anything. But even still, in this environment, given the printing going on, the balance sheet expansion, 4%. Who is taking 4% on thirty years at this point? I do not know, but somebody is taking less than three on the thirty-year off the US.
Mish Shedlock: Oh, they have to. That is part of the deal. Excuse me, that is part of the voluntary deal, which we know is not voluntary at all. You know, what got me the other day is Germany came out, there was all this big protest that Germany wanted to put in someone essentially saying for Greece to hand over its sovereignty, to put someone from the EU over the Greek budget to make all these approvals. Of course, Greece says no way. So the proposal after that was, and it really smacked me as being preposterous was, I will give you money if you give it right back. And this actually came from Sarkozy, who was trying to warm up lovey-dovey with Merkel. The two guys are trying to help each other with their campaigns. But the way this proposal works is instead of giving money to Greece, they are going to give it to a third party who only gives it to Greece if they do these things. But most of the money goes straight back to the bondholders.
Well, here is the deal. If I have a hundred bucks and I agree to give you a hundred dollars if you immediately give me back ninety, am I really giving you a hundred bucks or am I just giving you ten? That is what we are talking about here. They are calling this thing a hundred and thirty billion dollar euro bailout. But a hundred and ten, roughly, of that is just to meet interest payments on the bonds. So they are trying to segregate this money so that it goes straight back to the people giving them a hundred and thirty billion. And they are saying this is not a default? My God, Chris, this is absolutely nuts. This is a scam and they are doing this to prevent this CDS triggers from triggering.
Chris Martenson: I bet I know what the sticking point it. The sticking point is for the optics to look right, they actually have to wire the whole hundred and thirty billion over to Greece…
Mish Shedlock: Yes, yes, yes.
Chris Martenson: …and then trust that the hundred ten flows back out, and I bet they do not know if that is going to happen.
Mish Shedlock: Yes, that is exactly the problem here. So they are trying to prevent these CDS things to trigger. So they are going through what I would call a mathematical scam of giving someone money when they are really not giving them because that person never gets control over it. Instead, it is going through an intermediary. And I am saying hmmm, you know, instead of giving them a hundred and thirty billion, which a hundred and ten billion comes right back – I do not have the exact numbers, but it is something like that – why don’t you just give them ten billion or twenty billion? No, they cannot do that because that would constitute a default and they were not paid.
Chris Martenson: Well, hopefully, we do not have to talk about this next week and we will have something new and fresh besides Greece to talk about. Because it is, I just cannot even be bothered to keep up with it anymore. They have worn me out. They wore me out on this one.
Mish Shedlock: I am worn out, too. And with that, we will catch you not in seven, but in fourteen. I am going to be in Mexico next week and hopefully, getting some sun and not worrying about Greece.
Chris Martenson: Well, enjoy yourself there. All the best.
Mish Shedlock: Thanks, Chris. We will see you.