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nuggets of financial self-defence
Mish's take on global economic news and events
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Interest Rates and Bond Yields: Where are They Headed? September Hike Ideal? Is the Bond Bull Market Over?

czw., 03/09/2015 - 08:13
With all the chatter about whether the Fed will hike on September 17 or not, let's do an interest rate and bond yield recap of where various rates are, where they have been, and where they are likely headed.

Effective Federal Funds Rate



As of yesterday, the effective federal funds rate was a mere 8 basis points. Since April, it has been swinging from a low of 6-8 basis points to a high of 14-15 basis points. 

I suspect the odds of a hike are close to 50-50.

The CME Fed Watch has the hike odds at 27% as of September 2. However, the CME does not consider a move to 0.25% a hike.

I do, because it clearly is.

The current Fed stance is 0.00% to 0.25%. With the effective Fed Funds rate hovering between 8 and 15 basis points, a move to a firm 0.25% would be about an eighth of a point hike.

Why nearly everyone expects a quarter point hike is a pure mystery to me.

If the Fed delays until December, we may see such a move (if the economy stays reasonably firm),  but even then, I believe the Fed will baby-step this in a Market May I approach, quite similar to the childhood "Mother May I" game.

Yellen vs. Greenspan

  1. Recall Greenspan's famous statement: Hikes will be at a "pace that's likely to be measured".
  2. The Yellen expected "pace" is half as often.
  3. The Yellen expected "measure" is half as much.

Moody's Seasoned Baa Bond Yield Detail



Baa is Moody's lowest investment grade bond (one step above junk). It is a measure of risk taking appetite. The rise in yield from January is an effective tightening of rates, albeit from a low level. The following long term chart adds perspective.

Moody's Seasoned Baa Bond Yield



BB High Yield Bond Yield



BB is the top junk bond rating. Is the yield bottom in?

10-Year Breakeven Rate



Financial Times provides this Definition of Breakeven Rate.
The Break-even rate refers to the difference between the yield on a nominal fixed-rate bond and the real yield on an inflation-linked bond (such as a Treasury inflation-protected security, or Tips) of similar maturity and credit quality. If inflation averages more than the break-even rate, the inflation-linked investment will outperform the fixed-rate bond. If inflation averages below the break-even rate, the fixed-rate bond will outperform the inflation-linked bond.The 10-year breakeven rate is about 1.63% as of August 31, 2015. Clearly the market is not expecting serious consumer price inflation for quite a long time.

Yield Curve as of 2015-09-01



I created the above chart in StockCharts. The chart shows US treasury yields from 2 years to 30 years.

2- and 3-year yields have been rising very slowly since the beginning of 2013 in anticipation of Fed rate hikes.

At the long end of the curve (30-year in red, 10-year in orange) rates made recent highs in late 2013 but are well below those highs now.

Let's compare rates across the entire curve now compared to a  year ago.

US Treasury Yields Now vs. Year Ago



Thanks to Doug Short at Advisor Perspectives for help with the above chart.

Note that between 6-months and 2-years, treasury yields are higher than they were a year ago. Meanwhile, from 5-years and out, rates are lower than they were a year ago.

September Hike Ideal?

Bloomberg has a curious article out today: One Reason Market Turmoil Might Actually Make September the Ideal Time to Hike Interest Rates.
Torsten Slok, Deutsche Bank's chief U.S. economist, sees a silver lining in this market turmoil that he figures actually makes a September liftoff look more attractive.

"If anything, the narrative in markets at the moment is such that if the Fed does hike in September, then long rates and the dollar will decline because the market will think the Fed is hiking prematurely," Slok says in a research note. "Ironically, September may be the ideal time for the Fed to hike rates because given the way we currently talk about the economy in markets a Fed hike in September will likely be associated with an easing of financial conditions and not a tightening."

He asserts that the central bank ought to "do the first hike exactly when there is a bearish narrative in markets" to ensure it doesn't prompt yields further out along the curve to jump, as was the case in the infamous bond selloff sparked by 1994's rate rise.The Bloomberg article also mentions the "savings glut" thesis, a preposterous idea that I will rebut, in detail, later, in a separate post.

Mish Rebuttal of Slok's View

Other than general agreement over the unlikelihood of the long end spiking, Slok's reasoning seems flat out wrong.

The flattening of the curve is generally not good for bank profits and also reflects increasing recession possibilities.

A key reason the yield curve cannot invert now is the low end is at zero. Price in a couple hikes and portions of the yield curve could invert.

That's what happened in Canada earlier this year following a surprise cut in rates by the Royal Bank of Canada.

Canada Recession

On January 31, Based on an inversion in parts of the yield curve, I correctly proclaimed Canada in Recession.

Just yesterday, Canadian stats confirmed the recession. It remains to be seen if the US follows, but a flattening of the yield curve is not a good sign for growth.

For further discussion, please see Canada in Recession with Two Consecutive Quarters of Negative Growth.

How Big a Hike?

The debate still rages "will they, won't they". The correct answer is "It won't matter at all".

If the US does follow into recession, rest assured it will not be because of hike. With the global economy slowing rapidly, and with US equities and corporate bonds in huge bubbles, one hell of a payback is coming for the inane QE policies of this Fed.

Bubbles of Increasing Amplitude

Some defend the Fed, but I don't.

As noted in Fed Apologist Ritholtz Interviews Fed Apologist McCulley, Fed policy is precisely what's behind destabilizing bubbles of increasing amplitude over time.

Fed policy is also behind rising income inequality that Fed Chair Janet Yellen constantly whines about.

Is the Bond Bull Market Over?

Here's the question that's been on nearly everyone's mind for at least a decade: Is the Bond Bull Market Over.

I have two answers: Yes, and Perhaps Not.

Those answers are not contradictory. There are many bond bull markets to consider. Let's start with corporate bonds.

Near-Junk Corporate Bull Market Over?

Using Moody's Baa seasoned bonds as a good proxy for near-junk (the lowest investment grade bonds), let's take an even closer look at recent happenings.



The Moody's Baa seasoned bond yield hit an all-time low of 4.29% on January 30, 2015. It is now 5.36%. That's over a 100 basis point tightening (one full percentage point) in a mere seven months.

I am willing to state that the bull market in near-junk bonds is finished.

  • At some point the market will question covenant-lite conditions in which corporations can pay back debt with more debt issuance.
  • At some point the market will questions corporations taking on debt to buy back shares.
  • At some point the market will question the ability of some of these near-junk companies to survive at all.
  • At some point the market will realize what a bubble the Fed has blown with QE and how it seriously affected junk bond rates.

That "some point" appears to be now.

The only question is how fast the air comes out of the enormous junk balloon. We have yet seen a slow release of air from a bubble. Will this be a first?

Junk Bond Bull Market Over?

Let's hone in on BB bonds, the top-tier on non-investment grade (junk) bonds.



In April of 2013, the BofA Merrill Lynch US High Yield BB Effective Yield© hit an all-time low yield of 4.31%. The effective yield is now 5.62%.

That is a rise of 131 basis points (1.31 percentage points).

And for the same reasons noted in the above Baa discussion, I declare the end of the junk bond bull market.

Is the US Treasury Bull Market Over?

This question is amusing. Here is a pair of charts that shows why.

US 30-Year Bond Yield Monthly Chart



The "death" of the US treasury bull market has been proclaimed so many times it's difficult to show them all. Let's hone in further.

US 30-Year Bond Yield Daily Chart



Where others saw massive price inflation coming (with the CPI as the determining measure), I called for deflation (as measured by credit marked to market and asset prices). In other words I expected monetary inflation to manifest itself in asset prices not consumer prices.

I stick with that call. For all of those who think consumer price inflation is just around the corner, I have some questions.

Questions for Inflationistas

  1. What happens when there is another asset bubble bust in the US?
  2. What happens if the US goes into recession later this year or early 2016?
  3. What happens to the long end of the curve if the market even thinks the Fed will hike the US into recession?
  4. What is happening to the long end of the cure relative to the short end?
  5. Do consumer prices soar when commodity prices collapse?

