Thursday, July 24, 2014 - Bankster Logic

Bankster Logic
by Sinclair Noe

DOW – 2 = 17,083
SPX + 0.97 = 1987
NAS – 1 = 4472
10 YR YLD + .05 = 2.51%
OIL - .03 = 102.04
GOLD – 10.10 = 1294.90
SILV - .54 = 20.47

An extremely flat day on Wall Street but good enough for another S&P 500 record high close.

In economic news: Initial claims for state unemployment benefits declined 19,000 to a seasonally adjusted 284,000 for the week ended July 19, the lowest level since February 2006. In the past six months, unemployment has fallen much faster than expected, from 6.7 to 6.1%. The labor market is still struggling with long term unemployment and part-time jobs instead of full-time work, but it seems to be making progress.

One area not showing progress is wages. The Labor Department released its latest report on median wages; on a year-over-year basis, median earnings were up just 0.8% in the second quarter, to $780 per week, not enough to keep pace with inflation. The median wage data is a bit different than the weekly earnings data that comes out of the Labor Department’s payrolls report. That one is the average earnings, and what’s likely happening is the growth for top earners is pulling that series up more. Average earnings are up 2.1% year-on-year. The report also showed that women earned 83.5% of what men did.

The Commerce Department said new home sales dropped 8.1% to a seasonally adjusted annual rate of 406,000 units in June. It was the biggest decline since July of last year. May and April sales were revised lower. So this was a very weak new home sales report, but earlier in the week we saw a fairly strong report on existing home sales.

Let’s move over to earnings reports:

Amazon.com can sell stuff, they just haven’t figured out how make a profit. Amazon is expanding grocery service, they introduced a new smartphone, and a set-top box for TV streaming, and they managed to increase revenue 23% to $19.34 billion from $15.7 billion in the earlier period. They also reported a loss of $126 million or 27 cents per share.

Caterpillar has the exact opposite problem; revenue fell but they posted a higher profit. Caterpillar’s revenue numbers have now fallen in six of its past eight quarters, with the quarterly year-over-year decline averaging 8.3%. In the last quarter, sales fell 3% from a year ago to $14.1 billion, while profit increased 4.1%.

Starbucks posted fiscal third-quarter profit of $512 million, or 67 cents a share, up from $417 million, or 55 cents a share a year ago. Revenue for the three months ended June 29 rose 11% to $4.1 billion from $3.7 billion.

Signaling a major turnaround in the airline industry’s fortunes, the nation’s three major legacy carriers; American Airlines, United Airlines and Delta Air Lines — all posted record profits in the past quarter. Delta reported net income for the second quarter of $801 million, up 17 percent from the year-earlier period. United Airlines, which had a loss in the first quarter and has struggled with its merger with Continental Airlines, posted a $919 million second-quarter profit. Douglas Parker, the chief executive of American Airlines, said today that the airline’s second-quarter profit, excluding special charges, of $1.5 billion was its best quarterly earnings performance ever.

General Motors posted second quarter earnings of $190 million on revenue of $39.6 billion, up from $39.1 billion in the same period a year ago. The problem for GM has been recalls for safety issues, which have killed 13 people. GM set up a compensation fund with $400 million; they have also paid $2 billion this year for the recalls, and they announced pretax charges of $874 million to cover future product recalls. GM is likely to feel the financial repercussions of the millions of cars it has recalled for years to come. The company has recalled 29 million vehicles this year, many of which haven’t yet been repaired. To give a sense of the pace, GM recalled around 15 million vehicles for ignition switch related issues so far this year, and repaired around 560,000 in the second quarter. It announced a recall of more than 700,000 vehicles for a separate issue just yesterday. The surprising part is the increase in revenue, which comes in part from pricing, but also the bad press hasn’t deterred buyers.

Businesses and individuals in the US have parked about $2.6 trillion in money market funds. It is generally considered a safe place to leave money short term, or that was the thinking until 2008, when money market funds broke the buck, dropping below par value of $1 per share. Turns out, the funds weren’t guaranteed. There is no government insurance on the safety of deposits, no regulator-required capital buffer to protect against losses, no central bank ready to stand as “lender of last resort” to keep a money market fund from suffering a short-term cash crunch. Of course, the Treasury and the Fed stepped in to bail out the funds and avoid a run on the funds, which would have been catastrophic.

