Euro Slide Hurts US Multinational Corporation Profits; Roubini Eyes Sovereign Debt Defaults, Inflation

United Technologies Corp., Terex Corp., DuPont Co., McDonald?s Corp. and Johnson & Johnson are all singing the woes of a "strong dollar". Please consider Euro Slide Leaves CEOs Wringing Hands With Forecasts at Risk

United Technologies Corp. finance chief Greg Hayes sets aside some wiggle room in his profit forecast every year for swings in the euro. By March, half his safety net had already evaporated.

The maker of Otis elevators and Pratt & Whitney jet engines, which gets about a quarter of its sales from Europe, started 2010 assuming a $1.48 euro exchange rate. Hayes cut it to $1.37 last month as concern mounted that Greece would default on its debt. This week, the euro dropped below $1.32 for the first time since April 2009.

?It?s one of those things that you can?t control,? Hayes said in an interview April 23. ?In fact, I think our stock is actually down the last couple of days because of this Greece crisis.?

Terex Corp., DuPont Co., McDonald?s Corp. and Johnson & Johnson also said in the past two weeks that the euro?s slide is affecting profit or may hold back growth. The 8.2 percent decline in the currency so far this year makes U.S. exports more expensive and lowers overseas sales when euros are translated to dollars, threatening a potential rebound in revenue and a lift to the economy.

?McDonald?s sells more hamburgers overseas than they do in the U.S.,? Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a April 27 phone interview. ?That will have a notable impact, especially when you couple that with the fact that the euro has been falling for the better part of six months.?

?The dollar ought to weaken over time versus the euro just because of the deficit spending we have in the U.S.,? Hayes said in the interview, barring a financial meltdown in Portugal, Ireland, Greece and Spain. ?So the view long-term is bearish on the dollar. The problem is, on a quarter-to-quarter basis, it gets bumped around a little.?

Whose playbook is Hayes reading? There is simply no good reason for the Euro to rise against the dollar. Notice his out: "... barring a financial meltdown in Portugal, Ireland, Greece and Spain".

A meltdown in Greece is clearly underway, and it is likely to spread.

For more contagion details, please see Greek 2-year Yields Hit 18% on S&P Cut; Contagion Hits Portugal; Credit Swaps on Sovereign Debt at Record Highs; Blind Panic?

Also consider How Much is Needed to Bail Out Greece? $159 Billion? $794 Billion? Estimates Vary Wildly as Greece Turns Viral; S&P Downgrades Spain

Roubini Eyes Sovereign Debt Defaults, Inflation

Economist Nouriel Roubini says Rising Sovereign Debt Leads to Inflation, Defaults

?The bond vigilantes are walking out on Greece, Spain, Portugal, the U.K. and Iceland,? Roubini, 52, said yesterday during a panel discussion on financial markets at the Milken Institute Global Conference in Beverly Hills, California. ?Unfortunately in the U.S., the bond-market vigilantes are not walking out.?

?The thing I worry about is the buildup of sovereign debt,? said Roubini, a former adviser to the U.S. Treasury Department and IMF consultant, who in August 2006 predicted a ?painful? U.S. recession that came to fruition in December 2007. If the problem isn?t addressed, he said, nations will either fail to meet obligations or experience higher inflation as officials ?monetize? their debts, or print money to tackle the shortfalls.

?Tip of the Iceberg?

?While today markets are worried about Greece, Greece is just the tip of the iceberg, or the canary in the coal mine for a much broader range of fiscal problems,? Roubini, who teaches at NYU?s Stern School of Business, told attendees at the Beverly Hilton hotel. Increasing tax revenue won?t be enough to ?save the day,? he said.

Greece ?could eventually be forced to get out? of the 16- nation euro region, he said in a Bloomberg Television interview yesterday. That would lead to a decline in the euro and make it ?less of a liquid currency,? he said. While a smaller euro zone ?makes sense,? he said, ?it could be very messy.?

?Eventually, the fiscal problems of the U.S. will also come to the fore,? he said during the panel discussion. ?The risk of something serious happening in the U.S. in the next two or three years is going to be significant? because there?s ?no willingness in Washington to do anything? unless forced by the bond markets.

If Greece left the EU (either voluntarily or involuntarily), then depending on what its government did to inflate, its new currency might easily have complete and total distrust by the public (i.e. be worthless). Yes that is hyperinflation.

The US, with debt it its own currency, is not remotely in the same situation.

Europe Shouldn?t Bail Out ?Rich? Greece

Mark Mobius at Templeton suggests Europe Shouldn?t Bail Out ?Rich? Greece.

A default by ?rich? Greece on its debt would be the best way to ease the European fiscal crisis and help allay fears of a contagion, Templeton Asset Management Ltd.?s Mark Mobius said.

Greece should consider restructuring its debt to pay 25 cents to 50 cents for every dollar, helping to cut its debt level to a more sustainable level, said Mobius, who oversees about $34 billion in emerging-market assets as executive chairman of Templeton Asset. Lending aid to Greece may drag down the European Union as other indebted nations seek a bailout in turn, he said.

?A default will help to plug the leak,? Mobius said in an interview with Bloomberg Television in Singapore today. ?A bailout at this stage does not make sense to me.?

Assuming the term "rich Greece" was meant as sarcasm, I am in agreement with Mobius.

Indeed, I am not in favor of bailouts, and stated so long ago. Moreover, there is no reason for Germany to want to bailout Greece, as it will just lead to more bailouts of Portugal and Spain.