Bonus question: With the long end of the curve just 70 basis points away from a record low, and with a global growth slowing, is it inconceivable for another record low at the long end of the curve?

Is the Bond Bull Market Over?

  1. US Corporates: Yes - and with surprisingly little fanfare
  2. US Treasuries: Maybe - but with constant speculation and erroneous proclamations for what seems like forever.

By the way, junk bond bull markets and equity bull markets tend to go hand-in-hand. So do junk bond bear markets and equity bear markets.

Feelin' Lucky?


Link if video does not play: Dirty Harry.

Question for the Fed: Do you have another bullet left in your gun if things head south, or not? "Well Do Ya Punk?"

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Beige Book Highlights: Will They or Won't They? Still Undecided?

czw., 03/09/2015 - 00:45
The Fed's Beige Book is a summary and analysis of economic activity and conditions, issued roughly two weeks prior to monetary policy meetings of the Fed.

"Book" is an adequate expression. This month, the Beige Book is 50 pages long. It's prepared with the aid of reports from the district Federal Reserve Banks.

Don't bother reading the book. It's not worth the slog. 

Beige Book Highlights

Bloomberg offers these Beige Book Highlights.
The Beige Book, prepared for the September 17 FOMC meeting, is not underscoring any urgency for a rate hike. Eleven of 12 districts report only moderate to modest growth with the Cleveland district reporting only slight growth. This compares with 10 districts in the July Beige Book which reported moderate to modest growth. Most districts describe labor demand as no more than modest to moderate and most describe actual job growth as no better than slight or modest. But there are isolated areas of labor shortages and four districts report a rise in wages for specific industries. Inflation is described as stable with only slight upward pressure across districts.

The sample period for the report ended on August 24, capturing the beginning of global market volatility. Several districts cited China as a factor slowing down demand. Still manufacturing, boosted by the auto sector, is described as mostly positive though two districts, New York and Kansas City, report contraction. The strong dollar is cited by five districts as a negative for manufacturing. Farm conditions are described as mixed.

Housing is a clear positive in the report, with sales and prices rising in every district. Construction is described as strong. Retail sales are also positive and are continuing to expand in most districts. Loan demand is generally described as rising. There's no significant immediate reaction to the report.Will They or Won't They?

It matters not whether the Fed hikes or not. Either way, bubbles have formed in equities and junk bonds. Tiny hikes will not cause a recession, and the bubbles are destined to pop anyway.

In honor of the question, however, here's a musical tribute from the '40s, with thanks to reader Charles.



Link if video does not play: Your "Undecided" Now What are You Going to Do?

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Canada in Recession with Two Consecutive Quarters of Negative Growth

śr., 02/09/2015 - 21:10
Yesterday, Yahoo!News reported Canada Officially Enters Recession.
Reeling from low oil prices, Canada fell into a recession in the first half of the year, government data confirmed Tuesday, putting Conservative Prime Minister Stephen Harper on the defensive in the run-up to October elections.

According to Statistics Canada, the economy contracted 0.5 percent in the second quarter after retreating 0.8 percent in the previous three months.

It is Canada's second recession in seven years and it is the only Group of Seven nation in economic retreat. The figures are the weakest since the 2008 global financial crisis.

The data reflects fears about the health of the global economy as more gloomy evidence emerged of a slowdown in China, a main engine of growth worldwide.Canada Recession Call Easy

Unlike the US, where the Fed pegged short-term interest rates so low that the yield curve cannot invert, calling the Canadian recession was easy.

On January 21, 2015 I wrote Canadian Recession Coming Up: Yield Curve Inverts Following Unexpected Rate Cut; Loonie at Six-Year Low.

"Coming Up" happened quickly.

On January 31, I wrote Canada in Recession, US Will Follow in 2015.
Following the rate cut, the yield curve in Canada inverted out to three years. Inversion means near-term interest rates are higher than long-term rates.

I saw no other person mention the inversion at the time. An inverted yield curve generally portends recession.US Recession Call More Difficult

With constantly huge GDP revisions in the US, and with a yield curve that cannot invert, it's much tougher calling US recessions.

It remains to be seen if a US recession starts this year or not. Spectacular auto sales and modest home building have kept the economy trudging along.

However, the US is not going to decouple from a slowing global economy forever. The idea is as silly as the 2008 notion that China would decouple from the US economy.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Fed Apologist Ritholtz Interviews Fed Apologist McCulley

śr., 02/09/2015 - 07:17
Bloomberg columnist Barry Ritholtz interviewed Paul McCulley, former chief economist at PIMCO, and often mentioned FOMC candidate on the Fed's performance.

The Podcast is over two hours long, so let's just go with Ritholtz's brief summary: McCulley Demands Apology on Behalf of the Fed.
McCulley noted those who claimed QE and ZIRP were going to cause inflation and the collapse of the dollar were totally wrong, and he demanded these critics of the Federal Reserve owe former Ben Bernanke an apology. Had the Fed Chief listened to them, we would have found ourselves in a modern day depression.

He is leery of those who believe the Government and Federal Reserve should have let the crisis run its course on its own, with zero interventions. He is especially harsh on the Austerians, whom he said made the recovery weaker than it need be by thwarting traditional Keynesian stimulus.

The full podcast is available on iTunes, SoundCloud and on Bloomberg.Rebuttal

In a blend of a monetarist and Keynesian thinking, McCulley supports Fed policies of QE and is "especially harsh on the Austerians, whom he said made the recovery weaker than it need be by thwarting traditional Keynesian stimulus."

For starters, I dispute the notion that without QE and intervention that "we would have found ourselves in a modern day depression" as Ritholtz maintains. Ritholtz's claim is a poorly-formed hypothesis presented as fact.

Yes, it's true that many in the Austrian camp predicted a dollar crash and high inflation. But I am in the Austrian camp and debt deflation has been my model, and still is my model.

As for an apology, what about an apology from the Fed for blowing serial bubble after bubble of increasing amplitude?

It's inane to demand an apology from those who warned in advance, and correctly so, of the housing bubble and subsequent crash.

In a twist of irony, McCulley gloats over the alleged lack of inflation, but it's pretty clear he has his blinders on as to what inflation is and ways it can be spotted. In the case of Fed policy, inflation did not manifest itself in the CPI, but rather in asset bubbles, again and again.

Challenge to Keynesians

Only Keynesian and Monetarist fools (there is no more polite word), believe a low CPI is a big concern.

I repeat my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit".

Consumer Price Deflation NOT Damaging

Even the BIS has concluded that routine consumer price deflation is no threat. For details, please see Historical Perspective on CPI Deflations: How Damaging are They?

Income Inequality and Leverage

China and the emerging markets are imploding right now. Leverage is as high as ever. Fed policy induced corporations to go into debt to buy back their own shares at absurd prices.

Janet Yellen pisses and moans about income inequality, as does Ritholtz. Both are blind to the fact the Fed is the direct sponsor of it all.

Unfounded Gloat

This Keynesian gloat about the Fed saving the world is laughable because the final chapter has not been written. Assets are arguably as overpriced now as they were in 2000, and 2007. As with Japan, another lost decade in the US is likely.

Demanding an apology on behalf of the Fed is like demanding an apology on behalf of a doctor who cuts off the wrong leg of a cancerous patient if the doctor gets it right the second time.

It's the Fed that owes us all an apology.

Barry, Paul, where the hell is that apology?

But Keynesians and Monetarists don't apologize. They just demand more and more stimulus and debt in the inane belief the cure for a debt problem is more spending and more debt.

The average 7th grader can easily see the fallacies of such nonsense.

Unfortunately, as students progress through high school and college, repeated brainwashing by professors in academic wonderland about the alleged benefits of easy money has warped a lot of minds, in this case, the minds of the interviewer and the interviewee.

Mike "Mish" Shedlock 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.
Kategorie: Najnowsze feedy

Investigating Consumer Confidence: 3-Month Low? 10-Month Low? Near Record High?

wt., 01/09/2015 - 20:05
Last week, three different measures of consumer confidence came out:

  1. University of Michigan: Consumer Sentiment 
  2. Conference Board: Consumer Confidence Level 
  3. Gallup: Economic Confidence Index

Claim of Importance

Bloomberg states "Consumer sentiment is directly related to the strength of consumer spending."

