Home Refinance Calculator: January 2016

Sunday, January 31, 2016

Mish's Global Economic Trend Analysis

China Manufacturing Prices Decline 18th Month; China Hoping to Avoid Hard Landing
Nate Silver's Continual Underestimation of Donald Trump's Chances
Economists in Fantasyland: Economists See 20% Chance of Recession That's at Least 20% Likely Already Here

China Manufacturing Prices Decline 18th Month; China Hoping to Avoid Hard Landing

Posted: 31 Jan 2016 09:22 PM PST

China's manufacturing extended its long slump according to the Caixin China General Manufacturing PMI.

Chinese manufacturers signaled a modest deterioration in operating conditions at the start of 2016, with both output and employment declining at slightly faster rates than in December. Total new business meanwhile fell at the weakest rate in seven months, and despite a faster decline in new export work. Nonetheless, lower production requirements led companies to cut back on their purchasing activity and inventories of inputs. On the prices front, both input costs and output charges fell again in January, though at the weakest rates in seven months.

Weaker client demand led manufacturers to discount their prices charged again in January, thereby extending the current sequence of deflation to 18 months (although the rate of reduction was the slowest seen since June 2015). Lower selling prices were supported by a further fall in average input costs at the start of the year. In line with the trend for charges, the rate of decline eased to the weakest in seven months. Lower cost burdens were generally linked to reduced raw material prices.

China PMI

China Hoping to Avoid Hard Landing

Commenting on the China General Manufacturing PMI™ data, Dr. He Fan, Chief Economist at Caixin Insight Group said:

"The Caixin China General Manufacturing PMI for January is 48.4, up 0.2 points from December. Sub-indexes show a softer fall in new orders, which contributed the most to the improvement in the overall figure. Recent macroeconomic indicators show the economy is still in the process of bottoming out and efforts to trim excess capacity are just starting to show results. The pressure on economic growth remains intense in light of continued global volatility. The government needs to watch economic trends closely and proactively make fine adjustments to prevent a hard landing. It also needs to push ahead with existing reform measures to strengthen market confidence and to signal its intentions clearly."

Hard Landing Definition

If China is beginning to "show results", those results aren't pretty.

Depending on how one defines "hard landing", China is doomed. A couple years ago a "hard landing" was believed to be 6% growth. By that definition, a hard landing is baked in the cake.

3% or 2% growth, or even lower is highly likely.

Perhaps a couple years from now, 3% won't seem any harder than 6% did two years ago.

Mike "Mish" Shedlock

Nate Silver's Continual Underestimation of Donald Trump's Chances

Posted: 31 Jan 2016 03:49 PM PST

On January 18, I sent the article below (starting with the title Nate Silver Off the Mark on Donald Trump Nomination Odds) to the New York Times as an Op-Ed.

They did not publish it.

It's hard enough getting something timely to major new organizations, and when you do, you have to sit and wait days for no response. The New York times has the best turnaround of the bunch, three days so I could have used this earlier.

This would have been more timely on the 18th and even more timely when I first started writing, but here it is now. What I have to say the is still relevant.

Nate Silver Off the Mark on Donald Trump Nomination Odds

I am a big fan of Nate Silver. His calling of the last two elections was nothing short of brilliant. However, I just cannot accept Silver's current assessment of Trump's chances of winning the Republican nomination.

In footnotes to his January 8 article Three Theories Of Donald Trump's Rise Silver expressed belief that "Trump's chances are about half of what betting markets say they are. I think they're about half that - 12 or 13 percent."

Trump Odds According to Nate Silver

Historical Precedents

Given Trump's commanding lead in the polls, one might instinctively think Silver is crazy. But Silver cites historical precedents:

Polls before the first primary are not that useful
Political outsiders do not win elections
Establishment candidates do win elections

To that Silver adds "Trump could lose New Hampshire either to a surging Cruz or if one of the several establishment candidates — Marco Rubio, Chris Christie, Jeb Bush, John Kasich — can consolidate the support of more moderate/establishment Republican voters."

In defense of Silver, I would personally add there are 12 Republican candidates and anything could happen, in theory. One chance in 12 would be just over an 8 percent chance.

Bit of Realism

Chances are not all equal. So let's place some odds on some additional candidates.

What are the realistic odds that Ben Carson, Chris Christie, Carly Fiorina, Jim Gilmore, Mike Huckabee, John Kasich, Rand Paul, or Rick Santorum will win the nomination?

As long as we are taking history into consideration, Ben Carson has flamed out. Has a flame-out ever recovered? Does Rand Paul (my preference) have more than a 0.1% chance?

Does anyone in the above group of eight have more than a 0.5% chance? If so, who and why?

Even if you gave them all a 1% chance, which seems generous, the total combined odds would be 8%. Nonetheless, let's make that assumption and place it in a new chart.

Interpretation of Nate Silver Odds

Does the combination of Bush, Rubio, and Cruz really have a 79% of winning the nomination?

I think not.

Double the combined odds of Ben Carson, Chris Christie, Carly Fiorina, Jim Gilmore, Mike Huckabee, John Kasich, Rand Paul, and Rick Santorum to an amazing 16% and the Bush, Cruz, Rubio odds would still be 71%.

Triple the odds of the "group of eight" winning the nomination to a preposterous 24% and the "group of three" would still have a 63% chance of winning.

Mathematical Bias

By focusing solely on the odds of Trump winning, while placing no odds on the others, Silver introduces a mathematical bias far beyond what history can reasonably suggest.

Let's put a spotlight on Bush. Jeb Bush is polling 4.8% nationally.

Silver discounts national polls. I sympathize. But how far does one want to take that idea given that primaries start less than two weeks away?

Do candidates polling less than 5% at this stage often win nominations?

If one generously gives a Bush 5-15% chance of winning the momination, the combined Cruz Rubio odds would be something in the 65-75% range, assuming the group of eight has an 8% chance and Trump a 13% chance.

It all has to add up to 100%.

Arguably, the best chance for Bush and the ABT (Anybody But Trump) crowd has is if the Republican convention is deadlocked.

