Mish's Global Economic Trend Analysis

Strong Start to Third Quarter GDP?
It's Not Obama's Fault: Six Rules to Live By
Retail Sales Rise Thanks to Autos; Industrial Production Sinks Thanks to Autos; Last Hurrah for Autos?
Shocking Weakness in Empire State Manufacturing Report
Tsipras and Meimarakis Debate; Hung Parliament or Coalition Likely; El Dorado Gold Connection; Does it Matter Who Wins?
Ben Bernanke vs. John Hussman; Beauty of Truth vs. Beast of Dogma; Four Questions

Posted: 15 Sep 2015 10:16 PM PDT

In Retail Sales Rise Thanks to Autos; Industrial Production Sinks Thanks to Autos; Last Hurrah for Autos? I highlighted this Bloomberg claim:

"Taken together, July and August point to a very strong start to the third quarter for the consumer."

Later in the afternoon I decide to check. It just so happened the Atlanta Fed updated its GDPNow Model following yesterday's reports.

The Atlanta Fed forecast reads ...

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.5 percent on September 15, unchanged from September 3. The nowcast for third-quarter real personal consumption expenditures growth increased from 2.6 percent to 3.2 percent after this morning's retail sales release from the U.S. Census Bureau. This was offset by a decline in the nowcast of growth in real government spending after Friday's Monthly Treasury Statement and a decline in the nowcast of inventories for motor vehicle and parts dealers after this morning's industrial production release from the Federal Reserve.

GDP Now Forecast

The GDPNow forecast following the retail sales and industrial production numbers is the same as it was on September 3.

As noted above Retail Sales Rise Thanks to Autos; Industrial Production Sinks Thanks to Autos

It was a wash. And 1.5% GDP growth annualized is hardly a strong start.

Mike "Mish" Shedlock

It's Not Obama's Fault: Six Rules to Live By

Posted: 15 Sep 2015 03:50 PM PDT

A reader emailed a link to a preposterous Foreign Policy article by Aaron David Miller entitled "It's Not Obama's Fault".

The subtitle was just as preposterous: "The inconvenient truths about why you can't blame the West for what's happened in Syria."

Miller's article is the same old, same old flag waving "US never does anything wrong, and should apologize for nothing" type of thing.

In retrospect, the article could have been about anything, not just Syria.

The article did serve a purpose, however. In the future his entire article and anything similar can easily be replaced by a set of simple rules.

Six Rules to Live By

Rule Number 1: Never blame your own party
Rule Number 2: It's never Obama's fault
Rule Number 3: It's never Bush's fault
Rule Number 4: If you are a Republican, please see rule number 2
Rule Number 5: If you are a Democrat, please see rule number 3
Rule Number 6: If you are independent, please see rules number 2 and 3.

Fake patriot non-apologists are a dime a dozen.

But the demagogues who always blame the other party are just as bad, if not worse.

Anyone who does not understand how destabilizing US policy is for the entire Mideast has their head up their ass.

Mike "Mish" Shedlock

Retail Sales Rise Thanks to Autos; Industrial Production Sinks Thanks to Autos; Last Hurrah for Autos?

Posted: 15 Sep 2015 12:27 PM PDT

An interesting divergence in auto production and sales came out in separate reports today. Let's start with sales.

Retail Sales Rise Thanks to Autos

The Bloomberg Economic Consensus for Retail Sales was for 0.3% growth. Actual growth came it at 0.2%, nonetheless Bloomberg issued a glowing report, largely on autos, but also because of small upward revision for last month.

For a second report in a row, upward revisions highlight solid growth in retail sales. Retail sales rose 0.2 percent in August with ex-auto at plus 0.1 percent and ex-auto ex-gas at plus 0.3 percent. These are all 1 tenth below consensus. July, however, shows broad upward revisions with total sales at a very strong plus 0.7 percent vs an initial plus 0.6 percent. Ex-auto for July is revised upward by 2 tenths to plus 0.6 percent and ex-auto ex-gas revised upward by 3 tenths to plus 0.7 percent.

Turning first to strength in the August data, motor vehicles rose 0.7 percent on top of July's 1.4 percent gain. These are very solid readings for a very important component that points squarely at a healthy and confident consumer. Restaurants, another component tied to discretionary health, rose a very strong 0.7 percent to extend a run of gains. On the weak side are gasoline stations where, due to lower gas prices, sales fell 1.8 percent. But this decline actually underscores one of the reasons behind the consumer's health unlike, however, declines in building materials, down 1.8 percent, and furniture, down 0.9 percent. Yet both of these declines follow very strong gains in the prior month.