Let's investigate that claim starting with a look at the latest results from each survey. 

Consumer Confidence

On August 25, the Conference Board's "Consumer Confidence Level" soared well ahead of any Bloomberg Consensus estimate with a reading Bloomberg stated "will have forecasters scratching their heads."
Enormous improvement in the assessment of the current labor market drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report. This reading will have forecasters scratching their heads. The gain for this reading lifts the present situation component to 115.1 for a more than 11 point increase from July that points to consumer power for August.

The Yellen Fed has put great emphasis on the importance on consumer confidence readings and this report points to job-driven strength ahead for household spending.Head-Scratching Sentiment

Three days later, the University of Michigan release was another head-scratching event. Bloomberg reported Consumer Sentiment in U.S. Declines to a Three-Month Low.

The University of Michigan sentiment number came in at 91.9, well below any guess in Bloomberg's Consensus Estimate Range of 92.7 to 95.0.
An early reading on the effect of global volatility is downbeat as the consumer sentiment index came in well below expectations, at 91.9 for the final August reading. The mid-month reading was 92.9 which roughly implies a pace near 91.0 over the last two weeks which is the softest since May.Consumer Sentiment




Belief vs. Reality

In regards to consumer confidence, Bloomberg stated "The Yellen Fed has put great emphasis on the importance on consumer confidence readings and this report points to job-driven strength ahead for household spending."

Let's compare Yellen's belief to reality. Bloomberg conveniently provided this chart.



Here's a chart I put together last month on sentiment and sales.

University of Michigan Sentiment vs. Sales



To be fair, one needs to look at per capita spending and factor in boomer dynamics such as aging, etc. However, I do not have access to the conference board data, and the University of Michigan data on Fred is out of date.

Let's consider one more measure of sentiment.

Gallup Economic Confidence Index

On July 28, Gallup reported U.S. Economic Confidence Index Continues Downward, at -14.
Gallup's Economic Confidence Index continued its gradual, downward slide, reaching -14 for the week ending July 26. This represents a 10-month low for the index.

Last week's figure continues the generally downward trend that began in late January. At that point, the index peaked at +5 -- the highest weekly score Gallup has recorded since it began tracking economic confidence daily in 2008. Weekly figures have consistently been in negative territory since mid-March and have drifted gradually lower in recent months.

Gallup's Economic Confidence Index is the average of two components: how Americans rate the current economy and whether they feel the economy is getting better or getting worse. The index has a theoretical maximum of +100, if all Americans rate the economy as excellent or good and improving; and a theoretical minimum of -100, if all Americans rate the economy as poor and getting worse.

The current conditions score fell four points from the week prior to its current score of -9, accounting for the entire decline in the overall index. This was the result of 23% of Americans saying the economy is "excellent" or "good" and 32% saying it is "poor." Meanwhile, 39% of Americans said the economy is "getting better," while 57% said it is "getting worse." This resulted in an economic outlook score of -18, unchanged from the previous week.Gallup Economic Confidence



Polling Methods

  1. Gallup: "Gallup is based on telephone interviews conducted July 20-26, 2015, on the Gallup U.S. Daily survey, with a random sample of 3,540 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia."
  2. Conference Board: "The Consumer Confidence Survey uses an address-based mail sample design. The CCS mailing is scheduled so that the questionnaires reach sample households on or about the first of each month. The targeted responding sample size—approximately 3,000 completed questionnaires—has remained essentially unchanged throughout the history of the CCI."
  3. University of Michigan: The group surveyed 64 more people than usual in August in order to better capture the reaction to the market events, according to Richard Curtin, director of the Michigan Survey of Consumers. Typically, 500 consumers are polled every month. 

Questions

  1. Do the difference in polling methods help explain the different results? 
  2. Is it possible those responding to mail-in campaigns are economically better off and more likely to take the time to respond than those in phone surveys
  3. Is survey language a factor? Reading comprehension?
  4. Do people give different answers on paper than they might over the phone?
  5. Is the University of Michigan sample size of 500 big enough to predict spending patterns for the entire nation?

Poll Comparison

  • Gallup "Economic Confidence" is at a 10-month low. 
  • University of Michigan "Consumer Sentiment" is at a 3-month low.
  • The Conference Board "Consumer Confidence Level" is at the second highest level in 8 years.

The surveys are so out of line with each other, it is impossible that "sentiment" matches spending, no matter how one adjusts the data.

In fact, the above charts are so screwy that one might wonder if it's possible to accurately measure sentiment at all.

Assuming sentiment can be measured (and we have three different surveys that purportedly do just that), the usefulness of such wildly differing surveys is not readily apparent.    

Yellen can believe what she wants, but faith in sentiment as a leading indicator or purveyor of future economic spending patterns is seriously questionable, at best.

Forced to select a single survey, I would go with a phone survey over a paper survey, and a large sample size over a smaller one - Gallup.

By the way, the University of Michigan and Gallup surveys are at least going the same direction this year. The Conference Board survey is the odd man out.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

ISM Weaker Than Expected, Details Weak, Exports Contract Third Month

wt., 01/09/2015 - 18:42
Those expecting a boost from the ISM report for August were disappointed today.

The Bloomberg Consensus estimate for ISM was 52.8, with a range of 51.5 to 54.0. The report was below any economist's expectation at 51.1.
The ISM index, at a lower-than-expected 51.1, is signaling the slowest rate of growth for the factory sector since May 2013. And the key details are uniformly weak.

New orders, at 51.7, are at one of the slowest rates of monthly growth of the recovery, since April 2013. Backlog orders, at 46.5, are in a third month of contraction. New export orders, at 46.5, are also in their third straight month of contraction and are at the lowest rate since July 2012.

ISM's sample wasn't hiring much in August, at 51.2 for a 1.5 point decline from July and the weakest reading since April. Production slowed and prices paid, at only a 39.0 level last since in March, points to deflationary pressures.

The good news for the economy is that this report failed to pick up the auto-led surge that lifted the factory sector noticeably in June and July. Still, the ISM is followed closely and will raise doubts, justifiably or not, over a September 17 rate hike. ISM Details

Let's investigate all the details of today's report straight from the Institute for Supply Management Manufacturing ISM® Report On Business® released this morning.

IndexAugJulPP ChangeDirectionRate of ChangeTrend in MonthsPMI®51.152.7-1.6GrowingSlower32New Orders51.756.5-4.8GrowingSlower33Production53.656.0-2.4GrowingSlower36Employment51.252.7-1.5GrowingSlower4Supplier Deliveries50.748.9+1.8SlowingFrom Faster1Inventories48.549.5-1.0ContractingFaster2Customers' Inventories53.044.0+9.0Too HighFrom Too Low1Prices39.044.0-5.0DecreasingFaster10Backlog of Orders46.542.5+4.0ContractingSlower3Exports46.548.0-1.5ContractingFaster3Imports51.552.0-0.5GrowingSlower31
Key Points

  • Backlog of orders are in contraction
  • Growth in new orders plunged but still positive
  • Customer inventories surged (not a good sign for future orders)
  • Exports contracting faster for the third month
  • Prices have plunged 

There's nothing in the ISM report to make the Fed want to hike, but the Fed will do what they want.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.comMike "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.
Kategorie: Najnowsze feedy

China PMI Contracts Fastest Since February-March 2009

wt., 01/09/2015 - 11:39
China manufacturing and services are both in contraction at the fastest rate since early 2009.

The Caixin China General Manufacturing PMI shows operating conditions deteriorate at fastest rate since March 2009.
Chinese manufacturers saw the quickest deterioration in operating conditions for over six years in August, according to latest business survey data. Total new orders and new export business both declined at sharper rates than in July, and contributed to the most marked contraction of output since November 2011. Lower production requirements prompted companies to reduce their purchasing activity at the fastest rate since March 2009, while weaker client demand led to the first rise in stocks of finished goods in six months. Meanwhile, softer demand conditions contributed to marked falls in both input costs and output charges in August.Key Points

  • Output contracts at quickest rate in 45 months as new business falls solidly
  • Purchasing activity declines at sharpest rate since March 2009
  • Input costs and output charges both fall at marked rates

China Manufacturing PMI



Composite Contracts Most Since February 2009

The bad news in China does not stop with manufacturing. Markit reports the Caixin China General Services PMI has the fastest contraction of output seen since February 2009.