Until we see the results from Super-Tuesday and the polls of the states that follow, a deadlocked convention is a distinct possibility, but not one I have seen Silver depend on.

Other Flaws in Silver's Odds Estimates

We are dealing with humans, in real time, not history.

History suggests fringe candidates don't usually win elections, but they can. Jimmy Carter was unknown, but he won. Obama was not supposed to beat Hillary, but he did.

Yet, flame-outs are more likely. Carson did just that. So have many others.

Trump hasn't yet.

Rather than insisting a historical flame-out is still likely, Silver just might wish to consider reasons Trump will not flame out.

For example, a Gallup Poll headline from January 18 plays straight into Donald Trump's hands: Majority in U.S. Now Dissatisfied With Security From Terrorism.

Does Unpopularity Matter? When?

Silver notes Donald Trump Is Really Unpopular With General Election Voters.

Does unpopularity mean "People won't vote for the guy?"

I don't particularly like Trump. But I would vote for him over Clinton or Sanders.

What did Carson have before he flamed out other than he was "likable"? Amusingly, he's still the most likable Republican.

Carson comes across as sincere, and he is likable. But I would not vote for Carson under any circumstances. I would instead "waste my vote" and write in Rand Paul or vote for the Libertarian candidate.

Trump draws amazing crowds. Silver dismisses that. Yet, the last time someone generated this much crowd energy was Ronald Regan.

This is not a basketball game. Nor is this a one-on-one play with polls all breaking one way at the last minute. Those are areas in which Silver excels.

This is a one-on-many play, where voter attitudes have consistently sided with Trump, no matter who he offends. It's a mistake to discount such sentiment.

Like him or not, Trump is clever. For Republicans, he is on the right side of security, guns, abortion, and China. That's quite a bit.

And he's also a genuine outsider at a time nearly every other Republican is pretending to be one.

Is there any reason to suspect voter attitudes on terrorism, on Trump, or on Washington insiders will change in the next few weeks?

Odds of Winning it All

I suggest Trump's odds of winning the nomination are far more than what odds makers presume. And if Trump wins the nomination, I suspect his odds of him winning it all would be about 50%.

My rationale is that Hillary may not win the nomination. There is some chance of a criminal indictment related to emails. Sanders could pull out an upset. Odds of one of those have to be higher than the alleged 13% chance Silver assigns to Trump.

AWM (Angry White Men) will be a factor, perhaps totally negating any personal dislike of Trump.

Most importantly, I think the US approaching, if not already in a recession. Eight years ago, Obama blew dissatisfied Republican out of the water on the heels of a big recession that had just started.

Why can't that happen again? If anything, history suggests it will.

Mike "Mish" Shedlock

Economists in Fantasyland: Economists See 20% Chance of Recession That's at Least 20% Likely Already Here

Posted: 31 Jan 2016 10:32 AM PST

Economists have a perfect track record of 100% failure in ability to predict a recession. In a recession that's at least 20% likely to have already started, Economists See 20% Chance of US Recession this Year.

A Financial Times survey of 51 economists, conducted in the days after the Fed's January meeting, underscores the impact of the past month's severe market turbulence and a string of lacklustre economic reports out of the US and China.

The fear that the world's largest economy — considered the lone engine of global growth — is on the verge of recession has intensified. In the FT's December survey economists had put the odds of a US recession at 15 per cent during the next two years. Now, they see a one-in-five chance of recession in the next 12 months.

Economists surveyed by the FT emphasised that while the odds of a recession had climbed, a large majority still expected the US to escape one. Several who have fielded increased investor calls on the subject said that the conversation had been skewed because of the near obsession with the price of oil — a point that they argued had more to do with supply than global demand.

Mr Gapen, who put the odds of a recession between 10 and 15 per cent, said that he still thought strong consumption trends would keep the US economy from contraction.

Rate Hikes Odds

Less than 5% of economists see a greater than 50% chance of recession.

Hikes Foreseen in December Survey

In December not a single economist thought the Fed would hike zero times in 2016.

Hikes Foreseen in January Survey

CME Fedwatch Odds

The Fed Fund futures show a nearly 50% chance of no hikes this year.

Fantasyland Material

In contrast to Fed Fund futures, the latest Financial Times survey shows economists still expect two or three hikes this year. Over 10% of the economists foresee four hikes.

This is truly Fantasyland material.

Mike "Mish" Shedlock

Saturday, January 30, 2016

Mish's Global Economic Trend Analysis

Lacy Hunt – "Inflation and 10-Year Treasury Yield Headed Lower"

Posted: 30 Jan 2016 06:35 PM PST

No one has called long-duration treasury yields better than Lacy Hunt at Hoisington Management. He says they are going lower. If the US is in or headed for recession then I believe he is correct.

Gordon Long, founder of the Financial Repression website interviewed Lacy Hunt last week and Hunt stated "Inflation and 10-Year Treasury Yield Headed Lower".

Fed Tactics

"Debt only works if it generates an income to repay principle and interest."

Research indicates that when public and private debt rises above 250% of GDP it has very serious effects on economic growth. There is no bit of evidence that indicates an indebtedness problem can be solved by taking on further debt.

One of the objectives of QE was to boost the stock market, on theory that an improved stock market will increase wealth and ultimately consumer spending. The other mechanism was that somehow by buying Government securities the Fed was in a position to cause the stock market to rise. But when the Fed buys government securities the process ends there. They can buy government securities and cause the banks to surrender one type of government asset for another government asset. There was no mechanism to explain why QE should boost the stock market, yet we saw that it did. The Fed gave a signal to decision makers that they were going to protect financial assets, in other words they incentivized decision makers to view financial assets as more valuable than real assets. So effectively these decision makers transferred funds that would have gone into the real economy into the financial economy, as a result the rate of growth was considerably smaller than expected.

"In essence the way in which it worked was by signaling that real assets were inferior to financial assets. The Fed, by going into an untested program of QE effectively ended up making things worse off."