At some point the bailouts have to stop. I propose now. Greece can sink or swim on its own accord and that would be a mighty lesson for others.

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://feedproxy.google.com/~r/MishsGlobalEconomicTrendAnalysis/~3/TUx1KUVcxIE/euro-slide-hurts-us-multinational.html

Denny's Shareholder Trashes Chain in WSJ Interview

Oak Street Capital Management and Dash Acquisitions own a combined 6.5% stake in Denny's Corporation (DENN), and recently launched a proxy fight to add three new members to the company's board of directors. Calling themselves the Committee to Enhance Denny's, the group opined in a letter that "Shareholders cannot afford to allow the board and management to have more time to implement an effective strategy. We will not linger on the sidelines at this critical juncture."



Dash Acquisitions president Michael Dash, one of the group's three nominees, has been eating at Denny's a lot lately and he isn't happy. He talked with the Wall Street Journal today -- making him possibly the first major shareholder in a publicly-traded restaurant company to trash the company's food in an interview with a national publication.

Continue reading Denny's Shareholder Trashes Chain in WSJ Interview

Denny's Shareholder Trashes Chain in WSJ Interview originally appeared on BloggingStocks on Fri, 05 Mar 2010 18:30:00 EST. Please see our terms for use of feeds.

Permalink | Email this | Comments

Full story at http://www.pheedcontent.com/click.phdo?i=0189036f087b89fb69a845b555b885b6

Interview With A Commercial Real Estate Developer

Earlier this week I received an email from Ilene at Phil's Stock World about her interview with a Commercial Real Estate Developer.

Ilene writes "Hi Mish, I thought you might find this interesting, and perhaps want to use some or all of it. I know my interviewee well, and his thoughts in this area have been consistently correct."

With that backdrop here are a few excerpts from Interview with a Commercial Real Estate Developer about the CRE Industry.

Mr. Solomon (name changed) is a CRE veteran with 40 years of experience developing commercial real estate in 15 states and has kindly agreed to be interviewed about the current conditions in the CRE market.

Ilene: What are you seeing in the CRE market now?
Mr. Solomon: CRE is undergoing deleveraging with the rest of the economy, debts are being reduced or going into default. Large numbers of projects are not cash flowing and will have to be liquidated, or ownership will have to be transferred. Concurrently, there?s an oversupply caused by the same ill advised financing that led to the overbuilding.

Ilene: How far into the decline are we now?
Mr. Solomon: So far about 25%. A lot has been recognized. And it?s no longer a surprise. Some properties have already been foreclosed out. There are a lot of vacancies. I think a further substantial group of commercial properties will get foreclosed. I don?t see it leveling off for another few years because of the problems of contraction, debt, and oversupply. Oversupply in real estate doesn?t get worked off, the buildings have to be used. Less consumption and less business mean less demand. Creative financing, excessive easy money caused the oversupply, caused hyped up prices. Now there?s less demand, less employment, less consumption, and on top of that, the excess debt still has to be paid off ? there?s more deleveraging coming. There are probably many years of value declines ahead.

Ilene: Do you think the recession is over?
Mr. Solomon: No, we will be in it for a number of years. Assuming the GDP is up in the short term, it doesn?t matter. It?s due to more debt expansion. The real world debt must eventually decline. It?s a government induced blimp that cannot go on, it?s not sustainable.

Ilene: Are there any areas where you would be building now?
Mr. Solomon: Regions will do better in the lower tax states that are less unionized, with less government regulation, for example Texas.

Ilene: I know many of your projects are in CA, how is that state doing?
Mr. Solomon: The California government is dysfunctional, too little revenue and too much expenditure. Compared to WA, there are more people, more speculation, more bureaucracies, and now more contraction. CA also has extra political risks, the state is bankrupt. The U.S. is also bankrupt. If there were no restrictions due to traveling and language, many people would be going elsewhere. All things being equal, I?d be building where opportunity is greatest, taxes are lower, and there?s less regulation. I?d be more apt to buy something in TX because the economy is stronger than in CA, there is less regulation, no income taxes and the budget is better balanced.

Ilene: Does it matter that we?re bankrupt?
Mr. Solomon: We seem to be functioning as though we?re not. There?s no question that only two trillion of revenue can?t service $100 trillion of debt. It?s pretty clear that there?s a major problem.

Ilene: In your business, would you be hiring people any time soon?
Mr. Solomon: No hiring. Due to the economy and health care issues, we?re not hiring anyone. Hiring is a liability, might be taking on a life-long obligation. We prefer to be firing now, decreasing the number of employees.

Thanks Ilene and Mr. Solomon

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://globaleconomicanalysis.blogspot.com/2009/12/interview-with-commercial-real-estate.html

Reader Question Regarding "Dropping Out of the Workforce"; Implications of the Falling Participation Rate

In response to BLS Job Report: December Nonfarm Payrolls +103,000, November Revision +32,000, October Revision +38,000; Workforce DROPS by 260,000, reader "Aleph" wants to know how someone drops out of the workforce.

Aleph writes ...

Hello Mish

Can you explain to your readership how the government determines that a person has dropped out of the labor force, as opposed to running out of unemployment benefits and becoming desperate (or homeless) with no job and no decent prospects? Or do they make no distinction between voluntarily leaving the work force and involuntarily leaving it?

"Dropping out" sounds much less dire than being unemployed because there aren't enough jobs to go around.