Key points

  • Composite output and new orders both contract for the first time in 16 months
  • Job shedding intensifies at manufacturers, while employment rises only fractionally at service providers
  • Composite input costs and output charges continue to fall

By now it should be perfectly clear to everyone that the entire global economy is cooling and the US will not decouple from that slowdown. Nonetheless, most economists, including those at the Fed, still do not see the obvious.

Mike "Mish" Shedlock 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.
Kategorie: Najnowsze feedy

Greece Loses 17,000 Jobs in July, Most Since 2001

wt., 01/09/2015 - 06:47
It's no wonder Greek prime minister Alexis Tsipras wanted elections now rather than later. He does not want the grim news of job losses and austerity to hit when he is more vulnerable.

Tsipras' problem may well be that he is too late.

Via translation from Libre Mercado, The Greek Economy Lost 17,000 Jobs in July, the Worst Result Since 2001.
Industrial production recorded a record drop in July, according to estimates by Markit.



In addition, capital controls, have resulted in record job losses according to data published on Monday the National Confederation of Commerce and Companies (ESEE ).

Consequently, economic sentiment has suffered an unprecedented collapse, returning to its lowest level since the start of the crisis.



According to the local press, Greece destroyed about 17,000 jobs in July, the worst result since 2001. In addition, another 40,000 people went to work part time from full time, with a consequent reduction in salary.What a disaster.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Witch Hunt Victim "Confesses": Word Police in China vs. Word Police in US

pon., 31/08/2015 - 23:00
Witch Hunt Review

As I noted earlier today China Starts Witch Hunt for Those Obstructing Government Efforts to Prop Up Stocks.

Public Confession

It took less than a day for a victim of the witch hunt to be rounded up for public display. The Financial Times reports China Reporter Confesses to Stoking Market ‘Panic and Disorder’.
A leading journalist at one of China’s top financial publications has admitted to causing “panic and disorder” in the stock market, in a public confession carried on state television.

The detention of Wang Xiaolu, a reporter for Caijing magazine, comes amid a broad crackdown on the role of the media in the slump in China’s stock market, which is down about 40 per cent from its June 12 peak. Nearly 200 people have been punished for online rumour-mongering, state news agency Xinhua reported at the weekend.

“I shouldn’t have released a report with a major negative impact on the market at such a sensitive time. I shouldn’t do that just to catch attention which has caused the country and its investors such a big loss. I regret . . . [it and am] willing to confess my crime,” [said Xiaolu]

When the market turmoil began in June, Beijing imposed restrictions on media reporting of the stock market. The independent China Digital Times, which monitors internet censorship in the country, said in June media were told to avoid stoking panic.

Do not conduct in-depth analysis, and do not speculate on or assess the direction of the market,” it reported an official directive as saying. “Do not exaggerate panic or sadness. Do not use emotionally charged words such as ‘slump’, ‘spike’ or ‘collapse’.” Word Police US Style

With thanks to reader Mark for the link,  Campus Reform reports that Professors Threaten Bad Grades for Saying Oppressive Words.
Multiple professors at Washington State University have explicitly told students their grades will suffer if they use terms such as “illegal alien,” "male," and “female,” or if they fail to “defer” to non-white students.

According to the syllabus for Selena Lester Breikss’ “Women & Popular Culture” class, students risk a failing grade if they use any common descriptors that Breikss considers “oppressive and hateful language.”

Much like in Selena Breikss’s classroom, students taking Professor Rebecca Fowler’s “Introduction to Comparative Ethnic Studies” course will see their grades suffer if they use the term “illegal alien” in their assigned writing.

According to her syllabus, students will lose one point every time they use the words “illegal alien” or “illegals” rather than the preferred terms of “‘undocumented’ migrants/immigrants/persons.”

White students in Professor John Streamas’s “Introduction to Multicultural Literature” class, are expected to “defer” to non-white students, among other community guidelines, if they want “to do well in this class.”

Streamas previously generated controversy by calling a student a “white sh*tbag” and declared that WSU should stand for “White Supremacist University”.

It is notable that one of the syllabus provisions warns: ‘The subject material of this class is sensitive and controversial. Strive to keep an open mind.’

How are students supposed to approach these sensitive and controversial materials at all, let alone to keep an open mind, if they have to fear that a misconstrued statement, or one that unreasonably offends a classmate will lead to a grade reduction or even removal from class?Banned Words and Phrases Comparison

Banned Words and PhrasesChinaUSSlumpIllegal AlienSpikeMaleCollapseFemalePanicIllegalsOvervaluedDown BigHigh PE
Repercussions China vs. US

In China, use of banned words and phrases, or even an analytical report that says a company is struggling will land you in prison or worse.

It is illegal to speak the truth in China. Heck, it's even illegal to pursue the truth. China has banned in-depth analysis!

Chinese analysts are probably scrambling right now to make sure they do not hint that sales of a company are likely to decline, be worse than expected, less than last quarter, or anything similar.

Those who make a mistake will find themselves on public display with a forced confession. Failure to confess when asked is likely to mean a death sentence or prison for life.

At Washington State University, use of politically incorrect terms will simply affect your grade. Moreover, students have the upfront option to not take inane classes in the first place.

Rest assured, classes in "multicultural literature", and "Women & Popular Culture" are not a likely foundation for a well-paying job.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Inventory Grows in Economic Liftoff Anticipation

pon., 31/08/2015 - 19:44
The Chicago PMI reading came in just shy of the Bloomberg Econoday Estimate of 54.9.
The headline for August looks solid, at 54.4 for the Chicago PMI, but the details look weak. New orders and production both slowed and order backlogs fell into deeper contraction. Employment contracted for a fourth straight month while prices paid fell back into contraction.

Lifting the composite index are delays in shipments which point to tight conditions in the supply chain. Inventories rose sharply in the month and the report hints that the build, despite the weakness in orders, was likely intentional. But strength is less than convincing and this report suggests that activity for the Chicago-area economy may be flat going into year end. ISM Chicago

Let's dive into the Chicago PMI Report for further details.
While New Orders and Production softened in August, both remained above their 12-month averages and significantly up from the depressed levels seen between February and June. Part of that resilience in Production and New Orders was due to stock growth as companies built inventories at the fastest pace since November 2014. Feedback from companies was mixed although our assessment is that the overall positive tone of the survey is consistent with a deliberate stock-build in anticipation of stronger demand in Q4.

Despite the latest gain, the labour component remained in contraction for the fourth consecutive month and was still close to June’s nearly 5-1/2 year low. The Employment component has been relatively weak in recent months and the survey suggests it’s unlikely to see a strong pick-up in the short-term.

Responding to a special question asked in August, 63% of our panel said they didn't plan to expand
their workforce over the next three months.Economic Liftoff Anticipation

Once again, everyone hopes for a "second half liftoff" that perennially struggles to arrive as strong as expected.

This year, I highly doubt 2% for the entire year. 1% growth might be an achievement. Nonetheless, businesses stockpile in anticipation liftoff.



Anticipation is the word (and song) of the day.

Link if video does not play Anticipation: Carly Simon

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Dallas Fed Region Activity Plunges Well Below Any Forecast

pon., 31/08/2015 - 18:48
Repeat after me "housing and cars and part time jobs, oh my". There's little else worth cheering about, not even the stock market lately. And housing is not all that strong either.