Taken together, July and August point to a very strong start to the third quarter for the consumer, a fact that plays into the hands of the hawks at this week's FOMC. Still, the doves can argue that slowing in August could point to negative effects from China-based volatility.

Recent History Of This Indicator

Retail sales are expected to rise 0.3 percent in August, a moderate gain that would not change the fate of the week's FOMC meeting. But the range of forecasts is wide and a print near the top forecast of 1.0 percent could very well lift the chances of a rate hike. And strength in the month is seen in core sales reflected in the ex-auto ex-gas reading which is expected to rise a solid 0.4 percent. Gasoline stations are expected to post sharply lower sales in line with the month's fall in gasoline prices.

Industrial Production Sinks Thanks to Autos

The Bloomberg Consensus Estimate for Industrial Production was -0.2%, in a range of -0.7% to +0.5%. The actual number was -0.4%, with an interesting highlight.

A reversal in the auto sector pulled down industrial production in August, falling 0.4 percent vs the Econoday consensus for a 0.2 percent decline. The manufacturing component fell 0.5 percent, also deeper than the consensus at minus 0.3 percent. In an offset, gains in July proved more robust than initially reported with total industrial production revised 3 tenths higher to plus 0.9 percent and manufacturing revised 1 tenth higher, now also at plus 0.9 percent.

Motor vehicle production is August's disappointment, down 6.4 percent following July's giant 10.6 percent spike. When excluding motor vehicle production, however, industrial production was unchanged in August following respectable gains of 0.3 percent in the prior two months. But these readings are far from spectacular and the weakness in the latest month could be a signal of retrenchment tied to Chinese-based volatility.

Turning to the report's other two components, utility production rose 0.6 percent in August with mining at minus 0.6 percent. Mining, hit by weak commodity prices, has been hurting all year with the year-on-year reading at minus 3.2 percent. Utilities, however, are up 3.2 percent year-on-year which leads the major components as manufacturing's year-on-year rate is a soft looking plus 1.4 percent. Total industrial production is up only 0.9 percent year-on-year.

This weakness is reflected in capacity utilization which is at 77.6 percent in the August report, down 4 tenths in the month and 2 tenths lower than consensus. Manufacturing utilization is at a soft 75.8 percent vs an unrevised 76.2 percent in July.

The vehicle-led burst in the manufacturing sector faded noticeably by summer's end, a reminder that foreign demand for U.S. goods is weak and that the domestic energy sector is suffering. The consumer is the lead horse for the economy, making up for factory slack that the doves are certain to cite at this week's FOMC.

Last Hurrah for Autos?

In regards to retail sales, Bloomberg commented "Turning first to strength in the August data, motor vehicles rose 0.7 percent on top of July's 1.4 percent gain. These are very solid readings for a very important component that points squarely at a healthy and confident consumer."

In regards to industrial production, Bloomberg commented "Motor vehicle production is August's disappointment, down 6.4 percent following July's giant 10.6 percent spike."

Every month, I keep wondering "Is this the last hurrah for Autos?"

We still do not know.

Every recent downturn in autos has simply led to a greater rise the next month.

Yet, there is one thing we do know: A huge auto slowdown is coming at some point and it will likely hit the economy like a ton of bricks when it happens.

It's fully expected in this corner, but economists and the Fed will be "shocked" when it happens.

Healthy and Confident Consumer?

As for Bloomberg's anecdote about a "healthy and confident consumer", I suggest Bloomberg is in Fantasyland.

Excluding autos, retail sales have been generally weak and confidence numbers are all over the map. Bloomberg ought to know, because it comments on confidence every month.

The latest University of Michigan "Consumer Confidence Index" is at a 3-month low.
The latest Conference Board "Consumer Confidence Level" is near an all-time high.
A recent Gallup "Economic Confidence Index" is near a 10-month low.

For details, please see my September 1 article, Investigating Consumer Confidence: 3-Month Low? 10-Month Low? Near Record High?

Moreover, and as discussed in the above link, confidence and retail spending have at best a weak correlation.

Gallup Confidence Update

Since Gallup updates its Economic Confidence Numbers every week, let's take a quick look. The latest report came out six hours ago.