Flattening of the Yield Curve

"Monetary policies currently are asymmetric. If the Fed tried to do another round of QE and/or negative interest rates, the evidence is overwhelming that will not make things better. However if the Fed wishes to constrain economic activity, to tighten monetary conditions as they did in December; those mechanisms are still in place."

They are more effective because the domestic and global economy is more heavily indebted than normal. The fact we are carrying abnormally high debt levels is the reason why small increases in interest rate channels through the economy more quickly.

If the Fed wishes to tighten which they did in December then sticking to the old traditional and tested methods is best. They contracted the monetary base which ultimately puts downward pressure on money and credit growth. As the Fed was telegraphing that they were going to raise the federal funds rate it had the effect of raising the intermediate yield but not the long term yields which caused the yield curve to flatten. It is a signal from the market place that the market believes the outlook is lower growth and lower inflation. When the Fed tightens it has a quick impact and when the Fed eases it has a negative impact.

The critical factor for the long bond is the inflationary environment. Last year was a disappointing year for the economy, moreover the economy ended on a very low note. There are outward manifestations of the weakening in economy activity. One impartial measure is what happened to commodity prices, which are of course influenced by supply and demand factors. But when there are broad declines in all the major indices it is an indication of a lack of demand. The Fed tightened monetary conditions into a weakening domestic global economy, in other words they hit it when it was already receding, which tends to further weaken the almost non-existent inflationary forces and for an investor increases the value.

Failure of Quantitative Easing

"If you do not have pricing power, it is an indication of rough times which is exactly what we have."

The fact that the Fed made an ill-conceived move in December should not be surprising to economists. A detailed study was done of the Fed's 4 yearly forecasts which they have been making since 2007. They have missed every single year.

That was another in a series of excellent interviews by Gordon Long. There's much more in the interview. Give it a play.

Finally, lest anyone scream to high heavens, Lacy is obviously referring to price inflation, not monetary inflation which has been rampent.

From my standpoint, consumer price deflation may be again at hand. Asset deflation in equities, and junk bonds is a near given.

The Fed did not save the world as Ben Bernanke proclaimed. Instead, the Fed fostered a series of asset bubble boom-bust cycles with increasing amplitude over time.

The bottom is a long, long ways down in terms of time, or price, or both.

Mike "Mish" Shedlock

Friday, January 29, 2016

Mish's Global Economic Trend Analysis

Poll Shows Nearly 40% of Germans Want Merkel to Resign

Posted: 29 Jan 2016 03:54 PM PST

As proof of how badly German chancellor Angela Merkel has handled the refugee crisis, a new Poll Shows 40 Percent of Germans want Merkel to Quit.

Nearly 40 percent of German voters think Chancellor Angela Merkel should quit over her liberal asylum policy after almost 1.1 million newcomers arrived last year, a poll showed Friday.

As the mood in Germany has shifted from a euphoric welcome for people fleeing war and persecution last September to growing doubts about the country's ability to accommodate and integrate the record influx, the popular Merkel has come under increasing pressure.

However, the poll for Focus news magazine conducted by the independent opinion research institute Insa among 2,047 German citizens showed that a larger share -- nearly 45 percent -- did not think Merkel should resign.

Among members of her conservative Christian Union bloc, nearly 27 percent said they wanted Merkel, who has been in power since 2005, to step down.

Peak Merkel

I called for this well in advance, on October 18, 2015 to be precise: Swamped By Stupidity; Peak Merkel.

But politicians don't resign. They just keep on insisting they are right until they are forced out or voted out of office.

As recently as January 20, Merkel insisted Austrian cap on refugees 'not helpful' for European solution.

Yesterday, Merkel supposedly "struck an accord late Thursday with her fractious left-right coalition to tighten asylum policies, notably by making it easier to send back arrivals from North Africa and by delaying family reunifications."

What a joke!

The family reunification proposal is a rehash of an announcement from months ago. And deporting refugees requires approval from the nation of origin.

Do Syria and the African nations want the refugees back?

Merkel doesn't get it, and she likely never will. Her time is past.

Mike "Mish" Shedlock

BEA 4th Quarter GDP 1st Estimate 0.7%; Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming?

Posted: 29 Jan 2016 11:57 AM PST

The BEA "Advance GDP" estimate for 4th quarter came in today at +0.7% vs. an Econoday Consensus Estimate of 0.9%.

Consumer spending is the central driver of the economy but is slowing, at least it was during the fourth quarter when GDP rose only at a 0.7 percent annualized rate. Final demand rose 1.2 percent, which is the weakest since first quarter last year but is still 5 tenths above GDP.

Price data are not accelerating, at plus 0.8 percent for the GDP price index which is the lowest reading since plus 0.1 in the first quarter last year. The core price reading is only slightly higher, at plus 1.1 percent which is also the weakest reading in a year.

There are definitely points of concern in this report, especially the weakness in exports and business investment, but it's the resilience in the consumer, despite a soft holiday season, that headlines this report and should help confirm faith in the domestic strength of the economy.

GDPNow Final Estimate 1.0%

The Atlanta Fed "Final" GDPNow Estimate for the 4th quarter was posted on January 28.

That was the final estimate the GDPNow model will make for the 4th quarter.

The Atlanta Fed's first estimate of 2016 1st quarter GDP growth will be released Monday, February 1.

Q&A #1: Why Did GDPNow Rise After Durable Goods Report?

The above question pertains to the Atlanta Fed model which rose from 0.7% to 1.0% following a disastrous durable goods report on the 28th (See Shocking Crash: Durable Goods Orders Plunge 5.1%, Shipments Drop 2.2%, Huge Negative Revisions; Recession Here?)

Answer: Patrick Higgins, Senior Economist for the Atlanta Fed, explains via email ...

"Hi Mish, As you probably noticed the model forecast for the contribution of equipment investment to fourth quarter GDP growth declined 0.07 percentage point after the durable goods manufacturing report. But this was more than offset by a 0.20 percentage point increase in the contribution of inventory investment to fourth quarter growth after that same report. The model didn't use the December data on shipments of nondefense aircraft & parts which had an unusually large decline last month (from $16.0 billion to $10.8 billion). That data isn't ever folded in until the exports and imports data for civilian aircraft and parts is released. The net shipments measure fed into the model is aircraft & parts shipments plus imports minus exports. Since the December international trade data won't be released until after the GDP release, the December aircraft data won't ultimately be used for the fourth quarter GDPNow forecast."

