Saturday, February 06, 2010

Big News Nobody Saw

The biggest news story of January was missed by almost everyone.

China made an unexpected move to tighten credit, by increasing the reserves maintained by banks. These reserves act as ballast, to keep the economies upright and reduce the bouncing up and down that otherwise would occur in the credit markets. Lack of these reserves is one of the things that led to the giant bubble economy of a few years ago. (Actually, it was and is bubbles upon bubbles, but that is a story for a different day.)

Here is an excerpt from that BIG STORY that ran on 13 Jan:
The People’s Bank of China yesterday raised the proportion of deposits that banks must set aside as reserves by 50 basis points starting Jan.

18. Economists hadn’t anticipated the move until at least April, the median of 11 forecasts in a Bloomberg News survey showed last week.

Policy makers may follow up by raising their benchmark rate in coming months, rather than waiting until the second half of the year as most economists in the survey had projected. By moving ahead of the [U.S.] Federal Reserve, which plans to keep rates near zero for an “extended” period, pressure will rise to allow the yuan to appreciate for the first time since mid-2008.
The repercussions from that move caused the markets to move lower over the next several days, coinciding with President Obama's speech about taxing the banks. Thus he got the blame for the markets tanking, and for once he wasn't the guilty party.

News also found here
world’s largest lender by market value falls

and here
"Asian stocks fell for the first time in four days,
while copper and oil declined after
China raised the amount banks have to hold in reserve."

Two weeks later "Asian stocks snapped their longest losing streak since 2004, European shares and U.S. index futures rallied and the yen fell after Federal Reserve policy makers said America’s economy is in a recovery,"

But this is just an example, repeated every month for the past year, of talk of good times and the markets will rally. Soon after, they proceeded lower again, as skittishness over jobs reports (released about a week into every month) drained enthusiasm.

And just how are we doing on jobs?

The news had a good, but fake number right up front. So thin even the mainstream media picked up on the underlying bad news. The unemployment rate dropped, but the economy is still shedding jobs. People have been out of work so long they have dropped off the back end of the safety net and are no longer counted as unemployed. The real unemployment rate is still near 18%. And while we need to be adding 200,000 jobs a month just to maintain our current state of employment, this month they "adjusted" so many numbers from so many months that it makes me wonder how many jobs we really are losing.

One report said "The government’s survey of households showed employment increased by 541,000 workers last month and the number of people in the labor force rose. The gain brought the participation rate, or the share of the population in the labor force, up to 64.7 percent in January from 64.6 percent." There were other reports showing we had lost workers. It is getting hard to know what to believe.

But there is a small kernel of very, very good news hidden in all of this.
(Feb 5) Factory payrolls increased 11,000 in January, the biggest gain since April 2006, after falling 23,000 in the prior month.

And I don't know where this next article gets its history. The manufacturing index has been above water for the past 3 months, but manufacturing jobs continued to shrink until this month. The article says:
"Manufacturing, which accounts for about 12 percent of the economy, has been a driver of the recovery and is projected to continue to expand. The strength has yet to translate into more factory jobs. "

But overall, this expansion in manufacturing is one of two good bits of news. The drop in oil prices, and a drop in the price of fuel at the pump, is partially attributable to the sudden contraction in credit in China, and that too will fuel increases in U.S. manufacturing. U.S. manufacturing tends to be very energy intensive, so it will help us more than it will help Europe, which is already being hamstrung by a "Cap and Tax" system that impedes it from properly utilizing vast amounts of energy for its industry.

On the government front, we seem to have dodged the double barreled bullet of Socialist Medicine under the Obamacare label, and the "Cap and Tax" economy killer. Both are at least comatose, if not dead. This is fortunate, as I forecast back on the 29th of July, that the two of them would be the end of us.

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