The trend appears unmistakable to me, and it certainly is not strong. Nonetheless, the consumer sentiment myth goes on and on.

Mike "Mish" Shedlock

Shocking Weakness in Empire State Manufacturing Report

Posted: 15 Sep 2015 11:17 AM PDT

Last month we reported "Out of the Blue" Plunge in New York Region Manufacturing; Optimism Persists

As expected in this corner, there was absolutely no reason to be optimistic about manufacturing. Nonetheless, economists expected a snap-back.

The Bloomberg Consensus Estimate for the Empire State Manufacturing Index was -0.50, up from the August plunge to -14.92. The economists were off by a mile.

Highlights

The shocking weakness in August was no fluke as the Empire State index came in far below expectations for September, at minus 14.67. Next only to August's minus 14.92, September's reading is the weakest of the recovery, since April 2009. And, unfortunately, judging by new orders, activity in October may prove to be just as weak. New orders are deeply negative this month, at minus 12.91 vs minus 15.70 in August and the fourth straight negative reading. And manufacturers in the New York region won't be able to turn to backlogs which are extending their long run of contraction at minus 8.25.

Searching for positives in this report is difficult. Negative signs sweep components including shipments, at minus 7.98 following August's minus 13.79. If extended to national data, these results point to trouble for third-quarter GDP. Employment is at minus 6.19 which is the first negative reading since all the way back in January 2013. The workweek, reflecting the weakness in shipments, is down very steeply at minus 10.31. Price data show outright contraction for finished goods at minus 5.15 -- the first negative reading since November 2013. And rounding things out is a 10 point loss in the 6-month outlook to 23.21 which is the weakest since, once again, January 2013.

Recent History Of This Indicator

The Empire State manufacturing index is expected to bounce back in September, to a consensus minus 0.50 which would indicate only slight month-to-month contraction vs August's extremely deep contraction of minus 14.92. Focus will be on new orders which, at minus 15.70 in August, posted its weakest reading in 5 years.

Empire State Survey

Let's tune into the New York Fed Survey for further details.

The September 2015 Empire State Manufacturing Survey indicates that business activity declined for a second consecutive month for New York manufacturers. The headline general business conditions index remained well below zero at -14.7. As in August, declines were reported for both orders and shipments, with the new orders index coming in at -12.9 and the shipments index registering -8.0. The inventories index slipped a point to -18.5, indicating a continuing drop in inventory levels. Price indexes pointed to a small increase in input prices and a small decline in selling prices. Labor market indicators suggested that both employment levels and hours worked contracted. Indexes for the six-month outlook were generally lower than last month, suggesting that optimism about future conditions waned.

Mike "Mish" Shedlock

Tsipras and Meimarakis Debate; Hung Parliament or Coalition Likely; El Dorado Gold Connection; Does it Matter Who Wins?

Posted: 15 Sep 2015 10:30 AM PDT

Former Greek prime minister Alexis Tsipras who resigned on August 20 in the wake of his historic cave-in to the Troika, engaged in a Head-to-Head TV Debate yesterday with New Democracy leader Evangelos Meimarakis.

Monday night's debate featured sharp exchanges between former prime minister Alexis Tsipras, who last month triggered the snap election amid a rebellion in his leftwing Syriza party over a new EU bailout, and the centre-right New Democracy leader Evangelos Meimarakis.

Mr Tsipras repeatedly put his conservative opponent on the defensive, attacking Mr Meimarakis' party as responsible for "40 years of financial scandals while in power" that had benefited the country's business and political elite.

Mr Meimarakis countered the Syriza-led government had managed to bankrupt Greece in just seven months — to which a smiling Mr Tsipras hit back that this was like "someone who drank three bottles of whisky and a shot of vodka then claiming it was the vodka that had given him a hangover".

Syriza and New Democracy, with about 26 per cent of the vote each, according to forecasts, are well ahead of other rivals, but whomever wins will fall short of a parliamentary majority.

Mr Tsipras has repeatedly rebuffed [coalition] offers, and in a televised debate on Monday evening told Mr Meimarakis that any deal between the two parties after the election would be "unnatural".

One subject that figured into the debate was the investment by Eldorado Gold of Canada in a depressed region of northern Greece, which leftwingers oppose even though the country's supreme court has ruled that environmental permits are in line with international standards.