And so, a mere 6 years later, the government has finally managed a few reforms, but they aren’t real reforms because the bankers fought reform tooth and nail.  The new reforms do not include capital buffers, but they will allow for a floating NAV, or net asset value. So your share in a money market fund may or may not be worth one dollar. And if you try to cash out, the funds can impose extra fees to slow down a potential run. That’s about it. After 6 years. I hope you feel safe and secure in the knowledge that nothing of any substance has changed in the last 6 years.

An examination by the Federal Reserve Bank of New York found that Deutsche Bank AG’s giant U.S. operations suffer from a litany of serious problems, including shoddy financial reporting, inadequate auditing and oversight and weak technology systems. In a letter to Deutsche Bank executives last December, a senior official with the New York Fed wrote that financial reports produced by some of the bank’s US arms “are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm’s entire U.S. regulatory reporting structure requires wide-ranging remedial action.”

Deutsche Bank, one of Europe’s largest banks, was a forceful opponent of the Fed’s push to force foreign banks to comply with the same capital requirements as domestic banks. Officials from Deutsche Bank argued that the Fed’s requirement was too restrictive.  This year, the Fed went ahead with those tougher capital requirements for foreign banks. But it gave most of them until the middle of 2016 to comply. Yes, of course it’s theoretically possible that management could go through and fix everything that’s wrong with the firm’s US operations but, really, this is more of a tear down job.

Dark pools are where institutional investors can place large buy and sell orders without alerting the broader market. Prices and transactions are not reported; it is the furthest thing from a free and open marketplace.  Different financial institutions run a variety of dark pools. Barclays runs one of the biggest dark pools called Barclays LX. They’ve been sued by the state of New York for fraud; the suit alleges Barclays favored high frequency traders over other investors in the dark pool and they falsified marketing materials, inaccurately portraying the concentration of high-frequency traders in the market, and misrepresenting a service that purported to protect investors from predatory trading behavior.

Today, Barclays filed a motion to dismiss the lawsuit, and this is classic bankster logic; they argued that Barclays’ customers were sophisticated enough to understand that “glossy marketing brochures” about the dark pool, did not reflect its actual composition; their customers knew better than to rely solely on the marketing materials. So, they basically admitted they were lying in their marketing material, but their clients were smart enough to know that banks are liars.

President Obama called today for Congress to end a tax loophole that allows big corporations to designate a foreign country as their official address, in order to avoid US taxes. The corporation doesn’t have to actually move their headquarters, just set up an address overseas. Obama called on members of Congress to close the loophole even if they disagree with his broader calls for changes to the tax system that would lower corporate rates and close several loopholes, including that one. The legislative effort is unlikely to succeed in Congress.

Nine inversion deals have been reached this year by companies ranging from banana distributor Chiquita Brands to Medtronic. The whole idea is to pay less taxes while still enjoying the benefits of doing business in the US. Of course, the legal change of corporate headquarters is essentially a process of renouncing citizenship, and it just seems corporations should face the loss of citizenship the same way people do, which means they should pay an exit tax. There are other ways to put an end to this inversion tax evasion scheme. And if we don’t, you can count on executives whose companies were born of American ingenuity and which make their profits from American customers (including the government) will troll international waters for opportunities in low-cost tax havens. It’s a race to the bottom.

Tuesday, April 01, 2014 - Murderers and Cheats

Murderers and Cheats
by Sinclair Noe

DOW + 74 = 16,532
SPX + 13 = 1885
NAS + 69 = 4268
10 YR YLD + .04 = 2.76%
OIL – 1.99 = 99.59
GOLD – 5. 00 = 1280.80
SILV un = 19,86

Congratulations Mary Barra, you’ve been named CEO of General Motors, one of the biggest companies in America; now head on over to Capitol Hill to take the blame for the people who used to run the company.

Barra’s appearance before a subcommittee of the House Energy and Commerce Committee represented a significant new phase in the company’s crisis since it issued recalls that began in February for 2.6 million Cobalts and other vehicles. The problems with the cars involve faulty ignition switches; GM repeatedly failed to fix faulty ignition switches, despite conducting multiple internal studies of the problem since 2001, and 13 people died in the defective vehicles.

