Mish's Global Economic Trend Analysis

Brussels Tells Spain to Raise VAT Once Again
"Fixed Income Only Positive Return Asset Class in 2014, 30-Year Treasury Yield Headed to 2.50%" Says Steen Jakobsen
Arms of a Behemoth: Interesting Video on LNG Distribution
Shiller Kool-Aid Part II: Doug Short Chimes In
Shiller Drinks the Kool-Aid

Brussels Tells Spain to Raise VAT Once Again

Posted: 09 Apr 2014 07:00 PM PDT

The nannycrats in Brussels really don't get it. You do not hike taxes in the middle of a depression or coming out of a depression. Yet once again, and for the nth time, that is precisely the recommendation.

Via translation from El Confidencial, please consider Brussels Roadmap of Tax Reform

Note: This is an extremely choppy Google translation, presented "as is" instead of my customary edits.

The document is apparently technical. But has behind it an undoubted political. Not surprisingly, public weeks ago before the government will present its tax reform, and weeks after I did the Committee of Experts created at the time by the Ministry of Finance. And what the report of the European Commission is that Spain is facing a fiscal devaluation passing raise VAT. Therefore, the opposite of what has been said in public Minister Montoro.

In principle nothing new, but what is important is that for the first time, puts numbers. That is, clearly raises the government should lower taxes on labor, and, instead, increase the tax burden of indirect taxation (VAT) and excise taxes (snuff or hydrocarbons). Give a couple of Data to support this strategy. If the government reduces the tax burden direct point of GDP, unemployment would fall to the same extent. Or what is the same, it could create about 168,000 jobs immediately from current levels of employment.

The report of the European Commission insists again and again that the solution is to raise VAT, the impact on competitiveness is zero, since exporting firms do not pay. But with that hike planned results are not achieved, the Government to use the room for maneuver that has both environmental taxes as those related to home ownership is requested.

The notion that raising the VAT will increase jobs on the basis exporters don't pay is of course lunacy. Apologies for an "as is" translation but I believe I have the gist correct.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Fixed Income Only Positive Return Asset Class in 2014, 30-Year Treasury Yield Headed to 2.50%" Says Steen Jakobsen

Posted: 09 Apr 2014 11:37 AM PDT

I don't believe the growth estimates of the IMF and neither does Steen Jakobsen, Chief Economist of Saxo Bank.

Steen goes one further and calls for the yield on the 30-year long bond to drop a minimum of 150 basis points to 2.5%.

From Steen via Email

2014 started with high expectations on growth. The IMF, World Bank and ECB were falling over themselves to upgrade growth forecast for 2014 in early January but by now Q1 growth in the US is expected to come in at +1.9% after the initial +2.6% advertised by the pundits in late 2014 (Bloomberg December 12th, Survey).

The IMF forecast is despite Q4 revised considerably down from 4.1% to 3.2%, ending at 2.7% in final count. (37% drop from early to final number).

This apparently was entirely due to weather....

But the fixed income market seems to have a different opinion: This is my long term chart which have maximum one signal per year.

The model has been good in calling bigger trend changes, the last one being end of December 2012 where it bought on the close @ 2.94% yield. It's now getting ready to sell off indicating that the bond market "disagrees" more and more with the assumption on weather.

Furthermore, my gauge for central bank policy: The GDP weighted G-10 1 year interest is also making noises to the downside, although less so than long term interest rates....

The point here being that despite hearing daily from both investors and other strategist's that: "We are in clear recovery on growth and that 2014 will be a good year for stock market again".....I remain extremely disappointed on the REAL PROGRESS made in terms of structural and cyclical improvement in key indicators.

The housing market no longer supports growth.

Inverted 30 Year Mortgage Rates (Down Means Higher Rates) vs. Building Permits

It's important for me to point out that seeing new lows in yield does not imply that I am a Super Bear on world as Ambrose Evans-Pritchard said in his blog the other day: Bond Yield to Hit Fresh Lows as World Recovery Wilts, Growls Saxon Bear

It does mean that I believe the recovery or healing will be delayed into 2015 (It's a 2015 story not a 2014). Our model sees Q2-2015 as the real turning point, but more importantly presently the market is the most consensus it has been for the least amount of real data supporting it since crisis in 2009.

The world is in rebalancing mode which hurts growth in most of the world:

Asia and China needs quality growth to substitute nominal growth on over investment
The US current account is falling mainly due to less energy import leaving massive "hole in the ground on consumption" for rest of world
Europe has not even started to address it fundamental lack of reforms.

Presently Europe is trying to sell implications of low interest rates as recovery, a similar mistake similar made in Australia. Low rates are there for a reason or rather two:

Low growth and no visibility for improvement in business investment and consumer demand.
Deflationary forces - A lack of technology/innovation and a global depression (See Why world markets are in a state of flux in 2014)

If the recovery was real and deeply rooted, unemployment would be dropping, business would be investing in further capacity and most certainly the consumer would be out buying goods. No, the bond market remains the most steady hands of all markets and assets, and my conclusion remains the same:

Fixed income will be only asset class giving a positive return in 2014 leading to both inflation and growth from Q2-2015 as our rule of thumb of nine month lag from interest to the real economy will mean that the low rates seen over this summer will be positive for Q2-2015.