Thanks,

Aleph

Ways of Dropping Out

Hello Aleph, someone drops out of the workforce in one four general ways.

1. They stop looking for work
2. They retire
3. They go back to school full time and are unavailable for work
4. They are institutionalized (prison for example)

The big numbers come from 1, 2, and 3 with #1 leading the pack.

If a person wants a job, is available for a job and keeps looking for a job, that person is unemployed. I suspect most retirees, stop looking.

Note that number 2 may be voluntary or involuntary. An example of an involuntary retirement is someone who wants work to work but retires because he has expired all his 99 weeks of benefits and desperately needs to start collecting social security before he goes homeless.

All of this is determined by a phone survey. The BLS attempts to determine the following

1. Are you employed full time?
2. Are you employed part time?
3. Do you want a job?
4. Are you available for a job?
5. Have you looked for a job in the last four weeks?

• A Yes to #1 or #2, no matter how few hours someone worked (exceptions apply for unpaid family workers) puts someone in the "EMPLOYED" category.
• A No to #3, #4 (except for temporary illness), or #5 would put someone in the "NOT IN THE WORKFORCE" category.
• A No to #1 and #2, and a Yes to #3, #4 (except for temporary illness), and #5 puts someone in the "UNEMPLOYED" category.
• Those employed or unemployed are considered "IN THE WORKFORCE"

However, the BLS does not ask those questions directly. Rather the phone interview attempts to figure the answers to those questions.

How the Government Measures Unemployment

Please consider How the Government Measures Unemployment

There are about 60,000 households in the sample for this survey. This translates into approximately 110,000 individuals, a large sample compared to public opinion surveys which usually cover fewer than 2,000 people. The CPS sample is selected so as to be representative of the entire population of the United States.

Every month, one-fourth of the households in the sample are changed, so that no household is interviewed more than 4 consecutive months. This practice avoids placing too heavy a burden on the households selected for the sample. After a household is interviewed for 4 consecutive months, it leaves the sample for 8 months, and then is again interviewed for the same 4 calendar months a year later, before leaving the sample for good. This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year.

Each month, 2,200 highly trained and experienced Census Bureau employees interview persons in the 60,000 sample households for information on the labor force activities (jobholding and jobseeking) or non-labor force status of the members of these households during the survey reference week (usually the week that includes the 12th of the month). At the time of the first enumeration of a household, the interviewer prepares a roster of the household members, including their personal characteristics (date of birth, sex, race, Hispanic ethnicity, marital status, educational attainment, veteran status, and so on) and their relationships to the person maintaining the household.

Each person is classified according to the activities he or she engaged in during the reference week. Then, the total numbers are "weighted," or adjusted to independent population estimates (based on updated decennial census results). The weighting takes into account the age, sex, race, Hispanic ethnicity, and State of residence of the person, so that these characteristics are reflected in the proper proportions in the final estimates.

Because these interviews are the basic source of data for total unemployment, information must be factual and correct. Respondents are never asked specifically if they are unemployed, nor are they given an opportunity to decide their own labor force status. Unless they already know how the Government defines unemployment, many of them may not be sure of their actual classification when the interview is completed.

Similarly, interviewers do not decide the respondents' labor force classification. They simply ask the questions in the prescribed way and record the answers. Based on information collected in the survey and definitions programmed into the computer, individuals are then classified as employed, unemployed, or not in the labor force.

What are the basic concepts of employment and unemployment?

The basic concepts involved in identifying the employed and unemployed are quite simple:

• People with jobs are employed.
• People who are jobless, looking for jobs, and available for work are unemployed.
• People who are neither employed nor unemployed are not in the labor force.

Unpaid Family Workers

But what about the two following cases?

• George Lewis is 16 years old, and he has no job from which he receives any pay or profit. However, George does help with the regular chores around his father's farm and spends about 20 hours each week doing so.
• Lisa Fox spends most of her time taking care of her home and children, but she helps in her husband's computer software store all day Friday and Saturday.

Under the Government's definition of employment, both George and Lisa are considered employed. They fall into a group called "unpaid family workers," which includes any person who worked without pay for 15 hours or more per week in a family-owned enterprise operated by someone in their household.

Interview Questions

The questions used in the interviews are carefully designed to elicit the most accurate picture of each person's labor force activities. Some of the major questions that determine employment status are: (The capitalized words are emphasized when read by the interviewers.)

1. Does anyone in this household have a business or a farm?
2. LAST WEEK, did you do ANY work for (either) pay (or profit)?
If the answer to question 1 is "yes" and the answer to question 2 is "no," the next question is:
3. LAST WEEK, did you do any unpaid work in the family business or farm?
For those who reply "no" to both questions 2 and 3, the next key questions used to determine employment status are:
4. LAST WEEK, (in addition to the business,) did you have a job, either full or part time? Include any job from which you were temporarily absent.
5. LAST WEEK, were you on layoff from a job?
6. What was the main reason you were absent from work LAST WEEK?
For those who respond "yes" to question 5 about being on layoff, the following questions are asked:
7. Has your employer given you a date to return to work?
and, if "no,"
8. Have you been given any indication that you will be recalled to work within the next 6 months?
If the responses to either question 7 or 8 indicate that the person expects to be recalled from layoff, he or she is counted as unemployed. For those who were reported as having no job or business from which they were absent or on layoff, the next question is:
9. Have you been doing anything to find work during the last 4 weeks?
For those who say "yes," the next question is:
10. What are all of the things you have done to find work during the last 4 weeks?
If an active method of looking for work, such as those listed at the beginning of this section, is mentioned, the following question is asked:
11. LAST WEEK, could you have started a job if one had been offered?
If there is no reason, except temporary illness, that the person could not take a job, he or she is considered to be not only looking but also available for work and is counted as unemployed.