Members of Congress and the families of people killed in GM cars are urging Barra to declare the cars unsafe to drive until new ignition switches are installed. So far, GM has said the vehicles are safe to operate as long as there are no objects attached to the ignition key.  GM conducted several internal investigations of the switch problems, dating back as far as 2001. Company engineers learned that the key in the ignition could be inadvertently bumped into the off or accessory position, causing the engine to lose power and disabling air bags.

Documents show that GM approved the switch for installation in its compact cars in 2002, despite data from its supplier, Delphi that the key turned too easily in the ignition. Meanwhile, the National Highway Traffic Safety Administration knew of problems but did not order earlier recalls. The automaker rejected changes to the switch in 2004 and 2005 despite becoming aware of consumer complaints. In July 2005, the company and the National Highway Traffic Safety Administration learned of a fatal accident in Maryland that killed a young woman. It was the first of what would become a series of incidents in which vehicles suddenly lost power and air bags failed to deploy in a crash.

GM and Delphi changed the switches in 2007, but the new switches were also defective. Federal safety regulators made an internal recommendation to open a formal defect investigation in 2007 after receiving information about four fatal crashes involving air bags that failed to deploy, but the agency declined to pursue a formal investigation because, it said, it “did not identify any discernible trend.”

Last night, Barra met privately with 22 family members of accident victims at GM's offices in Washington. There is nothing that would indicate that Barra was involved in the past problems; she will be very much involved in resolving those problems. There needs to be compensation for families of the victims. And they will have to find out what went wrong, and how it could continue to go wrong for so long. There are still cars on the road with faulty switches. They will have to deal with that and fast. At this point, any more deaths would be tantamount to murder. Maybe we’ve already hit that point.

The executives at GM knew for 13 years that their cars had a defective ignition switch that could and did kill people. They did a "cost-benefit analysis" and concluded that paying off the deceased's relatives was going to be cheaper than having to install a $10 part per car. They then covered up their findings and continued to let millions drive around with the defective part in their cars. There would be no recalls. People died; parents had to bury their children.

Also today in Washington, the Senate Permanent Subcommittee on Investigations released a report on Caterpillar, the company that makes heavy construction and mining equipment. According to the report, Caterpillar paid its tax consultant and auditor, PricewaterhouseCoopers to help set up the transfer of $8 billion in profits to a Swiss subsidiary between 1999 and 2012. The transfers had no economic substance and were made solely to take advantage of the lower tax rate Caterpillar negotiated with Switzerland, which ultimately resulted in about $2.4 billion in tax savings. And even though the tax scheme was just a way of shuffling paper to avoid taxes, the report did not draw any conclusions about whether this was illegal. It will likely result in the introduction of new legislation to make it tougher to skirt tax laws, but then that legislation would have to pass, and there will be armies of lobbyists on the case.

Over the past two years, GE has deployed more lobbyists than any other company to argue for a tax loophole that lets businesses deduct interest earned from overseas lending, according to a new report by Americans for Tax Fairness. This particular tax break will likely cost the US government $62 billion in revenue over the next decade.

GE lobbyists made contact with lawmakers or their staffs at least 863 times over a two-year period between 2011 and 2013 to argue for the loophole, known as the "active financing exemption." Congress is expected to extend the exemption again soon, with bipartisan support. The company paid its lobbyists $63 million to advocate for the exemption and other tax-related interests over that time. Citigroup, the next-busiest company, sent lobbyists half as often to push for the deduction and spent less than $15 million.

All told, the top 30 companies and trade organizations that lobbied for the exemption; major Wall Street banks and other big multinational companies with financing arms, such as GE and Ford; made more than 4,000 contacts with Congress to press for an extension of the exemption. They paid lobbyists $586 million over that time. The tax break essentially lets businesses indefinitely shield from US tax authorities interest they earn from lending money overseas.

It's not clear how much the loophole benefits each individual company, in terms of tax savings. It also can't be determined from lobbying records how much money GE or other companies spent specifically to push for the active financing exemption because companies often lump together spending totals for several issues together. But GE wrote in its 2012 annual report that if the provision were not renewed, "we expect our effective tax rate to increase significantly."