The world is barely growing at zero policy interest, if anything the disinflation says lower growth is coming, so the path of least resistance is lower rates first as policy makers continue to believe "guidance on interest rates" is more important than real changes.

Join Steen at Wine Country Conference II

Want to hear a live discussion of what Steen Jakobsen thinks about Europe, China, or US interest rates?

Then come to the second annual Wine Country Conference which will be held May 1st & 2nd, 2014.

We have an exciting lineup of speakers for this year's conference.

John Hussman: Founder of Hussman Funds, Director of the John P. Hussman Foundation which is dedicated to providing life-changing assistance through medical research
Steen Jakobsen: Chief Economist of Saxo Bank
Stephanie Pomboy: Founder of MacroMavens macroeconomic research
David Stockman: Ronald Reagan's budget director, best-selling author, former Managing Director of The Blackstone Group
Mebane Faber: Co-founder and the Chief Investment Officer of Cambria Investment Management
Jim Bruce: Producer, Director, and Writer of Money For Nothing: Inside the Federal Reserve
Chris Martenson: Reknown speaker and founder of Peak Prosperity
Mike "Mish" Shedlock: Investment advisor for Sitka Pacific and Founder of Mish's Global Economic Trend Analysis

Conference Details

For further details about the 2014 conference, please see Wine Country Conference May 1st & 2nd, 2014

Unlike other "for profit" conferences, every cent of money raised in this event goes to charity. This year's cause is autism.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Arms of a Behemoth: Interesting Video on LNG Distribution

Posted: 09 Apr 2014 10:56 AM PDT

Here is an interesting video on liquid Natural Gas distribution that came my way courtesy of New Zealand reader Hugh Pavletich.

Link if video does not play: Arms of a Behemoth.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Shiller Kool-Aid Part II: Doug Short Chimes In

Posted: 09 Apr 2014 09:49 AM PDT

Doug Short at Advisor Perpspectives picked up my post Shiller Drinks the Kool-Aid.

Footnote from Doug Short

Doug emailed me a bit ago, adding a few charts of his own to my post.

When I read Mish's commentary this morning, I was interested in what the real (inflation-adjusted) weekly earnings of this employment cohort would look like over the past seven-plus decades. Here's what I came up with, courtesy of data from the FRED repository. This snapshot clearly supports Mish's perspective.

I would also emphasize the secular trends since the early 1980s that underly Mish's third chart above: The general decline in US manufacturing triggered by the growth offshoring and the accelerating efficiencies of technologies that replace human labor. Over this timeframe, real wages have been stagnant for a shrinking manufacturing labor force.

I'll close this footnote with a look at the Manufacturing Workforce as a percent of the Civilian Employed.

Tail Risk

Do economists understand tail risk and how economies can turn on a dime for no apparent reason other than a change in consumer sentiment? Apparently not.

Yesterday, the IMF Cut Downturn Danger to Near Zero.

The fund's World Economic Outlook now estimates only a 0.1 per cent probability of global recession in 2014, compared with a 6 per cent chance last October, with similarly reduced risks for 2015.

Most of the IMF's forecasts were little changed, with expectations of stronger growth in the US, the UK and Germany boosting the outlook.

Olivier Blanchard, chief economist of the IMF, said: "I think the recovery is strongest in the US in that, for the most part, the brakes are gone. People can borrow at low rates and the fiscal consolidation is now fairly slow . . . In a way it is pulling the world."

Time will tell, but the IMF has a history of being overly overoptimistic. And as I have said before, I did not believe the widely held China decoupling theory in 2007, and I sure don't believe in any US decoupling views today.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Shiller Drinks the Kool-Aid

Posted: 08 Apr 2014 11:54 PM PDT

One by one the bears and the rational thinkers throw in the towel. Economist Robert Shiller is the latest to drink the Kool-Aid.

As noted by Business Insider Shiller tweeted the following about a post from White House Council of Economic Advisers Chair Jason Furman on various economic indicators:

"Furman's blog chart 4 of hours worked in manuf suggests, with new record high of 42, no recession for years to come."

Manufacturing hours worked is the fourth chart in the White House Blog report on the Employment Situation in March.

click on chart for sharper image

I recreate the chart below but start the timeline at 1940 rather than 1950. I also added some highlights in red.

Supposedly the current reading of 42 is all you need to know to understand a recession isn't in the cards for "years to come".

Note that in the mid-1940s a recession started with weekly hours over 45, something Shiller conveniently chopped off in his chart.

OK let's toss that out as a war ending event.

Is there anything sacrosanct about 42 vs. 41 where many recessions started? I suggest no. And what about manufacturing employment vs. hours worked?

Good question. Here's the chart.

Manufacturing Employment

Two Questions

Is there anything about manufacturing employment that remotely suggests no recession for years to come?
Is there anything about manufacturing employment that indicates hours worked in manufacturing has the importance it may have had decades ago?

Reality

There is no single chart that is a sure fire indicator of anything. An inverted yield curve is probably the closest bet, but given QE and blatant Fed manipulation of interest rates, it's highly likely the next recession starts with a positive curve.

Even if hours worked has high importance (and it doesn't) there is absolutely nothing to suggest where manufacturing hours will be six months from now!

Shiller should know better than to make such statements.

I propose a $5,000 bet with Robert Shiller right now, donated to our favorite charity that he is wrong.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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