Who is not in the labor force?

Labor force measures are based on the civilian noninstitutional population 16 years old and over. Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces. As mentioned previously, the labor force is made up of the employed and the unemployed. The remainder?those who have no job and are not looking for one?are counted as "not in the labor force." Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

To summarize, employed persons are:

• All persons who did any work for pay or profit during the survey week.
• All persons who did at least 15 hours of unpaid work in a family-owned enterprise operated by someone in their household.
• All persons who were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various personal reasons, whether or not they were paid for the time off.

Unemployed persons are:

• All persons who did not have a job at all during the survey reference week, made at least one specific active effort to find a job during the prior 4 weeks, and were available for work (unless temporarily ill).
• All persons who were not working and were waiting to be called back to a job from which they had been laid off (they need not be looking for work to be classified as unemployed). -
  

One More Exception

Based on an example in the article, those out of work because of a labor dispute are considered employed even if they are looking for another job during the dispute.

Finally, please note that the official unemployment rate is solely based on the household phone survey as described above. It may not bear any resemblance to the weekly unemployment claims numbers or the monthly establishment jobs report.

Participation Rate, Employment Population Ratio, and Unemployment



click on chart for sharper image

The above chart from The Declining Participation Rate by Calculated Risk.

The falling participation rate reflects the number of people dropping out of the workforce. It is falling for two reasons. People have given up looking for a job and also because of demographics (people retiring as the boomer population ages). The predominant reason is people have stopped looking for a job.

Here are my posts on Creative Destruction, referenced in the chart above.

• Creative Destruction
• Creative Destruction And The Rising Tide of IT Pay Cuts

The workforce should be expanding by 100,000 to 125,000 jobs a month. Instead it is falling like a rock. This is a very deflationary event. It stops credit expansion, and it reflects retirees needing to draw down on their savings, pulling money out of the stock market.

Stock market pressures are negative when people need to get out or they fear further loses in their retirement accounts.

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://feedproxy.google.com/~r/MishsGlobalEconomicTrendAnalysis/~3/pkRoB5G9bNo/reader-question-regarding-dropping-out.html

Superb Russell Napier Interview on Financial Sense; Will the S&P Drop to 400 as Napier Suggests? Why it Might Not

Reader Chris sent the following comment regarding a Russell Napier Interview on Financial Sense:

Hi Mish if you get a chance, I highly recommend this Russell Napier interview with Jim Puplava. I think Napier is incredibly rational and knowledgeable, with a very interesting perspective on things. This is the best interview I have heard for a while.

Napier seems reasonably aligned with your own views on deflation and what you have been saying on stock market valuations.

Napier sees the scary prospect of a slumping economy and higher bond yields something that has not happened for a long time, as usually bonds do well when the economy sinks. Napier likens it to 1931 when the UK came off the gold standard.

I concur with Chris and would also like to add that Jim Puplava is one of the best interviewers around. Here are a few select quotes from the Financial Sense audio Russell Napier Discusses the Failure of QE2 and the Coming QE3

Puplava: For stocks to continue to do well, don't we need to see mild inflation and sustained economic growth, and do you see that as a possibility? The leading economic indicators would probably tell us otherwise.

Napier: I think we need to see more than that. The cyclically adjusted PE does not forecasting this level [of GDP] or associated with this economic outcome, it has been associated with very good economic outcomes. That is why I don't buy the story here.

Many people say that equities are cheap. Well they are cheap based on current earnings but current earnings are at an all-time high. We have a reasonable measure of this going back to 1929. You find that corporate profit as a share of GDP is the highest it has been since 1929.

This is a very mean-reverting figure.

So this stock market is pricing in more than a median economic recovery. Yet as you say, even asking for an average economic recovery is a big ask at this stage. The Fed has distorted two asset prices: treasuries and equities, but they have not yet produced a rise in fundamental economic activity to support these valuations.

Puplava: If I look at your analysis, so far you would argue that QE2 has failed, and a lack of broad money growth will mean that growth and inflation expectations are too high. That implies, likewise that equity prices should fall, and yields rise which you believe could lead to deflation and a bad environment for equities.

Napier: Equities are overpriced and bonds overpriced. But the thing I am saying that is really quite different is normally when the economy slows bonds do well, that is the normal relationship. That's what everybody expects. What I am saying is a much more frightening scenario, where the economy slows and bond yields go up. And the reason I am suggesting they go up is the matters underpinning their path of huge inflows of foreign central bank capital simply stop coming or slow very dramatically. You might say that this just does not happen. You just do not get scenarios like this. But what springs to mind is 1931 when falling Britain's exit from the gold standard and people panicked that America would do the same, and when they realized that money they lent to America the American government would be paid back in pieces of paper that would be worth less than gold, then suddenly bond yields went up into a depression as people reassessed the quality of the paper they would be paid back with.

I think that is where we are going, not just for the United stated but the developed world markets.

....
If the Chinese find a Paul Volcker, we all better be very careful.

Puplava: If some event like that happens, in 2009 the S&P 500 touched 666, could we go back to those levels again, or in fact lower?