Congress technically did away with the active financing exemption as part of a tax-code overhaul in the 1980s. At the time, lawmakers said it was too easy for companies to cut their tax bill artificially by making it seem as if profits earned in the US were instead earned overseas. Yet Congress reintroduces the exemption every year, as part of a giant package of more than 50 tax breaks known as tax extenders, which the Congressional Budget Office calculates could cost the government $700 billion over the next decade.

Support for the extenders is typically bipartisan. The last round expired at the end of 2013, and Congress is now considering a package that would apply the tax breaks retroactively to the beginning of 2014.

The companies who have pushed hardest for the extension of the tax loophole are among those that are the most criticized for exploiting US tax laws in order to shelter huge amounts of revenue overseas. Though the US corporate tax rate is technically 35%, the companies that employ the active financing deduction and other tax-sheltering mechanisms pay a far lower effective rate.

General Electric, according to some calculations, pays an effective rate of less than zero in many years. GE claimed a tax benefit of $3.1 billion, meaning it claims it overpaid by that much, between 2008 and 2012 on $27.5 billion in profits

According to a new report from ISI Research, US S&P 500 companies now have $1.9 trillion parked outside the country. Some of that is just multinational corporations profits overseas; welcome to globalization; a big part of it is tax avoidance. Apple figured out a way to legally avoid paying corporate income tax on $30 billion of overseas profits. Apple set up a shell company, an Irish subsidiary that didn’t owe Irish taxes because it was managed and controlled from the US, but it didn’t owe US taxes because it was incorporated abroad. Brilliant.

Except, sometimes a big multinational like Apple might want to bring that money back to America, at which point the government taxes the difference between what companies pay in corporate income tax abroad and what they would have paid here. So, if they ever want to get the money out of international limbo, there shouldn’t be any advantage to this kind of tax avoidance scheme. Unless, the government does something stupid, like rewarding this bad behavior, with a tax repatriation holiday; a brief window of amnesty to bring capital back onshore at a fraction of the tax rate, pennies on the dollar. So, all Apple has to do is be patient and wait for the tax repatriation holiday.

And why would the government offer such a gift to tax dodgers? The thinking is that it brings in fresh money, which will be put to productive purpose, spurring economic growth. We tried it in 2004, and it doesn’t work. Growth and investment didn't increase. Even though corporations weren't supposed to use these funds for share buybacks or dividends, they did. That was good news for stock owners; bad the economy and even worse news for workers. Some of the companies that brought the most money back actually laid people off.

Tuesday, April 23, 2913 - A Tweet Day

A Tweet Day

by Sinclair Noe

DOW + 152 = 14719
SPX + 16 = 1578
NAS + 35 = 3269
10 YR YLD un 1.70%
OIL + .38 = 89.57
GOLD – 12.70 = 1414.60
SILV - .47 = 23.04

Some days you hear a bit of news and it's bad, really bad. And then some days, hackers hack into the Associated Press Twitter account and tweet that there are bombs at the White House, and the stock market goes into a freefall, and it's bad, but not really bad.

Yes, a false tweet sent stocks plummeting. The 143-point fall in the Dow industrial average came after hackers sent a message from the Twitter feed of the Associated Press saying the White House had been hit by two explosions and that Barack Obama was injured. The fake tweet, which was immediately corrected by Associated Press employees, caused a sensation on Twitter and in the stock market.

White House officials were unimpressed. An AP reporter apologized for the Twitter hacking at the start of the daily White House press briefing, saying the tweet had been deleted as soon as it was discovered. A stoney-faced Jay Carney, Obama's personal spokesman, thanked the reporter but did not look amused. "The president is fine. I was just with him," added Carney.

The market recovered within a few minutes of the misunderstanding, but the incident raised many questions. We still have a problem with high frequency trading algorithms that scan the news and trade quickly, causing flash crashes. And then there are people who set stop losses, who may be kicked out of a trade because someone's computer over-reacts. There's a substantial business by high-frequency trading hedge funds reading machine-readable news sold to them for big bucks by brand-name news organizations.

Fans of flash-trading robots say they make the market more "liquid," meaning stocks trade more easily. But they can also make liquidity vanish in an instant, making it harder for the few remaining human beings in the stock market to keep order when things go haywire. Remember the Flash Crash of May 2010? Remember the Facebook IPO? Remember yesterday?