Mr Meimarakis made a point of bringing up the gold mining controversy in the debate, saying: "Syriza claims it wants investments to create jobs but you put thousands of jobs at risk just to score electoral points. You are driving away growth, not creating it".

An unruffled Mr Tsipras replied: "We only want investment that won't damage the environment."

Does it Matter Who Wins?

If we define "win" as ability to form a government after the election, then how can it possibly matter? Both parties have bowed down to demands of the creditors. There is nothing much left to fight over.

The socialists and the conservatives are effectively one and the same.

Aside from minor squabbles such as El Dorado investment, Greek policy will be run by Germany, with the IMF on the sidelines pressuring Germany to offer more debt relief.

One would have to believe Germany hopes Tsipras loses as his final punishment for the preceding showdown, but given Tsipras is now a German lapdog, the only thing that matters is if no one can form a coalition.

If Syriza barely wins and Tsipras holds to his "no deal" stance, expect another election, with reforms delayed in the process.

Here is the pertinent question: Is Tsipras making a political statement that no deal with New Democracy is possible, or is that really his firm position?

Saga Not Over

Even if a grand coalition forms, the saga will not be over. Greece will never be able to achieve and sustain the primary account surplus it needs to honor the deal. Ultimately, what cannot be paid back won't.

Mike "Mish" Shedlock

Ben Bernanke vs. John Hussman; Beauty of Truth vs. Beast of Dogma; Four Questions

Posted: 15 Sep 2015 12:07 AM PDT

Ben Bernanke the Comedian

Of the debates I would most like to see, John Hussman vs. Ben Bernanke would be right near the top of the list.

Let's kick off this hypothetical debate with a statement made by Ben Bernanke: "The problem with QE is it works in practice, but it doesn't work in theory."

Bernanke made that claim in response to a question if he was confident that QE (the policy of buying bonds to drive down long-term interest rates with short-term rates already at zero), would heal the economy.

Evidence In

Bernanke's response proved he is a better comedian than economist.

The evidence is in. What do we have to show for QE other than one of the biggest asset bubbles in history?

Beauty of Truth vs. Beast of Dogma

Don't take my word for it. Let's tune into this week's missive by John Hussman: Beauty of Truth vs. Beast of Dogma.

Hussman kicks off with a discussion only geeks can understand. But if you read far enough it quickly gets amusing.

For example, Hussman posted the following chart of the Taylor Rule (a rule that supposedly will allow the Fed to automatically set interest rates) with this comment ...

"It's unfortunate that the Federal Reserve is actually allowed and even encouraged to impose massive distortions on the U.S. economy based on relationships that are indistinguishable from someone sneezing on a sheet of graph paper."

Those who managed to get to that point were in for a nice down to earth set of comments and graphs that followed.

When you examine historical data and estimate actual correlations and effect sizes, the dogmatic belief that the Fed can "fine tune" anything in the economy is utter hogwash. At the same time, the demonstrated ability of the Fed to provoke yield-seeking speculation and malinvestment is as clear as day. An activist Federal Reserve is an engine of disaster and little more. Even with the best intentions, a dogmatic Fed, unrestrained by reasonable rules and constraints, is a reckless and deceptive beast, constantly offering to heal the nation with precisely the same actions that inflicted the wounds in the first place.

Truth, on the other hand, is beautiful. Economic relationships that are supported in real-world data are a sight to behold. You want to see some relationships you can count on? The chart below shows the relationship between the 3-month Treasury bill and the ratio of the monetary base (currency and bank reserves) to nominal GDP, in data since 1929. Notice something. Without paying banks interest to hold excess reserves idle in the banking system, the Fed could reduce its balance sheet by more than one-third (over $1.4 trillion) without pushing short-term interest rates above zero. That excess base money does nothing to support the real economy.

Nobody's desired level of saving, consumption, or real investment changes just because the Fed has chosen to force the economy to hold more base money and fewer Treasury bonds. But somebody has to hold that cash at every point in time – and nobody wants to hold it. So it simply acts as a hot potato, encouraging yield-seeking speculation in the financial markets. In my view, the most urgent action the Federal Reserve should take is to cease reinvestment of principal as the holdings on its balance sheet mature, in order to reduce this massive pool of idle base money, which does nothing but to promote speculation. No increase in interest rates would need to result from that action.