Today, the Dallas Fed reported that activity in its region plunged to a reading of -15.8, well below any economist's prediction. The Bloomberg Consensus range was -8.0 to +0.5.
Nowhere are the effects of the oil-patch rout more evident than in the Dallas Fed manufacturing report where the general activity index fell to minus 15.8 in August from July's already weak minus 4.6. New orders fell into deep contraction this month, down more than 13 points to minus 12.5 with employment, at minus 1.4, in contraction for a fourth straight month. Hours worked are at minus 6.3 while readings on the business outlook fell steeply though both remain in slightly positive ground. Less weak readings were posted by production, shipments and capacity utilization. But price readings are very weak, with raw materials at minus 8.0 and finished goods at minus 15.7. It really doesn't get any worse than this report which points to increasing drag from the energy sector. Dallas Fed Business Indicators



Note that wages and benefits are up big, while prices received and new orders are in deep contraction.

The above table from the Dallas Fed Texas Manufacturing Outlook Survey.

Some of the comments are interesting.

Primary Metal Manufacturing

  • Overall business is slowing.
  • The strength of the dollar is impacting us through an inability to export and high volume of imports.
  • The price of finished product dropped dramatically.

Fabricated Metal Manufacturing

  • New orders have dropped to half of what they were last year. Capital project equipment continues to be sourced in China and Korea as the owners are chasing every dollar of savings possible. We had our first layoff in 15 years.
  • We are currently experiencing a large surge in the automotive industry due to our relationship and close proximity to an automotive plant during a new vehicle implementation period.
  • It seems like if you are in a position to take on work and able to turn it around quickly there seems to be plenty of small to medium-range quantity types knocking. We are hoping that as oil prices continue to fall, food and other commodities fall also.
  • A little more deflation could certainly help.
  • Our oil and gas business, historically 50 percent of our revenues, is still down. Inventories have been consumed fairly well, which now offsets the second drop of oil prices. The growth we expect is due to our efforts to grow our non-oil and gas business.
  • The continued decline in the West Texas Intermediate crude oil price is expected to soften the demand for our basic fabricated products.
  • The volatility in the stock market and decreased energy costs always have a negative impact on replacement windows orders.
  • Even though there is a substantial decrease in raw material prices, capacity levels in PVC and glass are extremely constrained.
  • The reason for the decreased capacity levels is that during the housing crisis no capital expenditures were made and now most vendors are at full capacity.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

China Starts Witch Hunt for Those Obstructing Government Efforts to Prop Up Stocks

pon., 31/08/2015 - 07:07
In China, a massive witch hunt is underway.

Beijing regulators now seek individuals who  have destabilized the markets and spread rumors.

Official want someone to blame after their Large-Scale Share Purchases failed to halt a huge stock market slide.
China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials.

For two months, a “national team” of state-owned investment funds and institutions has collectively spent about $200bn trying to prop up a market that is still down 37 per cent since its mid-June peak.

After standing on the sidelines for more than a week, the government resumed large-scale stock-buying in the last hour of trade on Thursday. This helped to lift the Shanghai benchmark index from a small loss to end the day up more than 5 per cent. The market rose by almost 5 per cent again on Friday.

Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities.

Instead, authorities are planning to sharpen their focus on investigating and punishing individuals and institutions they believe have taken advantage of the state bailout to make profits or have obstructed the government’s attempts to shore up the market.

The regulator said 22 cases of insider trading, market manipulation and “spreading market rumours” had been handed over to the police.

Last Tuesday, following a 22 per cent fall in China’s stock market over four trading days — the worst drop for almost 20 years — police detained 11 people suspected of “illegal market activities”.Inane Policies

If China wants to find the culprits behind the selloff, its leaders ought to look in a mirror.

Totally inane growth targets, worthless or near-worthless SOEs, and currency manipulation by China's central bank are obvious problems that helped create a huge property bubble followed by a huge stock market bubble.

Instead of blaming their own bubble-blowing incompetence, Chinese regulators seek scapegoats.

Eight managers from Citic Securities, one of China’s largest investment banks, two officials from the China Securities Regulatory Commission, and a journalist from the financial magazine Caijing are among those already detained for "illegal activities" in the early stages of this witch hunt.

When the selloff resumes, the intensity of the witch hunt will pick up, and so will the intensity of capital flight.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Greek Snap Election Confusion; Tsipras' Questionable Gamble; Unwieldy Coalition Coming Up?

pon., 31/08/2015 - 05:16
Questionable Gamble

In the wake of reneging on major election promises, Greek prime minister Alexis Tsipras resigned and called for snap elections. He did so out of fear of losing a vote of confidence that would have forced the same result down the road.

In addition, Tsipras wanted the vote out of the way before further rounds of pension cuts and tax hikes took their toll on the economy.

His gamble now appears questionable.

Please consider Alexis Tsipras Rallies Supporters as Syriza Takes Knock in Polls.
Alexis Tsipras tried to rally Syriza party members behind him at the weekend in advance of a snap election, as opinion polls reflected deepening disappointment among voters with his government’s record.

His message to the weekend meeting was undermined by infighting among senior party officials, reflecting Syriza’s disarray in the wake of mass defections last week to Popular Unity, a new radical party led by the former energy minister Panagiotis Lafazanis, according to people who were present at the event on Saturday.

In another blow to the Syriza leader’s authority, a usually loyal party faction known as the “Group of 53”, which includes several former cabinet ministers, circulated a document at the meeting sharply criticising the premier’s decision last month to make a policy “somersault” and agree to a third rescue package totalling €86bn after months of tense negotiations.

“We need to come up with a persuasive alternative plan . . . that will lead us out of the memorandum [bailout agreement],” the document said.

More than 50 members of Syriza’s central committee and 27 of its MPs, including a former deputy finance minister, have switched to Popular Unity, which is campaigning on a defiant platform that calls for a voluntary exit from the eurozone and the re-adoption of the drachma.

“Re-adopting the drachma is not a catastrophe. . . There are plenty of European countries doing well that are not members of the eurozone,” Mr Lafazanis said at the weekend.

However, Syriza is still expected to win the election by a narrow margin, according to six opinion polls published over the weekend.

All give Syriza a lead of between 1.5 and 2.5 points over the centre-right New Democracy party, marking a sharp decline from its commanding 12 to 15-point lead in June — before Athens agreed to further tax increases and spending cuts in the latest rescue package.Unwieldy Coalition Coming Up?

US News reports New Greek election could mean new govt partners for Tsipras and his Syriza party.
Greece's outgoing prime minister, Alexis Tsipras, is banking on his popularity to win a national election next month and strengthen his grip on power after purging his radical left Syriza party of dissenters.

But as the political jostling heats up ahead of the Sept. 20 vote, it appears increasingly likely that Tsipras will have to form a new, more unwieldy coalition government — possibly with as many as three other parties.

The first major opinion poll since elections were called, published Friday in the left-leaning Efimerida ton Syntakton newspaper, showed Syriza as the most popular party, with 23 percent saying they intend to vote for it. That was down from 26 percent in early July.

The second-biggest party, the conservative New Democracy, appears to be catching up, with 19.5 percent of the intended vote, up from 15 percent in July.

Short of a majority, Tsipras would first look to renew Syriza's coalition with the Independent Greeks, a small right-wing party that had quietly backed all his policies. But in the ProRata poll, only 2 percent said they would support the Independent Greeks, below the 3 percent needed to enter Parliament.

If the Independent Greeks cannot guarantee Syriza a majority, things get more complicated.

Syriza would almost surely reject the idea of an alliance with the Popular Unity, the new party formed by its own dissidents.Tsipras Rules Out Coalitions

Adding to the election confusion, Reuters discusses other Setback Possibilities.
Syriza would get 29 percent and New Democracy party 27.8 percent if elections were held now, a poll conducted by Metron Analysis for Parapolitika newspaper showed. The result includes undecided voters.

Another poll by the University of Macedonia for Greek Skai TV showed Syriza leading the conservative opposition by three percentage points, with 61.5 percent saying Tsipras had pursued a wrong negotiating strategy with official lenders.

Syriza would get 25.3 percent of the vote versus 23.2 percent for New Democracy party another survey by polling company Marc for Alpha TV showed.

Popular Unity, the party formed last week by Syriza rebels who oppose the bailout, was backed by 3.5 percent in the ProRata poll - above the 3 percent threshold needed to enter parliament - and 4.1 percent in the poll by Metron Analysis.

The University of Macedonia poll showed it would score 5 percent.