Q&A #2 - Are Econoday Economists Tracking GDPNow?

Answer: It appears so at first glance. The Econoday consensus estimate of 0.9% is remarkably close to the 1.0% GDPNow estimate on the 28th and the prior estimate of 0.7% on the 20th. Then again, the Econoday range was a remarkable 0.0% to 2.3%. Why any economist would have predicted 2.3% is a mystery. That alleged economist ought to be following GDPNow more closely.

Q&A #3 - When Will Revisions Come?

Answer: Any time between February 26, 2016 and the next 10 years. The first revision to 4th quarter GDP will come on February 26. The BEA won't call it a revision though. Instead they will label the next revision the "preliminary" estimate for 4th quarter. At that time, first quarter 2016 will be nearly two-thirds over. The alleged "final" estimate for 4th quarter 2015 will come on March 25. Here's the BEA Schedule.

Q&A #4 - What About Construction Revisions?

The above question pertains to a massive GDP revision announced on January 4.

For details please see Diving Into the Revisions: Construction Spending Revised Lower 7 Consecutive Months! 2015 GDP Will Decline vs. Estimates: By How Much?

The BEA blames a "Processing Error" for one of its biggest errors in history. That processing error will affect GDP all the way back to 2005. My statement that revisions can come for 10 years was not a joke.

When will we know how construction affected GDP? I called the BEA on this in early January. The date I recall was July 26.

These guys are fast aren't they?

The main effect of the processing error is that construction spending for 2014 was way lower than reported. This will cause GDP in 2014 to rise.

In a research note, IHS Global Insight US economist Patrick Newport wrote "The upward revision to spending in 2014 is enough to raise growth that year from 2.4% to 2.6%-2.7%. The revisions are likely to boost growth for 2015 as well."

Newport's assessment about 2015 is undoubtedly wrong.

On January 5, I posted this table of construction revisions that I calculated from the BEA's revision announcement.

Total Residential Construction Spending vs. Previous Reports

Date	Total Residential Construction Spending
	Previous M/M Increase	Revised M/M Increase	Difference
Oct-15	0.98%	0.22%	-0.77%
Sep-15	1.58%	1.14%	-0.44%
Aug-15	1.73%	1.06%	-0.67%
Jul-15	1.60%	0.33%	-1.28%
Jun-15	0.74%	0.66%	-0.08%
May-15	1.71%	1.26%	-0.45%
Apr-15	2.60%	0.79%	-1.81%
Mar-15	-0.76%	-0.07%	0.69%
Feb-15	0.50%	0.65%	0.16%
Jan-15	1.25%	1.29%	0.04%
Dec-14	2.22%	2.85%	0.63%
Nov-14	1.52%	2.09%	0.58%
Oct-14	1.38%	2.12%	0.74%
Sep-14	2.24%	2.40%	0.16%
Aug-14	0.15%	-0.05%	-0.19%
Jul-14	0.03%	-0.28%	-0.30%
Jun-14	-1.13%	-0.88%	0.24%
May-14	-2.20%	-0.72%	1.48%
Apr-14	-0.46%	0.56%	1.02%
Mar-14	-1.11%	0.98%	2.09%
Feb-14	-0.76%	0.45%	1.21%
Jan-14	-1.25%	1.69%	2.94%

A quick glance at that table should convince you that GDP will go up in 2014 and down in 2015.

We will find out by how much in July. Lovely.

I guessed GDP would go up by about 25 basis points in first quarter of 2015, and down by about 50 basis points in second and third quarters.

If so, that would subtract about 75 basis points from 2015. My guess could be way off, but at least I have the sign correct.

Q&A #5: What About Recession?

At the start of recessions, GDP is frequently revised way lower for prior quarters, long after the fact, and without a doubt the US economy is flirting with, if not in recession right now.

Thus, construction spending is not the only subtraction I foresee.

For my take on recessions vs. the Fed model (not the Atlanta Fed GDFP model), please see Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Whether or not you accept my statement the US economy is very close to if not in recession right now, the Fed 12-month look ahead model of 3.56% is preposterous.

Q&A #6: What About the Consumer?

Bloomberg repeated the widely held belief "Consumer spending is the central driver of the economy."

I dispute that. So do others. See my article Debunking the Myth "Consumer Spending is 67% of GDP"

I cannot claim credit for the idea. To fully understand why the consumer is not the driver of the economy, please see ... Gross Domestic Output: Linking Austrian and Keynesian Economics: A Variation on a Theme by Mark Skousen.

Skousen destroys the fallacy that consumer spending drives the economy.

Mike "Mish" Shedlock

Thursday, January 28, 2016

Mish's Global Economic Trend Analysis

Bank of Japan Adopts Negative Interest Rates: Surprise, Surprise We Lied Again; Meaning of "Now"
World's First Robot-Run Lettuce Farm to Produce 30,000 Heads Daily; Tipping Point for Workerless Agriculture
Shocking Crash: Durable Goods Orders Plunge 5.1%, Shipments Drop 2.2%, Huge Negative Revisions; Recession Here?
Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Bank of Japan Adopts Negative Interest Rates: Surprise, Surprise We Lied Again; Meaning of "Now"

Posted: 28 Jan 2016 11:03 PM PST

Meaning of "Now"

Eight days ago, the Bank of Japan governor Haruhiko Kuroda, said No Plan to Adopt Negative Rates Now.

Well, that was then, and this is now.

Negative Rates Announced

Today we learn Bank of Japan Adopts Negative Interest Rates.

The Bank of Japan has slashed interest rates to minus 0.1 per cent in a shock move that adds a new dimension to its record monetary stimulus.

Showing its willingness to expand the policy further, the BoJ said it "will cut the interest rate further into negative territory if judged necessary".

