Mish's Global Economic Trend Analysis

Economic and Social Tipping Points: Have We Arrived?
Another Wild Ride; Stocks Collapse Into Close; Dip Buyers Hammered; Overhead Supply
Regional Manufacturing Expectations From Mars
New Home Sales Rise From July Downdraft; Surprise Softness in Home Prices

Economic and Social Tipping Points: Have We Arrived?

Posted: 25 Aug 2015 10:46 PM PDT

Economic Tipping Points

Was the Surprise Devaluation and Currency War by China two weeks ago an economic tipping point?
How about the 1000+ Point Plunge in the Dow partially recovered on Monday?
Oil prices at six year lows?

Social Tipping Points

I will return to economic tipping points in a moment.

Meanwhile, let's refocus the spotlight on social problems. Here's an image of a protest on Monday, in Germany.

Police confront rightwing demonstrators at the Heidenau refugee centre in eastern Germany

Spread Them Around

Please consider Merkel and Hollande Call For Equal Spread of Refugees Across EU

Angela Merkel and François Hollande on Monday called for a more equal distribution of asylum seekers across the EU, as violent clashes outside a German refugee centre highlighted the rising political tensions over record inflows of migrants into Europe.

"There was an aggressive xenophobic atmosphere which is no way acceptable," said the German chancellor. "It is disgusting how rightwing extremists and Neo-Nazis have tried to spread dumb messages of hate. But it is also shameful that citizens, some of them with children, have supported the demonstration by going along to it."

Ms Merkel and Mr Hollande backed the European Commission's push to revive controversial proposals for all 28 EU countries to sign up to a binding quota agreement, under which newly arrived refugees would be distributed around the bloc. Such a move would to ease the burden on Germany and a handful of other states which currently take a majority of asylum seekers.

Germany expects to receive a record 800,000 refugees this year, more than the entire EU received in 2014 and around 1 per cent of the country's population.

Ms Merkel and Mr Hollande also called for the full implementation of EU asylum rules — which cover areas such as legal rights and rights to medical and social care — across the bloc.

The German Interior Minister, Thomas de Maiziere, called for "freedom of movement and open borders." More specifically, he added "A European answer to maintain open borders and no controlsin the Schengen region is needed."

Schengen Area

The Schengen Area comprises 26 European countries that have abolished passport and any other type of border control at their common borders. Twenty-two of the twenty-eight European Union (EU) member states participate in the Schengen Area. Ireland and the United Kingdom maintain opt-outs.

Note that the UK is pissing and moaning over a few thousand refugees, not the 800,000 Germany gets.

A quick check shows David Cameron says Britain will Accept Just 'a Few Hundred' More Syrian Refugees despite 4 million displaced by the war.

Cameron a Liar or Delusional?

UK prime minister David Cameron insists he can get the EU treaty changes he wants even though Germany and France want something 180 degrees different.

Cameron is either a liar or delusional.

By the way, let's place the blame for the Syrian refugee mess where it belongs: President Bush was a direct sponsor of Isis, and president Obama sure did not help any.

EU Rules

Under EU rules, refugees are required to obtain asylum in the country in which they first arrive. Italy and Greece have not enforced that rule, for obvious reasons. They are the countries in which most refugees arrive.

Imagine Italy and Greece absorbing 800,000 refugees.

Unlimited Demand for Free Services

Germany and France want to spread the refugees.

Is that the answer? If so, at what cost?

Bear in mind refugees have "rights to medical and social care". Who pays?

That we can answer: taxpayers.

Also bear in mind, Greece has an unemployment rate of 25.6%, and Italy 12.6%. Youth unemployment in Greece is 49.7%, Spain is 49.3%, and Italy is 41.5%.

That is one hell of a lot of disgruntled people worried, with due cause, about others taking their job.

It's no wonder we have seen the rise of Golden Dawn in Greece, neo-Nazis in Germany, Beppe Grillo's M5S (five star movement in Italy), and Marine le Pen's National Front in France.