But the Independent Greeks, the ally in Tsipras' former coalition government, scored roughly 2 percent in three polls, meaning Syriza would be forced to seek another coalition partner.

Tsipras this week ruled out cooperating with the main pro-euro opposition parties - New Democracy, the Socialist PASOK and the centrist To Potami. The poll's result suggested that, in that event, the country would face a second round of elections.

One third of those who supported Tsipras' party in the January 2015 elections that took him into office said they were unsure if they will do so again, the ProRata poll said.

It also showed 25.5 percent of voters were still undecided, making them the biggest bloc. Election Ploy

Ruling out cooperation with other pro-euro parties looks like an obvious election ploy.

If Tsipras sticks to his word, questionable at best in light of recent events, then he will be out of power if the polls remain as they are now. And if so, another round of elections would be necessary.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Cost of PUTs on Shanghai Index Hits Record vs. Calls; Sentiment vs. Valuation

nie., 30/08/2015 - 19:20
In spite of the recent plunge on the Shanghai index, as recently as August 24, CALL options on the index were more expensive than PUT options.

This Bloomberg headline "If the Options Market Is Right, China's Stock Rescue Is Doomed" reads like something one would find in a tabloid, but the reverse is now true. Options traders have never been so pessimistic on China’s stock market, betting the government’s renewed effort to prop up share prices is doomed to fail.

The cost of bearish contracts on the China 50 exchange-traded fund surged to the highest level versus bullish ones since they started trading in Shanghai six months ago. The so-called skew also climbed to a record for a similar ETF in the U.S., even as government buying drove China’s benchmark index to a 10 percent rally in the final two days of last week.

Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Equities on mainland bourses traded at a median of 53 times reported earnings last week. That’s the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor’s 500 Index. Analysts have cut their 2015 profit estimates for Shanghai Composite companies by 8.8 percent this year, according to data compiled by Bloomberg.Options Skew



click on chart for sharper image

Valuation Still Extreme

Fundamentally speaking, the Shanghai stock market is hugely overpriced. I concur with BofA strategist David Cui, who says equity valuations and earnings growth aren’t appealing enough to support the market in the absence of government buying.

Cui estimates the Shanghai Composite needs to fall another 35 percent before shares become attractive. “The government will not support the market forever.”

Sentiment vs. Valuation

Valuation aside, sentiment is extreme enough that a corrective rally could get going.

However, it's important to note that stock market crashes do not occur on overbought conditions but rather on oversold conditions when no one wants shares at even plunging prices.

Mike "Mish" Shedlock 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.
Kategorie: Najnowsze feedy

Still "Too Early" to Decide on Rate Hikes: Let the Market be Your Guide

sob., 29/08/2015 - 19:32
Still "Too Early"

After all the hemming and hawing by nearly every Fed governor, and despite the fact the Fed has to do something in just over two weeks, the Fed still does not know what to do.

Speaking in Jackson Hole Fed governor Stanley Fisher Keeps September Rate Hike Option on the Table. With market turbulence casting a cloud over the outlook for US monetary policy, a senior Federal Reserve official strove on Friday to keep the option of an interest rate rise alive at September’s key meeting.

Stanley Fischer, the vice-chair of the Fed’s Board of Governors, said at talks in Jackson Hole, Wyoming, that it was too early to say how the recent market tumult had affected the argument for a move next month, and that no decision had yet been made.

“The change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is — more compelling, less compelling etc,” he told CNBC business news.

“We’ve got a little over two weeks before we make the decision,” he said. “And we’ve got time to wait and see the incoming data, and see what is going on now in the economy.”Fisher Not Certain

Here's the funniest line by Fisher in the interview: "The economy is returning to normal. We’re not certain we are there yet.”

I am certain the economy is nowhere near normal, and the Fed is the primary reason why.

My speech was all prepared for Jackson Hole, but somehow I was not on the invite list. It was a severe oversight by someone.

Where They Stand

Meanwhile, let's take a look at where all the Fed governors stand.

MarketWatch details Where every Fed member stands on raising interest rates.

  • Chairwoman Janet Yellen: Not at Jackson Hole. Told Congress in July that a rate hike this year would likely be appropriate.
  • Vice Chair Stanley Fischer: In an interview Friday, he said it’s too early to tell if case for rate hike was more compelling or less compelling. Before China yuan move, Fischer said case for September hike was “pretty strong” but not conclusive. He says level of confidence “pretty high” inflation will return to 2% target. He delivers a formal speech at Jackson Hole on Saturday.
  • Gov. Lael Brainard: Said in June that the Fed should give the data time to show labor-market progress, inflation rising.
  • Gov. Jerome Powell: Said in early August that he’s not sure whether to support a September rate hike.
  • Gov. Daniel Tarullo: Said in June that the U.S. economy has lost momentum.
  • New York Fed President William Dudley: Said on Wednesday that a rate hike is “less compelling” than a few weeks ago.
  • Chicago Fed President Charles Evans: Didn’t want rate hikes until middle of next year, as of July.
  • Richmond Fed President Jeffrey Lacker: Due to give a speech next month titled “The Case Against Further Delay.”
  • Atlanta Fed President Dennis Lockhart: Sees even odds of a September rate increase.
  • San Francisco Fed President John Williams: Said in June he expected two rate hikes this year.

Those are the voting members. It's difficult to say how recent moves have changed the opinions of those last offering a view months ago.

None of this matters of course. Such discussions are for entertainment purposes only.

Despite the fact the Fed is clueless about whether or not the economy is "normal", they will line up like ducks if Yellen decides to hike.

Let the market be your guide. It's still "too early" to know what the market view will be two  weeks from now.

Mike "Mish" Shedlock 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.
Kategorie: Najnowsze feedy

Imagination Sets In

sob., 29/08/2015 - 00:53
One of my constant themes over the past few years is the underfunding of state and local pension plans. Illinois is particularly bad, but let's look at some aggregate data.

The National Association of State Retirement Administrators (NASRA) provides this grim-looking annual picture.

Annual Update



Between the end of 2007 and end of 2014, pension plan assets rose from $3.29 trillion to $3.71 trillion. That's a total rise of 12.76%.

Plan assumptions are generally between 7.5% to 8.25% per year!

S&P 500 2007-12-31 to 2014-12-31



In the same timeframe, the S&P 500 rose from 1489.36 to 2058.90.

That's a total gain of 590.54 points. Percentage wise that's a total gain of 40.22%. It's also an average gain of approximately 5.75% per year.

Analysis

  • In spite of the miraculous rally from the low, total returns for anyone who held an index throughout has been rather ordinary.
  • The first chart is not a reflection of stocks vs. bonds because bonds did exceptionally well during the same period.

Drawdowns Kill!

To be fair, the first chart only shows assets, not liabilities, but we do know that pensions in general are still enormously underfunded, with Chicago and Illinois leading the way.

Negative Flow

Reader Don pinged me with this comment the other day: "Nearly all public pension funds have a negative cash flow, meaning they pay out in benefits each year more than they receive in contributions. For all public pension funds, the negative cash flow is approximately 3% of assets, which means an average fund needs to produce an annual return of 3% to maintain a stable asset value."

That's fine if assets have kept up with future payout liabilities and plans are close to fully funded.

However, it is 100% safe to suggest that neither condition is true.

So here we are, after a massive 200% rally from the March 2009 low, and pension plans are still in miserable shape.

And plan assumptions are still an enormous 8% per year. Let me state emphatically, that's not going to happen.

Stocks and junk bonds are enormously overvalued here.

GMO Forecast



"The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward‐looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forwardlooking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years."

Over the next 7 years GMO believes US stocks will lose money (on average), every year. Those are in real terms, but returns are at best break even, assuming 2% inflation.

Bonds are certainly no safe haven either. I strongly believe GMO has this correct.

Assume GMO Wildly Off

Even if one assumes those GMO estimated returns are wildly off to the tune of four percentage points per year, pension plans needing 8% per year will be further in the hole with 4% per year annualized returns.