"The bank will lower the short end of the yield curve by slashing its deposit rate on current accounts into negative territory and will exert further downward pressure on interest rates across the entire yield curve."

However, the BoJ will use a complicated three-tier system, which makes the negative rate much weaker than comparable moves by the ECB and other European central banks.

Crucially, it will only pay negative rates on any new bank reserves resulting from its programme of asset purchases. All existing bank reserves — which amount to about $2.5tn or 50 per cent of gross domestic product — will continue to be paid interest at 0.1 per cent.

That means there is unlikely to be any impact on bank profits or bank depositors in the short term. The negative interest rate will only have an impact over time as the BoJ keeps buying assets and creating new bank reserves.

The move will add to Mr Kuroda's reputation for surprises, suddenly adopting policies he has vehemently denied were even possible. Eight days ago he told parliament the BoJ was "not seriously considering" a negative rate.

Surprise, Surprise, We Lied Again

If any of these surprises ever accomplished anything, we wouldn't keep having them.

Mike "Mish" Shedlock

World's First Robot-Run Lettuce Farm to Produce 30,000 Heads Daily; Tipping Point for Workerless Agriculture

Posted: 28 Jan 2016 01:18 PM PST

Future of Farming

The future of farming has arrived. It's vertical, soilless, and run by robots.

Tech Insider reports World's First Robot-run farm will harvest 30,000 heads of lettuce daily.

The Japanese lettuce production company Spread believes the farmers of the future will be robots.

So much so that Spread is creating the world's first farm manned entirely by robots. Instead of relying on human farmers, the indoor Vegetable Factory will employ robots that can harvest 30,000 heads of lettuce every day.

Don't expect a bunch of humanoid robots to roam the halls, however; the robots look more like conveyor belts with arms. They'll plant seeds, water plants, and trim lettuce heads after harvest in the Kyoto, Japan farm.

The Vegetable Factory follows the growing agricultural trend of vertical farming, where farmers grow crops indoors without natural sunlight. Instead, they rely on LED light and grow crops on racks that stack on top of each other.

In addition to increasing production and reducing waste, indoor vertical farming also eliminates runoff from pesticides and herbicides — chemicals used in traditional outdoor farming that can be harmful to the environment.

The new farm, set to open in 2017, will be an upgrade to Spread's existing indoor farm, the Kameoka Plant. That farm currently produces about 21,000 heads of lettuce per day with help from a small staff of humans. Spread's new automation technology will not only produce more lettuce, it will also reduce labor costs by 50%, cut energy use by 30%, and recycle 98% of water needed to grow the crops.

Go Vertical

What starts with lettuce, won't stay with lettuce. Strawberries, cabbage, tomatoes, beans, eggplant, and many other vegetables can be grown this way.

Potatoes, peanuts, and things that grow in the ground may be off limits. Corn is too tall with acreage requirements too big.

Vertical Farms Half the Size of a Wal-Mart

Also consider Indoor Vertical Farm Half the Size of a Wal-Mart.

Matt Matros reads about the 34,000 bags of spinach Dole just recalled and shudders. A Salmonella contamination never would have happened on his farm.

Matros is CEO of FarmedHere, the largest indoor vertical farm in North America. At 90,000 square feet, the Bedford, Illinois farm is a leader in a growing agriculture movement that grows crops without soil and sunlight. Instead, these crops are grown indoors, where they're always monitored and kept away from harmful bacteria.

FarmedHere also prioritizes locally sourcing its produce, Matros says. It wants to deliver its herbs and leafy greens to consumers living at most 200 miles away, as part of a larger mission to reduce its carbon footprint.

In Matros' eyes, the move follows in the footsteps of the fast-casual chain Chipotle, which recently updated its mission to source from farms at most 350 miles away.

With 18 FarmedHere facilities, 75% of the US population would fall within that 200-mile radius, ensuring the produce can reach consumers quickly.

So far, the main crops are basil, mint, lettuce, and kale. Those are the low-hanging fruit that are easy to grow, Matros says.

Without the hassle of Mother Nature's changing climate, farmers can enjoy year-round growing seasons indoors, using less water, fewer pesticides, and avoid biological invaders that cause diseases like Salmonella, Escherichia coli (E. coli), and Listeria.

The company is anticipating an industry-wide tipping point a couple years down the line in which the winners are the local farmers who can provide nutritious food to nearby residents who need it, taking a big chunk of all long-haul trucks filled with produce off the road for good.

Tipping Point

Instead of digging deeper and deeper wells in the California desert to grow things, water in these farms is 95-98% recycled.

And commenting on labor issues, Matros points to Amazon's use of factory robots: "We're going to have that in our next farm, which will be open in about a year."

Japan will have similar technology in a similar timeframe.

The tipping point for worker-less agriculture has arrived.

Mike "Mish" Shedlock

Shocking Crash: Durable Goods Orders Plunge 5.1%, Shipments Drop 2.2%, Huge Negative Revisions; Recession Here?

Posted: 28 Jan 2016 10:35 AM PST

Crash!

Durable goods orders and shipments crashed in December.

The Econoday Consensus Estimate for durable goods new orders was a 0.2% rise. Here are the amazing results.

Crash vs. Thud

Econoday called the results a "giant thud". The words "giant crash" seem more appropriate. In retrospect, both terms may be inappropriate. Have we landed yet, or are we still falling?

Econoday reports ...

The factory sector ended 2015 with a giant thud. Durable goods orders fell 5.1 percent in December vs expectations for a 0.2 percent gain and a low-end estimate of minus 3.0 percent. Aircraft orders didn't help but they weren't the whole cause of the problem as ex-transportation orders fell 1.2 percent vs expectations for no change and a low-end estimate of minus 0.4 percent. Core capital goods, which exclude defense equipment and also aircraft, are especially weak, down 4.3 percent following a 1.1 percent decline in November. Shipments for core capital goods, which are an input into GDP, slipped 0.2 percent following a downward revised 1.1 percent decline in November (initially minus 0.4 percent).