Yep, yesterday. Google had a mini flash crash yesterday. And then it passed and nobody noticed much. It's actually happening all the time. And if you lose a little confidence in the markets, well you should. Now the market has almost become complacent of these errors.

And today's flash crash was a fairly simple prank hack; a one-hit wonder. Imagine if someone really wanted to be malicious. Imagine wave after wave of false news stories hitting the high frequency machines. We could one day be looking at not just a 150 point drop, but a thousand points, or maybe 10-thousand.

And if you still have some confidence in the markets, you'll love this next story. Standard & Poors, the credit rating agency is defending itself in a $5 billion civil fraud lawsuit. The government claims that S&P defrauded investors by telling them that its ratings on collateralized debt obligations were based on stuff like research and objective analysis. The government claims that, instead of objectively analyzing the CDOs, S&P analysts gave these CDOs the best possible ratings, in order to win more CDO-rating business from the banks that pay their salaries. 

The government seems to have a good case; many of the S&P analysts sent emails to each other and to their bosses explaining how bad the CDOs were and how the whole thing would end badly, and some referred to the ratings as “burning down the house”, and the whole email problem seems to indicate that the folks at S&P knew they were cheating; they really, really knew that what they were doing was wrong.

But S&P says that we should ignore those emails, that they were just part of the company's "robust internal debate." It says its ratings were just dumb and unreliable, not fraudulent. But then it also says we should go ahead and ignore its claims of objectivity and integrity, while we're at it. S&P is claiming that it's objectivity was mere puffery, which is a bit of a stretch for a legal defense, and even worse as a business model. It shouldn't come as a surprise. It has been painfully obvious that the credit rating agencies have a conflict of interests. They are paid by the banks whose products they rate.

This conflict was a problem before the crisis, and it remains a problem now. And though regulators have made loud noises about doing something about this problem, they have not done much in the way of solving it.

Which means that we could once again be in a situation in which a rating agency's ratings turn out to be woefully wrong. By that point, nobody will have any excuse for being surprised. S&P has all but told us to expect it. It is now part of the court records; their ratings are nothing more than puffery.

Speaking of puffery, it's earnings reporting season.

Apple reported fiscal second-quarter earnings of $10.09 a share on revenue of $43.60 billion versus $12.30 a share on $39.19 billion a year earlier. Better than expected. Apple is opening the doors to its bank vault, saying it will distribute $100 billion in cash to its shareholders over two years. Apple increased its dividend 15 percent to $3.05 a share and said it will expand its share repurchase program to $60 billion from the $10 billion level announced last year. 

KFC parent Yum Brands reported that quarterly profit fell less than Wall Street expected, despite a sharp drop in sales in its top market of China, and the company's shares jumped 6.5 percent. The fast-food operator reaps more than half of its overall sales in China. I did not know.

Some of the crown jewels of corporate America have reported declining revenues and earnings, and have lowered their forecasts, and in doing so, have unleashed a flood of obfuscation and excuses – from Easter falling on the wrong date to lazy sales reps. So when Caterpillar reported on Monday, it was almost refreshing in its unvarnished ugliness.

Sales plunged 17.7%, profits 44.6%. “A challenging first quarter,” Corporate Controller Mike DeWalt called it. Dealer sales had been less than expected, inventories had piled up on their lots, and they’d cut back their orders to bring down their inventories. End-user demand was down, along with sales of aftermarket parts. Everything was down. But manufacturing costs jumped, and profits sagged. The rest of 2013 would be tough, and revenue guidance was lowered by a chunk. Not a single excuse.

Then there’s IBM. Because it’s the world’s largest supplier of information technology, its earnings report is a harbinger of things to come… namely excuses. A technique it had picked up from Oracle last month. Oracle’s earnings call was a mess. Revenue dropped 1%, instead of being up. Revenues from new software licenses and cloud subscriptions dropped 2%, after the company had forecast an increase of 3% to 13%. Hardware sales were a disaster. Who did they blame? First, the government – the quarter “ended on the same day as the sequester deadline,” explained President and CFO Safra Catz – then the sales reps. Oracle had just hired 4,000 new reps around the world; that was the problem Catz and President Mark Hurd said in unison. They hadn’t been trained yet. It was just “sales execution.” Nothing else. Certainly not the economy, Catz pointed out.