Imagination

I have a musical tribute to imagination in regards to pension finances, especially imagination in Illinois.



link if video does not play: Creedence Clearwater Revival - Lookin' Out My Back Door

Illinois Non-Answer

Illinois house speaker Michael Madigan and Chicago governor Rahm Emanuel believe tax hikes are the answer.

Both are sorely mistaken. Here are a few viewpoints to consider.


The only way out of this mess is a pension restructuring coupled with municipal defaults.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Fed Queen Race: Personal Income Rises 0.4% as Expected; Good for Rate Hikes? GDP?

pt., 28/08/2015 - 18:59
Personal income for July rose as expected in today's Personal Income and Outlays report. Consumer spending rose nearly as expected, led of course by auto sales. Price pressure was nonexistent.
There's no hurry for a rate hike based on the July personal income and outlays report where inflation readings are very quiet. Core PCE prices rose only 0.1 percent in the month with the year-on-year rate moving backwards, not forwards, to a very quiet plus 1.2 percent. Total prices are also quiet, also at plus 0.1 percent for the monthly rate and at only plus 0.3 percent the yearly rate.

On the consumer, the data are very solid led by a 0.4 percent rise in income that includes a 0.5 percent rise in wages & salaries which is the largest since November last year. Other income details, led by transfer receipts, also gained in the month. Spending rose 0.3 percent led by a 1.1 gain in durables that's tied to vehicle sales. The savings rate is also healthy, up 2 tenths to 4.9 percent.

The growth side of this report is very favorable and marks a good beginning for the third quarter. This at the same time that inflation pressures remain stubbornly dormant. And remember this report next month will reflect the August downturn in fuel prices. With the core PCE index out of the way, next week's August employment report looks to be the last big question mark going into the September 17 FOMC.Favorable Beginning for Third Quarter GDP?

Let's investigate the above Bloomberg claim "The growth side of this report is very favorable and marks a good beginning for the third quarter."

Today's GDPNow Forecast 

The Atlanta Fed GDPNow Forecast sees it this way:

"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.2 percent on August 28, down from 1.4 percent on August 26. The forecast for real GDP growth in the third quarter decreased by 0.2 percentage points following this morning's personal income and outlays report from the U.S. Bureau of Economic Analysis. The slight decline in the model's forecast was primarily due to some weakness in real services consumption for July, which lowered the model's estimate for personal consumption expenditures from 3.1 percent to 2.6 percent for the third quarter."

GDP Now Model



GDP By Quarter

2015 Q1: 0.6%
2015 Q2: 3.7%
2015 Q3: 1.2% GDP Nowcast

Fed Queen Race

Consumer spending is supposedly humming along. GDP is not doing much of anything.

This reminds me of the Red Queen Race, an incident in Lewis Carroll's Through the Looking-Glass that involves the Red Queen and Alice constantly running but remaining in the same spot.

"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else—if you run very fast for a long time, as we've been doing."

"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Clearly we need to sell twice as many autos to get GDP where the Fed wants it to go.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

Steve Keen on Economic Forecasts, Ponzi Schemes, GDP, China; One Way Streets and Poison

pt., 28/08/2015 - 07:47
Economic Forecasts

Economist Steve Keen pinged me in response to my post Regional Manufacturing Expectations From Mars.

In that post, I compared Richmond Fed manufacturing survey expectations (six month look ahead projections made in February for August), to what actually happened in August.

In response, Steve Keen Tweeted

@MishGEA gets it wrong! Says "Regional Manufacturing Expectations From Mars" when they're really from Uranus.

I duly stand corrected. I am now planetarily aligned with Keen on the distinction between Mars and Uranus.

China Implosion

On a more serious note, please consider the Financial Times article Why China’s stock market implosion might not be very meaningful, by Izabella Kaminska.

Kaminska quotes Steve Keen as follows ...
One key peculiarity about China’s economy—and there are many—is that much of its growth has come from the expansion of industries established by local governments (“State Owned Enterprises” or SOEs). Those factories have been funded partly by local governments selling property to developers (who then on-sold it to property speculators for a profit while house prices were rising), and partly by SOE borrowing. The income from those factories in turn underwrote the capacity of those speculators to finance their “investments”, and it contributed to China’s recent illusory 7% real growth rate.

With property price appreciation now over, those over-levered property developers aren’t buying local government land any more, and one of the two sources of finance for SOEs is now gone. Borrowing is still there of course, and the Central Government will probably require local councils to continue borrowing to try to keep the growth figures up. But the SOEs are already losing money, and this will just add to the Ponzi scheme. The collapse of China’s asset bubbles will therefore hit Chinese GDP growth much more directly than the crashes in the more fully capitalist nations of Japan and the USA.Heart of the Matter

Keen indeed gets to the heart of the matter about SOEs, borrowing, and illusory growth rates.

I have commented time and time again, no one in their right mind believes Chinese growth rates. Not only are the numbers straight up fabrications, many of the projects have no economic benefit.

Moreover, Chinese growth estimates fail to take into account damaging pollution and cleanup costs that ought to subtract from GDP.

GDP itself is a useless statistic actually. The reason is government spending, no matter how counterproductive, adds to GDP.

It sounds convoluted, but if government paid someone to poison wells, that poisoning would, by definition, add to GDP.

Many connected politicians got extremely wealthy off SOEs. But most of the SOE projects had little if any economic benefit, and some undoubtedly had negative benefit because environmental damage was not properly accounted for.

In short, Chinese GDP does not properly reflect economically nonviable projects nor the outright poisoning of the Chinese population to hit preposterous targets.

Rather than admit past GDP was grossly overstated, revisions will likely be hidden in future GDP reports for years or decades to come.

Kaminska Concludes ...

"In short, don’t worry so much about the stock market, worry more about the potential collapse of other major Chinese asset classes like property, ghost towns and factories. That’s how the credit links back to the real economy."

Those were her words, not Keen's. I pinged Pater Tenebrarum at the Acting Man blog the above article and he replied ...

"Something has clearly changed now. Right now, it seems it actually does matter. China is seen as an economically important (for the world) since about 2005 or so, but I have a feeling that something more profound may actually be afoot now - due to the follow-on domino effects. I would estimate that global malinvestment in commodity projects along amounts to something like $2 to $3 trillion cumulatively, perhaps more. This one sector alone may leave behind $1 trillion in unpayable debt.

OK.
What's Changed?

China's Capital Accounts

Historically, China's stock market has moved independently of the country's economy because of China's closed capital account.

What if the Shanghai market has started to reflect the real fundamentals thanks to liberalization of China's capital account?

One Way Streets

Typically, money flowed into China in a one way street. This year, China took steps to open up the flows.

Forbes noted China Pledges 'Radical' Moves To Open Capital Account In 2015.

FTAlphaville notes This isn’t the Chinese capital account liberalisation you’re looking for.
Today every Chinese individual is allowed to buy no more than US$50,000 worth of foreign currency from banks each year. But that limit was lifted from US$20,000 in 2007, and it is also not that hard for the more savvy to get around it.

So we’re in a situation where China’s capital account is more open than it has been before and recent relaxations of control have increased the size and volatility of flows. Including, obviously but crucially, outflows.

This is a system that needs external capital very badly. It is happy to welcome it in, vastly less happy to see it leave. More so, it doesn’t take much to draw a lesson about attitudes to control and stability from China’s reaction to the recent stock market puke.Needs vs. Reality

China needs external capital. Instead, China sees capital flight. Resultant stress is everywhere one looks because debt exceeds carrying capacity.

Symptoms of Too Much Debt

  1. Yuan devaluation
  2. Stock market prop jobs by Chinese regulators
  3. Emerging market currency crashes
  4. Global equity bubbles
  5. Commodity price crashes
  6. Junk bond bubbles
  7. Slower global growth
  8. Still raging property bubbles in Australia, Canada, and the US West Coast (thanks to influx of money from China)

Debt the Problem

Numerous bubbles have started to implode, even as property bubbles in some places expand. Central banks are hard pressed to keep all the Ponzi schemes going.

Although we do not see eye-to-eye on the solution, Keen and I agree that debt is a primary problem. Many prominent economists still have not figured that out.