People are fed up.

Spreading Refugees Cannot Possibly Work

The idea that unlimited refugees can be spread around like cream cheese on a bagel, with no repercussions, is fallacious.

The more free services a county gives, and the more convenient it is for people to get those free services, the more takers there will be.

Spread refugees around, give them more care and services, the more you will have. Make it easy enough and half of Africa would move to Germany.

The US has the same problem of course, and no one seems to have figured that out (or cares to admit the real problem). The real problem is free services, not the lack of a wall.

Tipping Point?

What about those three questions I posed at the beginning? Are any of them economic tipping points?

Is immigration a social tipping point in Europe? The yuan devaluation? Oil price plunge? Stock market plunge?

Think carefully.

Here is the answer: All four points are symptoms of bigger problems. They are not tipping points in and of themselves. Rather they are signs of underlying economic weakness, that the economy has already tipped but has been propped up to no lasting avail.

When times are good, neo-Nazis don't thrive; Growth does not flounder; Few want to build walls across entire 2,000 mile borders.

Wealth Effect of Bubbles

The "wealth effect" of stock market bubbles can only go so far (assuming of course the effect is positive in the first place, and that I question).

Regardless, if the economy has tipped (and I think it has), the Fed prop-job has been so relentless, for so long, this may be the end of the line for a long time to come.

Mike "Mish" Shedlock

Another Wild Ride; Stocks Collapse Into Close; Dip Buyers Hammered; Overhead Supply

Posted: 25 Aug 2015 02:50 PM PDT

When I went to bed last night (actually something like 3:30 AM this morning), Dow Futures were up something like 366 points, S&P futures were up about 50 points or so, and Nasdaq futures were up on the order of 100 points.

Given only 6 stocks on the S&P rose yesterday, one might reasonably have expected a rebound for at least a day. Let's take a look at what actually happened in the cash markets today.

S&P 500 10-Minute Chart

Dow 10-Minute Chart

Nasdaq 100 10-Minute Chart

Russell 2000 10-Minute Chart

Overhead Supply

Dip buyers were had another rough go of it today.

That stocks could not muster even a one day rally in spite of extremely oversold conditions could be an ominous sign.

Despite significant gaps up, with further momentum until noon, the indices all closed in the red. This indicates a huge amount of overhead supply.

Mike "Mish" Shedlock

Regional Manufacturing Expectations From Mars

Posted: 25 Aug 2015 12:12 PM PDT

Last month, economists were excited when the Richmond Fed Manufacturing index unexpectedly rose from 6 to 13. The excitement lasted one month.

A new Richmond Fed report for August came out this morning. The forecast range of economic activity for August was 8 to 15, with the Consensus Estimate at 10. The actual result was a goose egg.

Early indications on August factory conditions are mixed with Richmond the latest, coming in at a disappointing zero. Orders are flat this month at only 1 vs 17 and 10 in the prior two reports. And backlogs are in deep contraction at minus 15. Shipments are also negative at minus 4 and capacity utilization is at minus 5. Hiring is flat and price data are mute. This report follows last week's big fall in the Empire State report and respectable readings in the Philly Fed and manufacturing PMI reports. All together, they point to a bumpy month for the still struggling factory sector.

Current Activity vs. Expectations

Diving into the Richmond Fed Manufacturing Report we see the same perpetual optimism that never seems to arrive.

Note the current conditions vs. expectations six months from now. Also note the level of inventories vs. current conditions.

For grins I downloaded historical data of future expectations. Let's take a look.