“What we really saw was the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4,” Catz said. Those “new reps,” she said, “ran out of runway in Q3.” They just couldn’t close their deals. “The issue for us is simply conversion,” Hurd added. “Clearly we have work to do in training new reps on managing the sales processes,” Catz chimed in. What about the old reps? Where they all on vacation? They didn’t say. Not a good omen.

Thursday evening, it was IBM’s turn to report a first-quarter earnings shortfall and revenues that, instead of growing, had skidded 5% from a year ago. To get back on track, IBM would swing the axe, at a cost of $1 billion in the second quarter – “workforce rebalancing” was its newfangled term, “to better align our resources to opportunity.” There’d be a lot of “rebalancing.” The term was used 14 times during the call. And it would dump some businesses.  A few moments later he added that revenues in the Americas were down 3%

A scary thought that the three largest markets in the world could weaken simultaneously – despite the prodigious amounts of money that central banks have printed and handed out. That phenomenon must be hidden under layers of lazy sales reps, sequester deadlines, and badly timed holidays. Yet, at the very end, something did slip out: “We are clearly not immune from changes in the global economy,” Loughridge said during his wrap-up, the most revealing sentence of the entire earnings call.

Monday, April 22, 2013 - Airplanes, Austerity, and Flying Bulls

Airplanes, Austerity, and Flying Bulls

by Sinclair Noe

DOW + 19 = 14,567
SPX + 7= 1562
NAS + 27 = 3233
10 YR YLD - .01 = 1.70%
OIL + .80 = 88.81
GOLD + 19.80 = 1427.30
SILV + .12 = 23.51

It's Monday but it's a better Monday than last Monday. No bombings to report today, at least not in our country.

Over the weekend, the cover story on Barron's magazine featured a cartoon drawing of a bull on a pogo stick, leaping through the air. You may recall that 6 months ago, Barron's poll of big money, institutional investors were bearish on the market; that was about 1,000 points ago. Now they're bullish. This would be a contrary indicator. But not today. Today, the bulls were buying the dips. The market started negative but finished positive. It’s all about momentum. Many fundamentally-oriented investors have been licking their wounds. And the nature of momentum-driven investing is that it can work longer than more sober-minded souls would think possible.

An open question is the odd continued rise of stock prices even as corporate earnings weaken. Why are investors paying more for companies whose earnings are declining in aggregate? In normal bull markets, you see a new leadership group emerge, and late in cycle, investors increasingly favor conservative stocks. This time the leaders are defensive plays, high quality companies that pay healthy dividends. While bulls say that this is predictable given ZIPR, we’ve had ZIPR for years now.
When this disconnect ends is anyone’s guess. But markets like this suggest that even more caution than usual is warranted.

The National Association of Realtors reported existing home sales slipped 0.6 percent last month to a seasonally adjusted annual rate of 4.92 million units. The supply of existing homes on the market for sale rose 1.6 percent during the month to 1.93 million, which represented 4.7 months' supply at March's sales pace, up from 4.6 in February.

That's is way below the 6 months' worth normally considered as an ideal balance between demand and supply. A year earlier, the inventory of unsold homes was 2.32 million, a 6.2 months' supply. More homes are expected to go on the market next month ahead of the summer buying season, so it might just be seasonal or it might signal that tight inventory is crimping demand, or it might signal that there is a real drag on housing.

It's earnings reporting season. Caterpillar reported this morning, with earnings of $1.31 per share; they missed estimates. In a statement the company expressed optimism on domestic housing, but said a 50% reduction in mining related businesses and little to no inventory build going into summer planting season will hurt results. For 2013, Caterpillar lowered its forecasts for both earnings and revenue to the low-end of the previous range.

Netflix posted better than expected earnings, and jumped about 20% in price.

Tomorrow, we'll get the Apple earnings. Over the past six months, Wall Street has gone from thinking that Apple can do no wrong to thinking that there's no way Apple will ever again do anything right. The stock has collapsed from a high of $702 to a recent low of $390 last week. Apple's results in the December quarter disappointed many analysts, and the company's outlook for the first quarter was muted. After a steady flow of news reports suggesting that first-quarter sales have not gone well, as well as Apple's failure to release any new products so far this year, many on Wall Street think that Apple will miss even its low guidance for the quarter.

