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Sunday, March 20, 2016

Mish's Global Economic Trend Analysis

Mish Moved Off Blogger to MishTalk.Com - For Email Alerts Please Sign Up Again on MishTalk!

Posted: 20 Mar 2016 11:24 AM PDT

I announced on February 22 Goodbye Blogger, Hello WordPress: Mish's GlobalEconomicAnalysis has Moved to MishTalk.Com.

My needs outgrew blogger.

The top reason is that I wanted a multi-page layout, with a different home page than the detail pages. Most of the top financial sites are organized that way. It's impossible with Blogger.

My entire blog has moved over intact, from the beginning, except for comments.

I failed to point out that existing subscribers to my feed were not carried over. There is no way to move a blogger feed into WordPress.

If you were an existing subscriber, you need to sign up again!

You can do so in the Upper Left of MishTalk.Com

Thanks.

Mike "Mish" Shedlock

Tuesday, February 2, 2016

Mish's Global Economic Trend Analysis

Goodbye Blogger, Hello WordPress: Mish's GlobalEconomicAnalysis has Moved to MishTalk.Com

Posted: 02 Feb 2016 11:08 AM PST

It's been a long run, but I am leaving Google Blogger for a new home on WordPress.

Please bookmark my new site: http://mishtalk.com/

Why Leave?

My needs outgrew blogger.

The top reason is that I wanted a multi-page layout, with a different home page than the detail pages. Most of the top financial sites are organized that way. It's impossible with Blogger.

In addition, WordPress offers additional features that Blogger doesn't.

Ability to write a post and release it at a scheduled time
Better development tools
Email notifications
A point of contact

My entire blog has moved over intact, from the beginning, except for comments. There are just a few more posts to pull over.

Daniel Robert and Michelle Langston at WordPress did a fantastic job with the move, converting all internal self-references to MishTalk from blogger.

Say goodbye to GlobaleconomicAnalysis.Blogspot.Com

Say hello to MishTalk.

Mike "Mish" Shedlock

Monday, February 1, 2016

Mish's Global Economic Trend Analysis

Iowa Caucuses: Cruz Edges Trump and Rubio; Clinton and Sanders in Dead Heat
"Blue Chip" Optimism vs. GDPNow 1.2% 2016 Initial Q1 Forecast; Strengths and Weaknesses of GDPNow
Construction Spending Anemic Despite Warm Weather; Where to From Here?
ISM Negative 4th Month, Employment Shows Significant Declines

Iowa Caucuses: Cruz Edges Trump and Rubio; Clinton and Sanders in Dead Heat

Posted: 01 Feb 2016 09:06 PM PST

Ted Cruz was the surprise winner in the Iowa Republican caucuses tonight edging out Donald Trump who in turn edged out Marco Rubio in a very strong voter turnout.

On the Democratic side, Hillary Clinton is just a handful of votes ahead of socialist Bernie Sanders in a vote still too close to call. Given that Clinton was ahead of Sanders by 40 percentage points a few weeks ago, this result may raise more eyebrows than Cruz did by winning the Republican side.

Via Real Clear Politics, the delegate totals look like this.

Mike Huckabee dropped out tonight. In speeches following the caucuses, both Trump and Rubio reached out to Huckabee.

New Hampshire

Trump and Sanders are both supposed to easily win new Hampshire.

Unless Trump puts in a poor New Hampshire showing, Iowa will soon be a meaningless result. Hillary's test comes after New Hampshire.

Mike "Mish" Shedlock

"Blue Chip" Optimism vs. GDPNow 1.2% 2016 Initial Q1 Forecast; Strengths and Weaknesses of GDPNow

Posted: 01 Feb 2016 10:30 AM PST

"Blue Chip" Optimism

The Atlanta Fed initial GDPNow Forecast for first quarter 2016 starts off with an anemic 1.2% whimper.

"The initial GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 1.2 percent on February 1. "

First Quarter 2016 GDPNow Forecast

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

The 4th quarter "Blue Chip" consensus at that time was about 1.9%. The actual BEA release was 0.7%.

Strengths and Weaknesses of GDPNow

The strength of the Atlanta Fed GDPNow model is that it mimics BEA calculations, thus providing an advance look as to what the BEA will report.

The inherent and unavoidable weakness in the GDPNow model is BEA revisions. GDPNow mimics a model in which data is revised, revised, and revised again.

Late last year the BEA announced it made a major "processing error" in regards to construction spending. The error affects GDP all the way back to 2005.

We will not know the total effect until July 2016. We do know the biggest errors pertain to 2014 GDP which will rise, and 2015 which will fall.

I discussed the forthcoming construction revisions in depth in When are Construction Revisions Coming?

Moreover, GDP is notoriously wrong around economic turns, like now. It's highly likely the GDPNow model has mimicked bad data from the BEA that will be revised substantially lower in the future.

If so, the US is in recession now, with the vast majority of economists in Economic Fantasyland.

Mike "Mish" Shedlock

Construction Spending Anemic Despite Warm Weather; Where to From Here?