Here's another relationship you can count on. By definition, nominal GDP is equal to the monetary base multiplied by the "velocity" of the monetary base. People often seem to believe that if the Fed doubles the monetary base, nominal GDP should double as well (either by prices increasing, real GDP increasing, or both). That outcome, however, would only occur if velocity was constant. In that case, quantitative easing would result in a greater level of spending on goods and services, rather than financial speculation. The graph below illustrates that this simply does not happen. In practice, doubling the monetary base simply causes people to hold more idle money balances, and velocity simply falls in half. As a result, actively expanding the money supply in pursuit of higher inflation or higher real GDP growth is ineffective, even if central banks create money in massive amounts as they have in recent years through quantitative easing. Because monetary velocity falls in proportion to growth in the monetary base, more QE simply depresses interest rates and distorts financial markets.

The effect of years of zero interest rate policies has been to progressively drive investors toward securities of greater and greater risk, in the belief that "There Is No Alternative" (TINA). In every other market cycle across history, once an "overvalued, overbought, overbullish" syndrome emerged in the stock market, market internals were either already deteriorating, or collapsed in relatively short order – meaning that investors became more risk averse. When overvaluation was joined by increasing risk aversion, air-pockets, panics and crashes typically followed.

In the market cycle since 2009, however, central banks aggressively and intentionally promoted speculation by holding interest rates at zero. That reduced the overlap between "overvalued, overbought, overbullish" syndromes and the eventual deterioration in market internals. Our own rather painful lesson from the recent cycle was that in the presence of QE, one must actually wait for internals to explicitly deteriorate before taking a hard-negative outlook on stocks.

After years of speculation, we currently estimate a 10-year nominal expected total return for the S&P 500 close to zero – much the same as we projected in real time at the market peak in 2000. The Federal Reserve seems to have no idea what it has done. Poor long-term market returns and severe interim losses are now baked in the cake as a result of obscene valuations. There is no way to undo this outcome – only to manage the consequences.

The real problem isn't what the Fed may do, but the ultimately unavoidable consequences of what the Fed has already done. The cost of reckless Fed-induced yield seeking will likely be felt first in the financial markets as previous paper gains evaporate, while defaults on excessive low-quality covenant-lite credit will emerge over the course of the economic cycle, and the impact of malinvestment will be to limit productivity and economic growth over the longer run. This is all rather inevitable except in the eyes of those who haven't watched and memorized a dozen adaptations of the same movie.

In short, my view is that activist Fed policy is both ineffective and reckless (and the historical data bears this out), and that the Federal Reserve has pushed the financial markets to a precipice from which no gentle retreat is ultimately likely. Similar precipices, such as 1929 and 2000, and even lesser precipices like 1906, 1937, 1973 and 2007 have always had unfortunate endings. A quarter-point hike will not cause anything. The causes are already baked in the cake. A rate hike may be a trigger with respect to timing, but that's all. History suggests we should place our attention on valuations and market internals in any event.

Mistakes Made

It's easy to find the mistakes of others (Ben Bernanke and Paul Krugman provide endless opportunities), but it's not so easy to admit your own.

Although things may not play out the same way next time, my own policy is to admit mistakes, or someone else will do it for you. Here's the key sentence from Hussman that explains where value investors, me included, went astray.

"Our own rather painful lesson from the recent cycle was that in the presence of QE, one must actually wait for internals to explicitly deteriorate before taking a hard-negative outlook on stocks."

QE did not do a damn thing for the real economy. In fact, by encouraging speculation, QE made matters worse.

But until the bubble bursts, QE allows Bernanke and the ECB to crack jokes and Laugh Like a Hyena. Click on link for video of actual hyenas laughing.

Four Questions

Will Bernanke admit his own role in the housing credit bubble?
Will Bernanke ever admit the Fed is a serial bubble blower with each bubble bigger than the one that preceded it?
Even after the current equity/junk bond bubble crashes, will either Bernanke or Janet Yellen admit their role in the mess?
Has nearly everyone been sucked in to the notion the Fed will not let another stock market collapse happen?

The answers to questions 1-3 are easy. Non, non, et non! (as my high school French teacher frequently stated years ago).

For investors, question number 4 above is the crucial one. And the critical answer is "yes". Mathematically, it has to be, for the masses.

More Questions

If the Fed could prevent stock market collapses why didn't it do so in 2008? Why did Japan have close to three lost decades? Why couldn't China halt the share plunge recently?

Does only the Fed have the magic wand?

Mike "Mish" Shedlock

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Tuesday, September 15, 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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