Future Expectations

Date	Shipments	Volume of New Orders	Backlog of Orders	Capacity Utilization	Vendor Lead Time	Number of Employees	Average Workweek
Jan-15	35	36	19	28	5	17	14
Feb-15	41	34	16	33	7	18	16
Mar-15	46	44	19	31	7	24	13
Apr-15	44	37	24	31	9	21	18
May-15	42	41	21	32	9	25	17
Jun-15	39	35	13	31	1	19	14
Jul-15	34	34	17	22	7	22	3
Aug-15	28	29	16	27	4	13	7

Projections From Mars vs. Actual US Activity

Date	Shipments	Volume of New Orders	Backlog of Orders	Capacity Utilization	Vendor Lead Time	Number of Employees	Average Workweek
Aug 2015 Actual	-5	0	-14	-4	6	5	8
August 2015 Projection (From February)	41	34	16	33	7	18	16
September 2015 Projection (From March)	46	44	19	31	7	24	13

I believe it's safe to say September will look nothing like the projections made six months ago in March.

These look ahead forecasts are so useless they may as well be from Mars. Yet, economists perpetually point to them as if they offer some sort of insight as to what will happen.

Mike "Mish" Shedlock

New Home Sales Rise From July Downdraft; Surprise Softness in Home Prices

Posted: 25 Aug 2015 10:29 AM PDT

A pair of housing reports were out today, new home sales, and the Case-Shiller index of home prices. Let's start with the latter.

Surprise Softness in Home Prices

The Bloomberg Consensus Estimate for the Case-Shiller home price index was +0.1%, but month-over-month prices actually declined.

Inventories may be low and sales rates firm, but both Case-Shiller and FHFA are pointing to a surprising flat spot for home-price appreciation. Case-Shiller's 20-city adjusted index fell 0.1 percent in June vs Econoday expectations for a 0.1 percent rise. Year-on-year, 20-city prices, whether adjusted or unadjusted, are unchanged at plus 5.0 percent. This rate has been inching higher but looks like it may be ready to fall back unless prices pick up.

Eleven of 20 cities show declines in the month with Chicago showing the steepest at minus 1.7 percent. The biggest gainer in the month is Portland, Oregon, up 0.5 percent to extend a long run of solid gains. Year-on-year, Chicago is the weakest at plus 1.3 percent with Denver at the top at plus 10.2 percent followed by San Francisco at 9.5 percent.

Softness in home prices is a surprise and suggests that sellers are offering price concessions. Flexibility in price is a positive right now for sales but tightness in available homes for sales, along with strong demand tied to health in the labor market, point to firming prices ahead.

New Home Sales Rise From July Downdraft

New home sales rose in July, rebounding from a dismal downdraft in July, but far less than the Bloomberg Consensus Estimate of 516,000 annualized.

New home sales rose solidly in July from a downdraft in June, up 5.4 percent to a 507,000 annual pace. Year-on-year, sales have surged, up 26 percent. The strength in sales has thinned an already tight market where supply is at 5.2 months, down from 5.3 months in June and compared with 6.1 months a year ago.

Regional data show a surge for the Northeast where, however, readings are skewed by very low sales rates. Still, the Northeast is out front with a year-on-year gain of 39 percent followed by the West at 30 percent and the South, which is much bigger than all the other regions combined, at a very strong 29 percent. The Midwest is lagging at no change.

Price data are of special interest given signs of weakness in this morning's FHFA and Case-Shiller reports. And here the story is much the same. Though the median price did rise 3.0 percent in the month to $285,900, the year-on-year gain, however, is only 2.0 percent which is a tiny fraction of the sales gain.

Though prices may not be soaring, supply is low and rates are low which should continue to encourage builders to enter the market. The housing sector may not be soaring, but it is a center of strength for the economy.

New Home Sales

click on chart for sharper image

Mixed Bag

The above chart puts a needed perspective on new home sales. Year over-year sales growth seems impressive, but actual sales in number of units don't. And home prices seem to have hit a wall.

Bloomberg says "supply is low and rates are low which should continue to encourage builders to enter the market."

That sounds much like "If you build it, people will buy" speculation. Perhaps they will. But at what price? Who is left that wants a house, needs a house, and can afford a house?

Stalling home prices likely provides the answer.

Housing will be a net contributor to GDP, just nothing like the mid-2000s.

Mike "Mish" Shedlock

Home Refinance Calculator

Tuesday, August 25, 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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