Orders for civilian aircraft lead the dismal list, down 29 percent in December. The other main subcomponent for transportation, motor vehicles, also fell, down 0.4 percent in a reminder that vehicle sales were slowing at year end. Capital goods industries show deep declines: machinery down 5.6 percent, computers down 8.7 percent, communications equipment down 21 percent, and fabricated metals down 0.5 percent.

Other readings include a surprising 2.2 percent monthly drop in total shipments and a 0.5 percent drop in total unfilled orders. All this weakness isn't a plus for inventories which rose 0.5 percent to lift the inventory-to-shipments ratio sharply, to 1.69 from 1.64. The rise in inventories poses a headwind to the sector and will dampen future shipments as well as employment and is a reminder of the inventory warning in yesterday's FOMC statement.

Inventories Up 5 Consecutive Months

Those who wish to dive into the details can do so at the Census Bureau report Advance Report on Durable Goods Manufacturers' Shipments, Inventories and Orders December 2015.

Here are some additional inventory highlights:

Inventories of manufactured durable goods in December, up following five consecutive monthly decreases, increased $2.1 billion, or 0.5 percent, to $397.9 billion. This followed a 0.2 percent November decrease.
Transportation, up following three consecutive monthly decreases, led the increase, $1.8 billion or 1.4percent to $131.8 billion.

Autos Down 4th Quarter

Of other note, the auto sector that had been on fire in 2015 went negative in the fourth quarter.

October, November, December shipments for motor vehicles and parts were -2.9%, +1.1%, -0.4%.
October, November, December orders for motor vehicles and parts are -3.0%, +1.0%, -0.4%.

Recession Here?

In contrast to the preposterous Fed model that says the odds of a recession in all of 2016 is a mere 3.56%, this report strengthens the odds the US economy is already in recession.

For further discussion, please see Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Mike "Mish" Shedlock

Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Posted: 28 Jan 2016 12:39 AM PST

Of all the ridiculous opinions as to why the US is not about to enter a recession, the Fed's "Workhorse" Model is at the top of the list.

Torsten Sløk, chief international economist at Deutsche Bank, is taking the optimistic route by drawing attention to a certain economic model that currently puts the chance of an imminent contraction in the single digits. The Federal Reserve's so-called probit model looks at the difference between 10-year and three-month U.S. Treasury rates to gauge the probability of a U.S. recession over the next 12 months.

"The Fed has a workhorse recession model where [the] yield curve today is a predictor of future recessions, and running the Fed's probit model with today's values for 10-year and 3-month rates shows that there is currently a 4 percent probability of a recession over the next 12 months," Sløk said in an e-mail.

The Model

Prepare to have your eyes gloss over because here is the model.

Highlights in yellow are mine. Note that two constants are estimated using data from January 1959 to December 2005. Not only that, the constants were fitted to match what happened. Lovely.

Practical Considerations

Those hand-picked constants happened to work in prior recessions with varying degrees of success as noted in a New York Fed paper appropriately called The Yield Curve as a Leading Indicator: Some Practical Issues.

The report failed to mention the most practical of practical issues: It's damn hard for the 3-month to invert with 10-year treasuries when the Fed has artificially held short-term yields closet to zero.

Of course there is a practical reason for the Fed not pointing out that practicality. The article was written in 2006 before short-term yields went to zero.

You might have thought chief international economists would have stopped to consider such practical issues, but you would be wrong.

One might also have thought such issues would have crossed the minds of the New York Fed, but please banish that thought as well.

The New York Fed research still promotes this ridiculous model on its page The Yield Curve as a Leading Indicator.

You can download the current data to play with in Excel. You can also download the current 12-month look-ahead probability chart.

Yield Curve and Recessions

Despite the obvious uselessness of the indicator under current conditions, others are on the same bandwagon.

Pater Tenebrarum at the acting man took them to task back in 2014 with his post Yield Curve and Recessions.

One popular theme gets reprinted in variations over and over again. Here is a recent example from Business Insider, which breathlessly informs us of the infallibility of the yield curve as a forecasting tool: "This Market Measure Has A Perfect Track Record For Predicting US Recessions" the headline informs us – and we dimly remember having seen variants of this article on the same site at least three times by now:
At a breakfast earlier today, LPL Financial's Jeffrey Kleintop noted that the yield curve inverted just prior to every U.S. recession in the past 50 years. "That is seven out of seven times — a perfect forecasting track record," he reiterated.

The yield curve is inverted when short-term interest rates (e.g. the 3-year Treasury) are higher than long-term interest rates (e.g. the 10-year Treasury yield). "The yield curve inversion usually takes place about 12 months before the start of the recession, but the lead time ranges from about 5 to 16 months," wrote Kleintop in a recent note. "The peak in the stock market comes around the time of the yield curve inversion, ahead of the recession and accompanying downturn in corporate profits."
This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve!

Holy Grail

No need to sell now. The holy grail has been perfected. When the yield curve inverts, wait another six months for stocks to peak then sell.

Tenebrarum points out the amazing success of that method for Japan.

The model last worked in1991. Since then, the yield-curve method has had a perfect track record of failure. In at least 6 recessions since, counting one in 2014 the above chart does not show, the model has failed.

Recession Odds

I think there is a 25% chance or better the US already went into recession as of December 2015 or January 2016. A couple of bad jobs reports will seal the deal, and it may not even take that. But that's just a guess. I have no economic formula for economists to go gaga over.

John Hussman does have a nice discussion in his latest post Wicked Skew: When Extreme Losses are Standard Outcomes.

On the economic front, I continue to believe that a U.S. recession is not only a risk, but is now the most probable outcome. As I noted last week, among confirming indicators that generally emerge fairly early once a recession has taken hold, we would be particularly attentive to the following: a sudden drop in consumer confidence about 20 points below its 12-month average (which would currently equate to a drop to the 75 level on the Conference Board measure), a decline in aggregate hours worked below its level 3-months prior, a year-over-year increase of about 20% in new claims for unemployment (which would currently equate to a level of about 340,000 weekly new claims), and slowing growth in real personal income.