For example: Larry Summers and Ray Dalio Seek Return of Quantitative Easing.

Paul Krugman says "Debt is Good".

Krugman: "There’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt."

Debt Bubbles

Debt and bubbles go hand in hand.

No matter how big the bubble, no matter how much the resultant income inequality, no matter how ridiculous or nonviable the project, no matter how little the economic benefit, no matter how much government overpays (thanks to inane union work rules and prevailing wage laws), you can always count on Krugman to want more and more and more debt, even though Japan is living proof such policies do not work.

In the US, the Fed used a housing bubble to bail out a dotcom bubble. And now we have QE-driven stock market and junk bond bubbles to smooth over the housing bubble. Corporations have gone into debt to buy back their own shares at absurd valuations.

Debt has been used to cure debt problems over and over again. Apparently the cure is the same as the disease.

Mike "Mish" Shedlock 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.
Kategorie: Najnowsze feedy

Yet Another Dispute Over GDP; What's Really on the Fed's Mind?

pt., 28/08/2015 - 02:43
Disputes over GDP go on and on and on. MarketWatch reports By another measure, the U.S. economy was ho-hum in second quarter.
There are two ways to compute how well the economy is doing.

One is to tally all the goods and services produced during a given time period — that’s called gross domestic product.

Another is to measure all the incomes earned in the production of those goods and services — that’s called gross domestic income.

Over time, they should be exactly the same. But measurement isn’t easy, and so the Commerce Department not only reports both figures, but also for the first time on Thursday averaged the two together.

The result wasn’t great: It’s showed a 2.1% average for the second quarter, since GDP growth was a sterling 3.7% and GDI was a meager 0.6%.

According to Josh Shapiro, chief U.S. economist at MFR, that’s the largest gap between the two measures of the economy since the third quarter of 2007.

Some research has shown the GDI figures to be a more accurate representation of economic activity, but the evidence is mixed and the debate continues. Nonetheless, the disparity reported in Q2 does lend credence to the notion that the GDP growth reported in the quarter likely overstates the underlying vitality of the economy in the span,” he said in a note to clients.Two Measures



That may look significant, but let's investigate further.

DGI vs. GDP Percent Change from Year Ago



DGI vs. GDP Percent Change from Year Ago Detail



Large Gap?

On a year-over-year basis it's hard to discern any gap. The dispute of Josh Shapiro, chief U.S. economist at MFR, is easily seen as total nonsense.

I don't believe the economy is as strong as most claim, but I certainly won't post easily disproved charts to make my point.

What's Really on the Fed's Mind

Still, one has to wonder "What's really on the Fed's mind?"

I surely doubt it is fear of inflation, at least as they claim to measure it. It's possible they fear bubbles, but I doubt that too. The Fed historically has been blind to bubbles.

Rather, I suspect they have come to the conclusion this recovery is as good as it gets, and if they cannot hike now, they will not be able to.

That may sound lame, but it is exactly how economic clowns think.

Let me phrase it this way: "We need to hike now so we have ammunition to cut when we need to."

Meanwhile, nothing the Fed says at all is believable if for no other reason than historical precedent that proves without a doubt, they clearly have no idea what's really going on, especially at turning points.

They cannot really come out and say "We are clueless bubble blowers", can they?

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

GDP by Other Measures; Will the "Real" GDP Please Stand Up?

czw., 27/08/2015 - 21:30
In the wake of a stronger than expected GDP report (see Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing), some are questioning the stated growth.

For example, the Consumer Metrics Institute says "On the surface this report shows solid economic growth for the US economy during the second quarter of 2015. Unfortunately, all of the usual caveats merit restatement".

Consumer Metrics Caveats

  1. A significant portion of the "solid growth" in this headline number could be the result of understated BEA inflation data. Using deflators from the BLS results in a more modest 2.33% growth rate. And using deflators from the Billion Prices Project puts the growth rate even lower, at 1.28%.
  2. Per capita real GDP (the number we generally use to evaluate other economies) comes in at about 1.6% using BLS deflators and about 0.6% using the BPP deflators. Keep in mind that population growth alone (not brilliant central bank maneuvers) contributes a 0.72% positive bias to the headline number.
  3. Once again we wonder how much we should trust numbers that bounce all over the place from revision to revision. One might expect better from a huge (and expensive) bureaucracy operating in the 21st century.
  4. All that said, we have -- on the official record -- solid economic growth and 5.3% unemployment. What more could Ms. Yellen want?
Revisions

I certainly agree with point number three. Significant GDP revisions are the norm, even years after the fact. The numbers are of subjective use at best because GDP is an inherently flawed statistic in the first place.

As I have commented before, government spending, no matter how useless or wasteful, adds to GDP by definition.

Moreover, inflation statistics are questionable to say the least, as are hedonic price measurements and imputations.

Imputations

Imputations are a measure of assumed activity that does not really exist. For example, the BEA "imputes" the value of "free checking accounts" and ads that number to GDP.

The BEA also makes the assumption that people who own their houses would otherwise rent them. To make up for the alleged lost income, the BEA actually assumes people rent their own houses from themselves, at some presumed lease rate. Imputed rent is an addition to GDP.

Why stop there? On the same basis people who cut their own grass would have to pay someone else to do it for them. And married men might go to prostitutes if they were not married.

And what about back scratching? You scratch mine and I scratch yours. Clearly there is unreported economic activity here.

There are limitless imputations the government can concoct if GDP needs a future boost.

By the way, Europe did recently revise up GDP on the grounds of unreported prostitution and illegal drug profits.

GDP by Other Deflators

Every month there are questions in regards to GDP deflators.

This month, Consumer Metrics notes that the CPI as a deflator would result in a more modest 2.33% growth rate. Computing GDP using the Billion Prices Project would put the growth
rate even lower, at 1.28%.

That's interesting, but is it valid?

Deflator Differences

EconPort compares the Differences Between the GDP Deflator and CPI
Although at first glance it may seem that CPI and GDP Deflator measure the same thing, there are a few key differences. The first is that GDP Deflator includes only domestic goods and not anything that is imported. This is different because the CPI includes anything bought by consumers including foreign goods. The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.Difference Between further adds to the explanation.
CPI and GDP deflator generally seem to be the same thing but they have some few key differences. Both are used to determine price inflation and reflect the current economic state of a particular nation.

GDP Deflator takes into account goods that are produced domestically. It does not bother with imported goods and it reflects the prices of all the commodities, services included. The GDP deflator is calculated quarterly and it weights may change per calculation.

There are so many price indices out there and GDP is unlike some of them that are based on a predetermined basket of goods and services. In the GDP deflator, the so-called basket in a year is weighted by the market value of all the consumption of each good therefore it is allowed to change with people’s investment and expenditure patterns since people do respond to varying prices.

CPI tends to consider insignificant goods, even the outdated ones that are not really purchased by the consumers anymore. Nevertheless, they are still considered for pricing in the fixed basket. Consumption goods are the main priority of the CPI measure. The prices of other items used in production are not considered as well as the prices of investment goods. Only consumer items are taken into account. The machines and the industrial equipment that are used to make them are not considered.I am not going to suggest the GDP deflator is by any means correct.

Indeed, I believe some prices are inherently difficult if not impossible to measure. But substituting the CPI as a more valid measure is as likely as not to be even more inaccurate.

Solid Growth?

In regards to point number four, average growth through three quarters is certainly not solid. Q1
is 0.6%, Q2 is 3.7%, and the GDPNow estimate for Q3 is 1.4%.

For 2015, through three quarters, we are talking about growth of about 1.6% or so. This is not rate hike material.

Since point four above was obvious sarcasm targeted at Fed Chair Janet Yellen, I am in agreement with Consumer Metrics on this point.

Per Capita GDP

Finally, and in reference to point number two, real per capita GDP remains quite anemic.



The above chart from Advisor Perspectives.

Per capita GDP reflects aging boomers, student debt, government debt, slow household formation, untenable pension promises, and extremely poor central bank and governmental policies that have effectively wiped out the middle class.

Mike "Mish" ShedlockMike "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.
Kategorie: Najnowsze feedy

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