Napier: In my 2005 book "Anatomy of the Bear" I forecast the S&P would bottom in 2014 and the S&P would get to 400. I do not have a strong feeling as to the particular year it happens, but 400 number is looking at the low points over the last 100 years, of cyclically adjusted PEs, and also the Q-Ratio which is measuring equities to the replacement value of assets, and if the valuation measures continue to mean-revert, then we are not talking 666 but a number near 400.

The bottoms I talked about in the book are not about business cycles, they are about things much bigger than that: the first world war, the great depression, the second world war, and the collapse of the Bretton Woods agreement. And this is right up there with the collapse of the Bretton Woods agreement.

This is an emerging market that says we no longer think the developed world has good credit quality and we refuse to back developed world governments with our capital. If we begin to question the credit of governments of the developed world then this [400] is where we go to.

In Austrian terms, the Austrians always tell us we have creative destruction. We have had several business cycles governments have refused to permit creative destruction of the private sector. They threw their balance sheets and the balance sheets of the central banks on the line to stop creative destruction.

So the ultimate situation we have to get to is the creative destruction of the government.

Puplava: Given this forecast that seems highly likely, what would it take to turn you more positive on the equity environment?

Napier: As a historian, the one thing that can always come along is technology that permits much higher level of productivity growth. Cheap energy is something that could transform long-term growth forecasts. There may be many others, but I can't see them on the horizon.

=========================
That concludes the Financial Sense audio excerpts.

Here is a link to the much shorter Financial Times video Long View: Historian sees S&P fall to 400

Stock market historian and CLSA consultant Russell Napier discusses with head of Lex John Authers his warning that the real bear market in the S&P has yet to come and could push the US equities index down to 400, plus he explains how emerging markets could trigger a leap in US Treasury yields. (11m 16sec)

Stocks Tremendously Overpriced

In 2007 people might even have thought Napier was a bearish fool. He clearly wasn't. The S&P 500 fell to 666 and there is no reason why that level cannot be tested again.

I made the case recently in Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

As a follow-up, please consider Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?

Overvalued is Not a Price Target

Stock prices are tremendously overpriced. However, I do not know if we see Napier's targets or not.

Overpriced can be worked off by a stock market that goes nowhere for 10 years or a stock market that takes another plunge. It can even be worked off by a bigger rally now before a plunge. I seriously doubt the latter, but it is certainly possible.

What's Different Now?

The big difference that I see now vs. 2008 and early 2009 is corporate cash levels. Cash levels are much higher today thanks to a certifiable bubble in corporate bonds.

Google, which does not even need cash raised billions in a 10 year blended offering at 2.33%. Google will not default but that is ridiculous . Why lend money at 2.33% for 10 years when such a paltry yield does not possibly compensate for the risk of much higher rates a few years from now, possibly even next year?

Who knows what interest rates will be 5 years from now? I don't. Nor does anyone else.

Regardless, corporations from total junk to top-tier are flush from with cash from debt offerings. Unless corporations blow it on stock buybacks or acquisitions at absurd prices, corporations have a chance to sit on cash (debt really), for a long as the terms permit.

Thus, corporations can weather a cash-crunch storm today better than a couple years ago.

In the midst of the decline in 2008-2009 there was a genuine fear corporations in need of cash could not raise that cash. Now they have cash-on-hand in advance. It sits on the balance sheet as debt (it is debt), but it is spendable.

The best use for that cash is to let it sit there. If instead, corporations blow it on absurd buybacks at silly prices we will be back in the 2008 crash scenario. For reasons Napier suggests the markets could crash anyway.

Not knowing what corporations or the Fed will do (or in what time-frame), I see no need to make a prediction other than to say history suggests that stock market outcomes from here are highly unlikely to be favorable even if corporations avoid serious mistakes.

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://feedproxy.google.com/~r/MishsGlobalEconomicTrendAnalysis/~3/MnusI0BeLfE/superb-russell-napier-interview-on.html

PhD's In Distress and the Unsustainable Cost of Education

In response to How Being The Slightest Bit Overqualified Can Cost You A Job I received several interesting Emails.

Here is an Email from "PhD In Distress" about overqualified candidates fresh out of college with nowhere to go, competing for jobs that essentially do not exist.

"PhD In Distress" writes:

Dear Mish,

I very much enjoyed your article today ?How Being The Slightest Bit Overqualified Can Cost You A Job?. Although it seemed you and those giving comments seemed to focus on the overqualification of experienced workers, I would like to bring the plight of overqualified students (particularly PhD students) to your attention. I say this as a PhD science student myself.

In case you are not familiar, the ?typical? PhD undergoes the following path: BS (usually adding significant debt) then PhD (most programs I know of skip masters level and pay about $20000/year and take 5-7 years) then postdoctoral experience (essentially you do the same work as your PhD for an additional 2-3 years in a different lab except you only make $35000/year) then you can attempt to get a job in either academia, industry or government. I should also mention that student loans can be put on hold while in a PhD program but not during a postdoc.

The postdoctoral experience has not been traditionally necessary for my field to get a job in industry and I am attempting to do so sans postdoc as I have no academic inclinations.

The problem that I see is that when I look for a job using keywords in my field is that I get one of two postings:

1) BS required, MS preferred (making up about 60% of postings)
2) PhD with 5+ years experience (making up 20% of postings and sometimes academic experience such as postdoc won?t even count)

This means that I am overqualified for over half the positions that are posted. Even worse, most of the positions for my level require experiences that I cannot even obtain after my PhD.