Last week, new claims for unemployment jumped to 293,000, a level we've observed only once since last April. Even at this early point (given that employment measures are among the most lagging economic indicators), we already observe a pickup in claims from last year's lows. To put this increase into perspective, the chart below shows points where the ISM Purchasing Managers Index was below 50, the S&P 500 was below its level of 6 months prior, and the 4-week average of initial unemployment claims was at least 5% above its 12-month low. While a year-over-year increase in unemployment claims closer to 20% would be a more reliable confirmation of recession, it's clear that even here, the current combination of evidence is more associated with recession than not.

One Model is Wrong

Seven out of seven times we have been in these conditions, the economy was close to or in recession.

That's one possible model. It contrasts with the Fed's model which says the 12-month look ahead odds are only 3.56%.

Take your pick.

Some economists take the Fed's model.

Why? Because the Fed put a formula to it. That makes it official even though the model has no scientific basis under current conditions.

Simply put, some economists refuse to think.

Reflections on Economic Modeling

Constants α and β are on the verge of massive revisions. After the next recession (which we may already be in), the Fed will see fit to dream up a revised formula that will take into account conditions at zero bound.

That revision will work for the last two recessions but it may not work for the next three.

Mike "Mish" Shedlock

Wednesday, January 27, 2016

Mish's Global Economic Trend Analysis

Chicago Board of Education Yanks $875 Million Bond Sale Over 7.75% Yield; Five Questions for Chicago
Oil Inventory Hits "Levels Not Seen in 80 Years"; Crude Jumps on News Russia May Cooperate with OPEC
New Home Sales Surge but Prices Down Sharply; Prices Have Room to Fall; Is Everybody In?

Chicago Board of Education Yanks $875 Million Bond Sale Over 7.75% Yield; Five Questions for Chicago

Posted: 27 Jan 2016 06:45 PM PST

On Wednesday, the Chicago Board of education pulled the plug on a proposed $875 Million Bond Sale.

Facing hefty yields, the financially ailing Chicago Public Schools (CPS) postponed Wednesday's planned $875 million bond sale and will evaluate the timing on a day-to-day basis, a school official said.

The nation's third-largest public school system is struggling with a structural budget deficit of at least $1 billion. Its fiscal woes led Illinois Governor Bruce Rauner and Republican lawmakers last week to push for a state takeover and potential bankruptcy for CPS - moves that were quickly shot down by Chicago Mayor Rahm Emanuel, who controls the school system, and leaders of the Democratic-controlled legislature.

A pre-pricing marketing scale circulated by underwriters on Tuesday for the "junk"-rated general obligation bonds showed yields topping out at 7.75 percent with coupons of 7.25 percent for bonds due in 2041 and 7 percent for bonds due in 2044. That yield indicated a so-called credit spread over Municipal Market Data's benchmark triple-A yield scale of as much as 506 basis points.

That spread was wider than the 464 basis-point spread the school system's 19-year bonds were fetching in secondary market trading last week.

Five Questions for Chicago

Will the yields be any lower tomorrow? Next week? Why?
How the heck is the school district going to close a hole of at least $1 billion?
Will Emanuel push for yet another massive tax hike just to pay teacher pensions?
How can another tax hike do anything but postpone the problem?
Since the most likely outcome is bankruptcy, why was the yield offering so good?

Reflections on Bankruptcy

In regards to question number five, 7.75% seems very attractive given the high likelihood those bonds will soon be worthless.

Heck, even 10% would be a bargain for the city and a horrid deal for the bondholders.

But that's not the way markets work. No one thinks bankruptcy is coming until it's a few weeks away. And of course, for bankruptcy to be possible, the Illinois legislature has to approve it.

Governor Bruce Rauner needs to hold firm until Emanuel begs the union-controlled Illinois legislature to pass a municipal bankruptcy bill.

"I'll Be a Better Mayor"

In his mayoral victory speech, Emanuel promised "I'll Be a Better Mayor".

Stepping back, recall that Emanuel defeated Cook County Commissioner Jesus "Chuy" Garcia in a runoff on April 7, 2015.

In debates ahead of the runoff, Emanuel said Garcia's promises would require tax hikes to fund them. Emanuel called tax hikes failed "politics of the past."

Emanuel forgot to say he would undertake the same failed measures as Garcia, only much bigger.

Six months later, Emanuel passed the largest property tax hike in Chicago history. And in the understatement of the year, Emanuel commented "It's Not a Piece of Art".

With that I have one final question for the mayor.

Bonus Question

Hello Rahm, when will you put city taxpayers and the good of the city itself ahead of the unions and your perpetual reelection campaign that's currently nothing but lies and deceit followed by monstrous tax hikes?

Mike "Mish" Shedlock

Oil Inventory Hits "Levels Not Seen in 80 Years"; Crude Jumps on News Russia May Cooperate with OPEC

Posted: 27 Jan 2016 12:49 PM PST

"Levels Not Seen in 80 Years"

The supply glut in oil storage continues as crude. Inventories hit new all-time highs this past week.

The above charts from EIA Weekly Supply Data shows the crude inventory of 494,920,000 (not counting strategic reserves) passed the previous high of 490,912,000 set on April 24, 2015.

Reserves, including the Strategic Petroleum Reserve (SPR), reached 1,190,038 barrels, also a record high.

Comments From EIA Weekly Report

Here are some interesting comments from the Weekly EIA Report.

"At 494.9 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 3.5 million barrels last week, and are well above the upper limit of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories decreased by 4.1 million barrels last week but are near the upper limit of the average range for this time of year. Propane/propylene inventories fell 6.2 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories decreased by 1.0 million barrels last week."

Crude Jumps on News Russia May Cooperate with OPEC

Despite the record inventory surge, crude jumped a bit from extremely oversold levels on news Russia Dangles Prospect of OPEC Cooperation.

Oil futures surged on Wednesday, after Russia said it was discussing the possibility of co-operation with OPEC, fanning hopes that a deal was in the works to reduce oversupply that sent prices the lowest levels in a dozen years last week.

Russia's energy ministry said possible coordination with the Organization of the Petroleum Exporting Countries (OPEC) was discussed at a meeting with Russian oil companies on Wednesday.