The government is expected to report Friday that the economy expanded at a relatively healthy 3% clip in the first three months of 2013 after an anemic 0.4% gain in the fourth quarter. But don’t put too much stock into the mostly backward-looking report on gross domestic product. The signs of another midyear slowdown are already evident in softer consumer spending, a barely growing manufacturing industry and a slower pace of private-sector hiring. The same seesaw pattern also occurred in 2012 and 2011; and this year we can add in the effects of the fiscal cliff and the sequester. Consumers are finally feeling the bite from an increase in taxes earlier in the year and a round of federal budget cuts should pinch harder. The cuts only started to take effect in mid-March, and the biggest impact is likely to be felt in the next few months. Best case is for a continuation of an uneven recovery.

Today was the first day of the sequester hitting airports, as the nation's largest airports dealt with the onset of furloughs for FAA air-traffic controllers. Reports of late takeoffs at O’Hare, Atlanta’s Hartsfield-Jackson Atlanta International, New York’s LaGuardia, Los Angeles International and Charlotte-Douglas International in Charlotte, N.C., were widespread. In many cases, planes left the gate, only to sit on the tarmac for extended periods of time, while many flights were cancelled. Flights into cities such as Washington and New York were delayed by more than two hours as a result of the furloughs. Flight delays and cancellations at one airport can have a ricochet effect throughout the rest of the country, messing up arrivals and connections.

Pimco’s Bill Gross, the manager of the world’s largest bond fund, is the latest to trash a focus on austerity by British and euro-zone officials, telling the Financial Times that moving to cut debt too fast instead risks wrecking an economic recovery rather than righting the fiscal ship.

“The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not,” Gross said. “You’ve got to spend money.”

 Gross says it was a mistake to think bond markets were calling on governments to embark on a round of severe fiscal belt-tightening. “In the long term it is important to be fiscal and austere,” Gross said. “It is important to have a relatively average or low rate of debt to GDP. The question in terms of the long term and the short term is how quickly to do it.”

Of course, last week, there was a major brouhaha about the academic research of Rogoff and Reinhart, who in 2010 put forth the idea that when a country reaches 90% debt to GDP it willl inevitably result in economic contraction. Last week, three economists presented a follow-up which showed Rogoff and Reinhart had flawed assumptions and basic math errors in their research. The idea that there’s a debt-to-GDP threshold that is true for every country, falls apart.

The “moral of this story is that it is an illusion to expect that the complicated relationship between public debt and GDP growth will always and everywhere be the same.” The idea that there is a stable relationship between debt and growth across time and places, independent of weak economies, is now behind us.

The timing of these developments is interesting. Right now there’s a serious effort to rethink the move to austerity. Between the developments in Japan and the IMF’s efforts in Europe and England, the common wisdom will soon be that austerity as a solution was oversold, with all the toxic side effects hidden. The question next will be how to turn that into political power.

France and Spain fell short of their budget deficit goals last year and rather than imposing even more draconian measures, the European Commission signals an end to sharp spending cuts.

The EU's statistics office Eurostat said France posted a deficit of 4.8 percent of economic output, higher than its 4.5 percent target. Spain's shortfall was the largest in the EU. Despite cuts and tax increases, Spain's budget shortfall was 7.1 percent, excluding bank recapitalization, higher than the government's 6.98 percent official year-end reading and well above Madrid's original target of 6.3 percent.

With budget cuts blamed for a second straight year of recession, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed. European Commission President Jose Manuel Barroso, said today that austerity had reached its natural limits of popular support, saying: "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support."

Budget cuts have been at the center of the euro zone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have little hope of finding a job. Crippling levels of unemployment and outbreaks of violence in southern Europe are now forcing a rethink, with the focus shifting to economic growth strategies.

It is not yet clear just how big a policy shift EU policymakers are planning.

From the Wall Street Journal:

Troubles overseas are threatening the US recovery for the fourth year in a row. This time it’s weakening economies abroad, rather than tumbling financial markets, signaling turbulence ahead.

US exports of goods to the European Union are declining outright. Growth in overall US exports has been sputtering for months, after a three-year postrecession surge. And major US companies are reporting increasingly disappointing overseas outlooks tied to the recession-plagued euro zone and slowing growth in other leading economies such as China.

The renewed fears of a global slowdown come after months of hope that a stronger recovery was finally taking shape.