My plight is no company in this economy will spend money on an entry level, unproven PhD that will need 2+ years training before he/she is adding significant value to the company.

That leaves me and many others with the only option being a postdoc. However, there has been a glut of postdocs building since the 90s. More and more students are chasing fewer and fewer academic positions (which require a postdoc).

Many of them simply give up and start looking for industrial positions. This has not gone unnoticed by industry and has resulted in more and more companies requiring experience for what should be entry level positions.

The great recession has only exacerbated the problem and now I know of people on their third or fourth postdoc (mostly looking for academic experience but still well into their 30s and making $35000 with a PhD). This makes it even harder for recent grads just to get their first postdoc. Again, why would a professor hire a new grad when he/she can get someone with 3+ years experience and pay them the same?

So here I am highly educated with no place for a job. I?m overqualified and overspecialized for 60% of the work yet simultaneously underqualified for the other 40%. Moreover, there seems to be no way to rectify the situation.

Therefore, it should come as no surprise that more and more domestic (US) students have begun to realize what a raw deal a science PhD has become. This is reflected in lower numbers of domestic PhD students over the past couple decades. Though this is particularly bad for the US in the long run as foreign science PhD?s increasingly return home to work in available and relatively well paying jobs.

I feel particularly bad for the spike of new students entering a PhD program now to avoid the recession. If we will have structurally high unemployment for a decade (for which you have made a compelling case) then we will have 2 more ?generations? of PhDs in an increasingly bleak situation. Even if the economy improves it would take massive growth just to get through the backlog of experienced postdocs and laid off scientists seeking positions.

In either case, my approaching graduation has made me more aware and thoughtful of my situation and thought your article was timely and informative. Keep up the great work spreading the word about real recovery through sound money and policy!

Just in case you would like to share this, please do not use my name or initials. Science is a very small and intellectually inbred community and not very open to criticism.

Thank you again,

PhD In Distress

Plight of the PhD

Thanks to "PhD In Distress" for explaining the sorry plight of those seeking higher degrees. When hiring does start, it will likely be with those having a fresh degree than those who had been seeking employment for years.

These two posts should put a solid kibosh to the Obama Administration's notion that education is the key to success and all we have to do is give people more training.

If corporations are not hiring, all the education in the world will not do any good. In fact, as these posts show, it can be a detriment.

As I have stated before "If everyone has a PhD, then PhD's will be driving trucks, mowing grass, and greeting at Walmart".

Here is the lotto-like process described in ?How Being The Slightest Bit Overqualified Can Cost You A Job?.

• 500 r�sum�s came in for an administrative assistant for a trucking company
• 61 were selected out of the first 271 for review
• The rest were not even looked at
• Highly overqualified candidates were weeded out on the first pass
• Slightly overqualified candidates were weeded out in the second pass
• 8 were selected for a one hour interview
• 2 were invited back for a second one hour interview
• 1 said she would try and grab a fly ball at a stadium ballpark in response to a random question, the other would not

When it came down to the final two candidates, the lucky lotto winner was the candidate willing to grab a fly ball.

Escalating Costs Out Of Line

The cost of a US education seems enormously out of whack for what it provides. Currently all that education buys you is a chance to enter a lottery for the few jobs available where "To land a job you have to be the perfect candidate, near the top of the stack of r�sum�s, neither underqualified nor the slightest bit overqualified and you have to be willing to grab at a fly ball"

With an education, you are forced to play R�sum� Lotto hoping to be on the top of the stack, hoping for an interview, hoping for second interview, then hoping for an offer.

However, without an education you will most likely be fighting for trade jobs, retail jobs, or government jobs.

The education system has clearly broken down.

College Price Comparison Flashback

In 1971-1976 I attended the University of Illinois graduating with a B.S. in Civil Engineering.

I financed my way through college working at the Danville, Illinois Holiday IGA grocery store in the summer, and by playing poker on weekends against farmers in Cayuga Indiana and various other places. A big night was making $100 as that was a whole week's wages at the grocery store.

Tuition was $250 a semester, and the U of I was one of the best engineering schools in the country. Tuition was something like $400 a semester my final year.

University of Illinois Tuition is now in excess of $6,000 a semester.

Whole chickens on sale, and a loss leader at that were $.21 lb. You can sometimes find them on sale for $.49 lb. You can easily find them for $.69 lb on sale.

Since 1971, chicken prices on sale have approximately tripled, the minimum wage has roughly quadrupled and the cost of tuition at the University of Illinois has gone up by a factor of 24.

Something is out of whack and it is not chicken prices or the minimum wage. Currently, I do not think I could finance myself through college playing poker on weekends against farmers in Cayuga Indiana, nor do I think anyone else could either.

With the cost of education up 24 times (and that is tuition only, not room and board) the trend in education costs is simply not sustainable.

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://globaleconomicanalysis.blogspot.com/2009/10/phds-in-distress-and-unsustainable-cost.html

Frisby's Bulls and Bears 2011 Predictions from James Turk, Bob Hoye, Mish, Others

Last week I did an interview with Dominic Frisby at Frisby?s Bulls and Bears. The interview was part of a series of podcasts with James Turk, Mike Hampton, Bob Hoye and others. I was Part V: Predictions For 2011 with Mike ?Mish? Shedlock

Click on the above link for the podcast.

In the one hour podcast I expanded on the ideas presented in Ten Economic and Investment Themes for 2011.