Posted: 01 Feb 2016 09:20 AM PST

Economists expecting a huge surge in construction spending thanks to unusually warm December weather were no doubt shocked by today's anemic report.

The Econoday Consensus Estimate was for +0.6% in a range of 0.3% to 1.3%, but not a single economist came close.

Held down by weakness in the nonresidential component, construction spending didn't get a lift at all from the mild weather late last year, rising only 0.1 percent in December following a downwardly revised 0.6 percent decline in November and a 0.1 percent contraction in October. Year-on-year, spending was up 8.2 percent, a respectable rate but still the slowest since March last year.

But there is very good news in the report and that's a very strong 0.9 percent rise in residential construction where the year-on-year rate came in at plus 8.1 percent. Spending on multi-family units continues to lead the residential component, up 2.7 percent in the month for a 12.0 percent year-on-year gain. Single-family homes rose 1.0 percent in the month for an 8.7 percent year-on-year gain.

Now the bad news. Non-residential spending fell 2.1 percent following a 0.2 percent decline in November. Steep declines hit manufacturing for a second month with the office and transportation components also showing weakness. Still year-on-year, non-residential construction rose 11.8 percent.

Rates of growth in the public readings are led by highway & streets, at a 9.4 percent surge for December and a year-on-year rate of plus 12.0 percent. Educational growth ended 2015 at 9.4 percent with state & local at plus 4.4 percent. The Federal subcomponent brings up the rear at minus 1.4.

Lack of business confidence and cutbacks for business spending are evident in this report but not troubles on the consumer side, where residential spending remains very solid and a reminder that the housing sector is poised to be a leading driver for the 2016 economy. Still, the weak December and revised November headlines are likely to pull down, at least slightly, estimates for revised fourth-quarter GDP which came in at plus 0.7 percent in last week's advance report.

Total Construction Spending

Total Construction Spending Detail

Where to From Here?

Total construction spending has stalled since June 2015.

Bloomberg noted the "good news" in residential. Residential construction, especially single family homes, is more likely to be more opportunistic based on weather. New Wal-Mart superstores etc., are planned events.

It remains to be seen if "the housing sector is poised to be a leading driver for the 2016 economy".

I strongly suspect "not".

Mike "Mish" Shedlock

ISM Negative 4th Month, Employment Shows Significant Declines

Posted: 01 Feb 2016 08:41 AM PST

Manufacturing in January continues its dismal track record with the latest ISM reading. Econoday reports ...

Employment sank the ISM index in January which could muster no better than a 48.2 for what, following annual revisions to 2015, is the fourth sub-50 reading in a row. This is by far the worst run for this closely watched indicator since the Great Recession days of 2009.

Employment fell a very steep 2.1 points to 45.9 to signal significant contraction for manufacturing payrolls in Friday's employment report, which however would not be much of a surprise given the sector's prior payroll contraction. This is the third sub-50 reading for employment of the last four months and the lowest reading since, once again, 2009.

There is good news in the report and that's a snapback for new orders, to 51.5 for only the second plus 50 reading of the last five months and which points to overall improvement in the coming reports. But backlog orders, at only 43.0, remain in deep contraction, and what strength there is in orders isn't coming from exports which are in contraction for the seventh of the last eight months. Manufacturers have been working down backlogs to keep production up, which came in at 50.2 to signal fractional monthly growth. Inventories remain steady and low but the sample still say they are too high, sentiment that points to lack of confidence in the business outlook.

Confirming the weakness is breadth among industries with 10 reporting composite contraction against eight reporting monthly growth. If it wasn't for strength in new orders, January's data would be almost entirely negative. This report is a downbeat opening to 2016 which follows a definitively downbeat year for the factory sector in 2015.

ISM Manufacturing Index

Let's further dive into the numbers straight from the ISM Report.

Index	Jan	Dec	PP Change	Direction	Rate of Change	Trend in Months
PMI®	48.2	48.0	0.2	Contracting	Slower	4
New Orders	51.5	48.8	2.7	Growing	From Contracting	1
Production	50.2	49.9	0.3	growing	From Contracting	1
Employment	45.9	48.0	-2.1	Contracting	Faster	2
Supplier Deliveries	50.0	49.8	0.2	Unchanged	From Faster	1
Inventories	43.5	43.5	0.0	Contracting	Same	7
Customers' Inventories	51.5	51.5	0.0	Too High	Same	6
Prices	33.5	33.5	0.0	Decreasing	Same	15
Backlog of Orders	43.0	41.0	2.0	Contracting	Slower	8
Exports	47.0	51.0	-4.0	Contracting	From Growing	1
Imports	51.0	45.5	5.5	Growing	From Contracting	1

Key Points

Backlog of orders in contraction 8 months
Exports back in contraction
Prices in contraction 15 months

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

The Fed did indeed hike. And economists still believe no recession is coming.

For my take, please see Economists in Fantasyland: Economists See 20% Chance of Recession That's at Least 20% Likely Already Here.

Mike "Mish" Shedlock

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