"I remain skeptical, at the end of the day, about that happening as the oil producers are looking at the other guy to cut production while maintaining their own levels," Andrew Lipow of Lipow Oil Associates said.

Crude was looking firm before the Russia news on the back of a U.S. Energy Department report showing a surprise spike in demand for refined products like heating oil last week, when a massive blizzard hit the U.S. Northeast.

The U.S. Energy Information Administration said inventories of distillates, fell more than 4 million barrels, trumping expectations for a rise of about 2 million.

Economists Surprised Again

Despite the small drawdown in fuel oil please recall the report stated "Distillate fuel inventories are near the upper limit of the average range for this time of year."

Economists can be surprised by anything including the possibility blizzards and cold weather may increase the demand for fuel oil in the Northeast!

Mike "Mish" Shedlock

New Home Sales Surge but Prices Down Sharply; Prices Have Room to Fall; Is Everybody In?

Posted: 27 Jan 2016 10:17 AM PST

December new home sales surged well over the high end Econoday estimate.

The outlook for the housing sector just got a boost from a sharp jump in new home sales, up 10.8 percent to a 544,000 annualized rate that is 44,000 over the Econoday consensus and 24,000 over the high estimate. The gain, however, may have been boosted by discounting as the median price slipped 2.7 percent to $288,900 for a year-on-year rate of minus 4.3 percent.

With builders slow to bring new homes to market, low supply remains a central factor holding back sales. Supply did rise 6,000 in the month to 237,000 but supply relative to sales fell back to 5.2 months from 5.6 months. A reading of 6.0 months is considered to be the balance point between supply and demand.

Regional data show a 32 percent sales surge in the Midwest where the year-on-year rate of 39 percent is the strongest. Sales in the West and Northeast both rose 21 percent in the month with the year-on-year rate in the West, which is a key region for new housing, up 22 percent while the Northeast, which is a very small region in this report, down 6.5 percent on the year. The South, which is the largest region, shows a fractional gain in the month and no change on the year.

For full year 2015, new home sales rose 14.7 percent to 501,000 from 437,000 in 2014. Sales of new homes have been noticeably higher than prices, suggesting that prices have room to accelerate. This report follows special strength in existing home sales with both perhaps benefiting from December's warm weather but with both pointing nevertheless to new momentum for 2016.

Negative Momentum

Why did sales surge 39% in the Midwest? Because this was one of the warmest December on record even discounting global warming silliness.

Bloomberg calls this "new momentum" for 2016. Indeed it is, but that momentum is negative.

This statement by Bloomberg caught my eye: "Sales of new homes have been noticeably higher than prices, suggesting that prices have room to accelerate."

Prices Have Room to Fall

I suggest home prices have room to fall. Curiously so does Bloomberg, albeit in different ways, and in a different article.

Please consider Bloomberg's article The Surge in U.S. Mansion Prices Is Now Over, published just two days ago.

The world's economic woes -- from China to Russia to South America -- are damping sales in the high-end real estate market. Haywire overseas stock markets and dropping currency values caused in part by plummeting oil prices are dulling demand for mansions, penthouses and winter escapes.

Luxury Pfft

Prices for the top 5 percent of U.S. real estate transactions remained flat in 2015 while all other houses gained 4.9 percent, according to data from Redfin Corp., a real estate brokerage and data provider.

Stronger Dollar

The stronger dollar is driving South American buyers away from the 23,000 condos in the pipeline for Miami's downtown area, said Peter Zalewski, owner of South Florida development tracker CraneSpotters.com. Buyers signed about one-fourth fewer pre-construction contracts last year than in 2014, according to Anthony M. Graziano, senior managing director at Integra Realty Resources Inc., which tracks condo data for the Miami Downtown Development Authority.

In nearby Sunny Isles, Florida, faraway currency fluctuations are endangering the sale of a $3.7 million condominium.

In Houston, the plunge in oil prices to a 12-year low is killing the luxury boom. Sales for homes priced at $500,000 or more dropped 17 percent in December from a year earlier, according to the Houston Association of Realtors.

Manhattan resale prices for the top 20 percent of the market peaked in February and have fallen every month since, according to an analysis through October by listings website StreetEasy.

Even in San Francisco, where the market for luxury properties remains strong, the inventory of listings for $2 million or more jumped in October to a record level, said Patrick Carlisle, chief market analyst for Paragon Real Estate.

"More sellers are jumping in and more buyers are holding off because they're worried about where the volatility is going," Carlisle said.

Buyers are now on the hunt for deals, said Nela Richardson, chief economist at Redfin.

"There's a limit even to what a wealthy person will spend," she said.

Is Everybody In?

Bloomberg did not make the necessary connection, but they did provide the chart. Let's tie up some loose ends.

In bonds, rot starts with junk and spreads to the core. With homes, price rot starts at the high end.

With Chinese West-coast buyers now not feeling so wealthy after a 47% plunge in the stock market, and with "Temporary" Capital Controls likely on the way, that segment of the high-end market is toast.

The strong dollar is having the same effect in Florida. And in New York, well ... "There's a limit even to what a wealthy person will spend."

And every decrease in the price at the high end, affects every level below it. A mansion that was $1,000,000 but is now $900,000 will affect the price of homes listed for $850,000 to $900,000, etc., all the way down the ladder.

Is Everybody In?

Let's return to the Econoday "room to accelerate" misanalysis.

If homebuilders could sell more expensive homes, they surely would. And at the very high end, it appears we have hit the peak. That group is "all in".

It was one hell of a bubble-reblowing effort by the Fed, but another slide lower awaits. New homes prices will likely get cheaper and cheaper with more and more features added.

In turn that will lower the price of similar existing homes. This stuff does cascade. We have seen it before.

Lack of Supply

There's plenty of talk about lack of supply. Actually, there's an ample supply of homes. There's just no supply at prices people are willing and able to pay.

Expect lower, not higher prices. And if you need to get out, beat the rush, if you still can.

Mike "Mish" Shedlock