We also discussed a "bonus 11th" theme regarding Japan. You will need an hour to play the podcast but I put a link on the right sidebar so you can easily find it and play at your leisure.

For a quick review please see Mish Interview on Frisby's Bulls & Bears

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://feedproxy.google.com/~r/MishsGlobalEconomicTrendAnalysis/~3/hHfHbOWXFj0/frisbys-bulls-and-bears-2011.html

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://feedproxy.google.com/~r/MishsGlobalEconomicTrendAnalysis/~3/IZBNvfI_zLA/email-from-birgitta-jonsdottir-member.html

An Interview with Carlos Solari of Computer Science Corp.

Filed under: Management, Internet, Interviews, Workspace, Stocks to Buy, Technology

In a world where one line of data can mean the difference between success or ruin for individuals, companies, or even entire countries, the validity and security of sensitive data has increasingly become of paramount concern. A raft of cyber-security companies are answering these important issues with solutions for everything from email privacy to network breach protection. One such company, and a stand out in its field, is Computer Sciences Corp. (CSC).

Continue reading An Interview with Carlos Solari of Computer Science Corp.

An Interview with Carlos Solari of Computer Science Corp. originally appeared on BloggingStocks on Fri, 02 Apr 2010 18:30:00 EST. Please see our terms for use of feeds.

Read | Permalink | Email this | Comments

Full story at http://www.pheedcontent.com/click.phdo?i=8edbfb74d36d1b350283d51f78e57b7f

Bill Gross says QE3 Unlikely Even as Job Growth Slows; Gross Still Shuns Treasuries, Likes Dividend Yielding Equities

Bill Gross says QE3 Unlikely Even as Job Growth Slows

Pacific Investment Management Co.?s Bill Gross, manager of the world?s biggest bond fund, said the Federal Reserve is unlikely to do a third round of quantitative easing even with the economy adding fewer jobs than forecast.

Central bankers are likely to ?extend the extended period? language for longer in their policy statements, Gross said in a radio interview on ?Bloomberg Surveillance? with Tom Keene. The less-than-projected pace of jobs growth in May that the Labor Department reported today shows that ?there is a persistency here. It?s back to our old new normal,? he said.

?We don?t see a QE3. There has been too much discussion and dissent within the Fed to permit that type of program,? Gross said in the interview from Pimco?s headquarters in Newport Beach, California. Given the current pace of growth and inflation ?they will speak to a fed funds rate that persists for an extended period of time, which in effect caps interest rates in the process.?

Investors could seek higher real returns than those now offered from government debt through investing in shares of ?conservative? companies such as Procter & Gamble Co. (PG), Merck & Co. or those of utilities, according to Gross.

?The Treasury market up to seven or eight years is negative in terms of real interest rates, and that?s not a positive for savers,? Gross said. ?But if they took that money and invested it in a conservative stock, such as a Proctor or a Merck or a utility yielding 4 percent; then that?s 3.5 to 4 percent real yield in comparison to those negative real yields in the Treasury side. So you have to take a little bit of a chance in order to avoid getting your pocket picked here.?

Video



I concur with Gross about the likelihood of QE3 in the near-term horizon and suggested the same thing in a recent interview on Market Ticker with Aaron Task. The key to that sentence is the phrase "near-term".

Right now, the Fed does not want more froth in junk bonds, nor does it want higher commodity prices or $150 crude, especially since QE2 was a miserable failure in producing jobs or reviving housing.

However, should the economy enter a sustained downturn, and if commodity prices plunge (giving the Fed some breathing room), it's a given the Fed will try something. Whatever the Fed tries will likely be good for gold.

Please see Why I Continue to Like Gold for a video discussion.

The problem with Gross's dividend stock play is that it is likely all stocks get hit in another sustained downturn. A 4% yield may be nice, but not if it comes at the expense of a 25% haircut in equity prices.

With valuations stretched everywhere one looks, there is a lot to be said for waiting on the sidelines for better opportunities.

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://feedproxy.google.com/~r/MishsGlobalEconomicTrendAnalysis/~3/mN1A5gcDF0M/bill-gross-says-qe3-unlikely-even-as.html

China?s Real-Estate Developers Struggle with Debt; Servicing China's Total Debt Load is Problematic; Dramatic Slowdown in China Coming

Inquiring minds are digging deeper into China's bank credit bubbles, fixed asset investment bubble, and property bubbles. Please consider Closer Look: 100 Trillion Yuan in Banking Assets on Caixin Online.

As of 2010, the total assets of China's banking industry have grown to 2.39 times the amount of national GDP, breaking records once again at nearly 100 trillion yuan. In comparison, according to OECD data, Japan's banking assets in 2008 stood at US$ 9.81 trillion, 2.27 times the amount of its GDP, which was US$ 4.32 trillion. Germany, another country representative of economies that rely on banks for financing, had 6.6 trillion euros for banking assets and 2.48 trillion euros for GDP in 2008. Its 2008 banking-assets versus GDP ratio was 2.66, almost the same as it had been in previous years.

The surge in China's banking assets, which took off in 2009, was attributed to political directives rather than monetary policies. In 2009, huge amounts of loans were made at the order of government. The central bank did not cut interest rates; in fact, it conducted a net absorption of liquidity from the market through its open market operations. Meanwhile, the market capitalization of domestic stock exchanges more than doubled from a year earlier, an indication of too much capital flowing around.

