Slight Bounces in Manufacturing, Weakness in Services
Markit has published its latest Flash PMI data for the euro area and several individual countries in Europe, and the news remain grim. The PMI composite for the euro area as a whole has bounced fractionally to a two month high due to a slightly better manufacturing PMI reading, but the services component has declined steeply, resulting in continued weakness overall. From Markit's summary of the data:
“The Markit Eurozone PMI Composite Output Index was little-changed in November according the flash estimate, up fractionally from 45.7 in October to 45.8. October’s reading had been the lowest since June 2009 and, for the fourth quarter of 2012 so far, PMI data suggest the strongest contraction of output since the second quarter of 2009.”
The current gap between the euro area PMI and GDP is likely to be eventually closed via a decline in GDP – click for better resolution.
Chris Williamson, Markit's chief economist, commented as follows:
“The eurozone economy continued to deteriorate at an alarming pace in November, and is entrenched in the steepest downturn since mid-2009.
“Officially, the region saw only a very modest slide back into recession in the third quarter, with GDP falling by a mere 0.1%, but the PMI suggests that the downturn is set to gather pace significantly in the fourth quarter. The final three months of the year could see GDP fall by as much as 0.5%.
“While it is reassuring to have seen signs of stabilization in some survey indicators, the overall rate of decline remains severe and has spread to encompass Germany, suggesting the situation could deteriorate further in the coming months. With jobs being cut at the second-fastest rate since January 2010 and expectations for the year ahead in the services sector slumping to the lowest since March 2009, firms have clearly become increasingly anxious about the economic outlook and are seeking to control costs as much as possible. All this suggests that any swift return to growth is unlikely.”
The complete report (pdf).
Furthermore, here are links to the flash PMI reports of Germany and of France, both of which are in essence very similar to the euro area wide survey results (in other words, a horror-show).
Readers should keep in mind that PMI data are diffusion indexes – any reading below the 50 level signifies contraction (a plurality of negative indications from the companies surveyed). From time to time the indexes will bounce a little because one or the other sub-component is improving, but as long as we get readings well below 50 overall, the outlook remains bleak. Moreover, if one looks at the sub-components in detail, we can see that prices have risen, but both the all important order backlog and employment components remain in steep decline. This is basically the worst combination possible.
Money Supply Expansion Accelerates
We would however add to this that money supply growth in the euro area is lately accelerating again. What we see in the PMI data above is the lagged effect of the steep slowdown in money supply growth in the years 2010 and 2011, which was a direct result of the combination of collapsing bank lending and fiscal austerity (austerity plays into it because it means the supply of bonds for monetization purposes has slowed down a bit).
As painful as a recession is, especially in the peripheral countries where major bubble activities have collapsed, it is the economy's way of healing itself. It would make little sense to artificially support, say, the construction industry in Spain and Ireland, given that the housing bubble has left both countries with a massive oversupply of houses. However, the liquidation of malinvested capital in such an important sector of the economy naturally is an especially painful process. An enormous amount of wealth has been squandered, and it is to be welcomed that money supply growth has slowed over 2010-2011, as that has averted the resumption of economic activities that are likely to squander real wealth.
Now that money supply growth is re-accelerating, one must expect a lagged reaction in economic activity and economic data as well. As of the end of September, true money supply growth in the euro are has accelerated to 5.6% year-on-year and was growing at a 5.5% annualized pace in the quarter and 11.7% annualized in the month (as always, the data and related charts come via Michael Pollaro).
It remains to be seen of course whether this pace can be maintained or even increased in coming months. So far, the ECB's ample provision of credit has had far less effect on money supply growth than the inflationary push of 2008-2009, but it appears that there are reasons to expect bank lending in the euro area to grow once more, in spite of the fact that European banks are severely capital challenged at this time (i.e., many are Potemkin villages that are only pretending at solvency).
Euro area – the true money supply in billions of euro, TMS year-on-year growth and M3 y-o-y growth – click for better resolution.
The source of increased lending in the euro area are apparently not European banks, but chiefly US banks. To be sure, their share of the overall credit pie is still small, but it appears to be growing fast.
According to a recent press report:
“American banks having a hard time finding credit-worthy customers near home are finding more business in an unlikely spot — Europe.
At a time when credit problems in Greece, Spain and elsewhere on the continent are dominating headlines, U.S. lenders have been able to capitalize on the crisis by taking business away from European banks.
Bank lending may seem sparse in the U.S., but that's largely a matter of perception. Bank lending is actually on the rise, but only to borrowers with nearly spotless qualifications.
In Europe, meanwhile, lending standards are tightening while credit conditions are worsening, according to the most recent bank lending survey from the European Central Bank. Worsening economic conditions have put pressure on banks there while opening opportunities for well-capitalized institutions in the U.S., where the economy is managing to eke out at least slow growth.
"In all, this suggests that the ECB is still struggling to ease financial conditions as business cycle dynamics remain very adverse," economist at Nomura Securities said in a note. "The ongoing tightness in credit conditions in some euro-area countries remains the biggest challenge for the ECB."
Recent numbers show that American lenders have taken their largest-ever share of lending to European customers, a direct outgrowth of retrenchment from banks in financially troubled nations having to rein in their businesses to weather the sovereign debt storm.
U.S.-originated loans to European customers have totaled about $25 billion in 2012, which is nearly 5 percent of Europe's total loan volume and triple the share from the same period last year, according to Dealogic.
Clearly though this lending activity is significant at the margin. While uncovered money substitutes (the major money residual stemming from fractionally reserved lending) grew still at a negative 8.5% year-on-year as of September, they were growing at a positive 13.4% annualized rate in the month and a 10.5% annualized rate in the past quarter. This indicates that overall, bank lending is currently picking up strongly in the euro area.
Since uncovered money substitutes are effectively 'money from thin air', the usual effects can be expected to be set into motion with a lag. This will probably be hailed as a 'recovery' at some point down the road, but if it were possible to create wealth by increasing the money supply, we would of course all have long ago arrived in the Land of Cockaigne.
And no, this is not something we need to test experimentally over and over again to be absolutely sure. It has never worked and won't work this time around either.
Charts by: Markit, Michael Pollaro
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- A Date Which Will Live in Infamy
President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.” Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard. Nixon points out where numerous evil speculators were suspected to be...
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- News from TINA Land
Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Silver is in a Different World
The Lighthouse Problem Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams. Who put that bobbing lighthouse there? Image credit: John Lund / Corbis Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat,...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...
- Real vs. Nominal Interest Rates
Calculation Problem What is the real interest rate? It is the nominal rate minus the inflation rate. This is a problematic idea. Let’s drill deeper into what they mean by inflation. What to include, and how can it even be added up? Illustration by alekup You can’t add apples and oranges, or so the old expression claims. However, economists insist that you can average the prices of apples, oranges, oil, rent, and a ski trip at St. Moritz. This is despite...