China?s Real-Estate Developers Struggle with Debt

MarketWatch reports China?s Real-Estate Developers Struggle with Debt

The debt carried by China?s real-estate developers jumped 41% in the March-ended year from the same period 12 months earlier, according to a report by Chinese state media.

The value of unsold houses was up 40.2% to CNY903.5 billion, the Xinhua report said. Average profit was down 4.9% to CNY54.65 billion yuan.

Chinese government measures designed to cool the housing market have made it harder for real-estate companies to replenish their working capital by quickly selling apartments.

China's Unsustainable Growth

The above links are thanks to Michael Pettis at China Financial Markets.

Pettis commented on those articles, the unsustainable nature of China's loan growth, and the painful rebalancing that must happen in his latest weekly Email. Pettis writes ...

The fundamental imbalances are all in place and are not beginning to reverse. They will not reverse until there is a radical change in the growth model, and investment comes down sharply. Unfortunately that will also mean a sharp decline in growth.

My friend Wei Liao from Paridon, in Singapore, sent me a reference to an interview in 21st Century Business Herald (a well-regarded local newspaper) with Zhu Bailiang. Zhu is the chief economist at the State Information Center of China, a policy think tank affiliated with the NDRC, and in the interview he argued that the government shouldn?t introduce tighter monetary policies because existing limits on car and home purchases will hurt the economy.

Zhu is not a policymaker but he is a senior advisor to the very powerful NDRC, an entity usually considered less focused on correcting domestic imbalances and more focused on maintaining high growth and redistributing income to the poorer sectors of the economy. As Wei Liao points out, it is pretty rare that someone from China?s economic policymaking circle makes such a comment in the midst of what is supposed to be a tightening cycle.

I am also hearing, by the way, that there is a lot of opposition from local and municipal borrowers towards raising interest rates even further ? even though in real terms interest rates have decline quite substantially. This shouldn?t be a surprise since they have a lot of outstanding debt and are expected to borrow even more this year and next. Servicing the debt is unlikely to be easy and they want more, not less, relief.

I would argue that Zhu Bailiang?s comments and the rumors of opposition to further interest rate hikes probably indicate that the very intense debate within policy-making circles continues unabated. In fact, on that note, for me the most interesting thing that happened during the SED meetings in Washington this week involved Monday?s much-commented interview on the Charlie Rose show with Wang Qishan ? who is expected to be named Vice Premier next year.

The gossip that I have heard in Beijing is that both Wang and Li Keqiang ? expected to be named Premier next year ? understand China?s debt position, worry that the current growth model is unsustainable, and want to move quickly towards an economic growth model that de-emphasizes investment and exports. They also recognize that this will result in a sharp slowdown in growth ? although not nearly as sharp as I expect.

But they will not be able to do so without a pretty complete consensus within policy-making circles. A lot of very powerful constituencies ? the export sector, local and municipal borrowers, SOEs ? have benefited from distortions, like the currency and the interest rate regimes that have created the imbalances. They are likely, not surprisingly, to be loathe to give these up, and so it will not be easy to arrive at a consensus.

I have many times argued that historically one of the key indicators that the high-growth investment-driven model has reached its limits as a wealth creator (i.e. is no longer allocating capital efficiently) is when we see an unsustainable increase in debt. Of course whether or not we have reached this point is still much debated, but I would argue that we started to see this at least five years ago. The surge in banking assets doesn?t give much comfort.

Dramatic Slowdown in China Coming

China is going to slow, much more than anyone thinks. The commodity producers and commodity producing countries like Australia and Canada will take a hit. In contrast, the US, Japan, and Europe will benefit from falling oil prices. However global trade in general will slow, as will employment, and corporate profits.

We are starting to see a global growth slowdown already. When China joins the siesta, the slowdown will accelerate.

For more on the global slowdown, please see Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected

The pertinent question now is whether or not the market forces China's hand before the Chinese leadership change next year. I think it is possible, however a sustained drop in oil and commodity prices might be enough to forestall such an event.

Regardless, the markets will likely react in advance of that slowdown, whether forced by the markets or by plan of China's new leaders.

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

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Full story at http://feedproxy.google.com/~r/MishsGlobalEconomicTrendAnalysis/~3/0neZV7S1wL0/chinas-real-estate-developers-struggle.html

Chris Anderson: Here is Why Print Magazines Still Matter

Wired Editor-in-Chief Chris Anderson doesn't think his magazine's content needs to be updated minute-by-minute. If he were to build Wired from the ground up, Anderson would still release a print edition – a process he calls "event publishing."

"Events can mobilize the marketplace in a way a stream can't," Anderson told us. "... Saying 'this is one of the 12 most important things we have to say per year' gives it weight."

This interview is part of our Inspiring Performers series.

Watch Chris Anderson's Full Interview HERE >

Sponsored by:

Produced by Will Wei & Kamelia Angelova.  

Watch Chris Anderson's Full Interview HERE >

Don't Miss:

• Chris Anderson: Here's How We'll Get Wired App Sales Up Again

• Is The Web Really Dead? Chris Anderson Explains

• Chris Anderson: Here's What I Learned From My "18 Months Of Failure" Editing Wired

• How Chris Anderson Became The Editor-In-Chief Of Wired Magazine After A Career In Physics

Join the conversation about this story »

Full story at http://feedproxy.google.com/~r/businessinsider/~3/xuwpDDvmk1Q/chris-anderson-publishing-adapting-to-a-new-age-2010-11