Mish's Global Economic Trend Analysis

Knowing the Unknowable; Reflections on the Fed Hike
Lincolnshire, Illinois Approves Right-to-Work Ordinance; Battle Headed for Courts
Empire State Manufacturing Contracts Fifth Month, Employment and Workweek Worst Since 2009

Knowing the Unknowable; Reflections on the Fed Hike

Posted: 15 Dec 2015 04:44 PM PST

In the past week, two readers, one of them a blogger, professed to "know" something that cannot possibly be known.

"Epocalypse" Now

The first person, an economic blogger, tells me a global economic collapse of biblical proportion is coming. He labels the collapse an "epocalypse" and offered a guest-post article that I passed on.

I responded "No one knows the precise timing of a collapse. There might not even be one.
Stocks could do a slow decline like Japan for years."

You can start a countdown, because yesterday he pinged back "Check in with me at the end of the week."

Crunch Time

Reader "BL" wrote ...

Hello Mish,

It is crunch time. An escalation in interest rates will immediately bankrupt the United States because the country will be unable to service the eighteen plus trillion dollar debt.

The United States economy will collapse fifteen days after an increase in the interest rate. That is the real reason that Janet Yellen will do nothing forever. Do the math. What is the cost of a 1% increase in the national debt?

What are you afraid of? Speak the truth. Stocks are overvalued and will continue to be so until the crash. When will the crash occur? You know the answer. You have always known the answer. Tell the truth. The crash may occur before the next presidential election. What will that mean? You also know the answer to that question.

It is crunch time. Speak the truth or be buried by the truth. Your choice.

Sincerely
BL

Impossible to Know the Unknowable

I responded to BL with the following challenge (slightly abbreviated from my original reply).

Anyone who claims they know precisely when stocks will collapse is either a fool or a charlatan.

But since you "know" stocks will collapse 15 days after a hike, I suggest you put everything you have on it with PUTs. What could you possibly be afraid of?

It's crunch time, do as you say or don't tell me you know what will happen. Your choice.

Second Thoughts

BL had second thoughts.

Hi Mish,

I appreciate your humor. Thus I take on the dual moniker of fool and charlatan.

So, you have two points. The first is that no one can "know" that the market will collapse if the "Fed" raises interest rates. And your second point is that only a fool or charlatan can claim that the market will collapse within 15 days of a raise in interest rates.

I actually believe you are better equipped than I to find and identify a number of macroeconomic reasons why the market will collapse with a raise in interest rates. You have touched on many of the reasons in the last year by pointing to other articles and sources.

We are not on opposite sides of a financial war. We are on the same side in the same battle. Up until now, it has been a "cold" war. It becomes a "hot" war when stocks go down precipitously. Then what happens?

Thank you for responding. It means you are listening to your readers. That's a good thing.

Sincerely
BL

Reflections on the Fed Hike

We can all find countless reasons why the stock market should sink. But we had the same reasons a year ago, even two years ago.

Will a simple hike be enough to prick the bubble? Don't be so sure.

Recall that the stock market rose for two years after housing topped. I have the peak of housing summer of 2005. Case-Shiller has it summer 2006.

I believe Case-Shiller misses the mark because of under-the-table kickbacks like free cars, free trips, and even free cash back at closing that were not accurately accounted for.

Regardless, even if Summer of 2006 was the top, the market rose for another 16 months after housing topped. So why can't the market rise for another three months or more after a hike?

Fundamentals

Realistically, 1/8 or 1/4 point will do nothing fundamentally. As a function of sentiment, it's entirely conceivable a smaller than expected hike causes a spike-high euphoria.

How Big the Hike?

I made the claim many times over the past few months that if the Fed hiked, it would likely be by 1/8 point (12.5 basis points). We will see. But even if the Fed gives the expected range of 25-50 basis points tomorrow (up from 0-25), that does not mean I was wrong.

We have to see where the Fed actually targets the rate within the range it provides. If the fed targets 25 basis points, up from roughly 12.5 then a 1/8 of a point hike was the correct call.

Gaming the Reaction

What will the reaction be to a range of 25-37.5 basis points? To a range of 25-50 hike with an initial target of 25? With an initial target of 37.5?

How the hell can anyone possibly know? The Fed doesn't even know.

Any reaction is possible tomorrow, including nothing. And a big yawn would wipe out both PUTs and CALLs by everyone who thinks something must happen. The winner in that scenario would be the option sellers, not buyers.

It's all a guess. I have no particular edge as to what happens over the course of the next two weeks let alone three days. I believe I do have an edge as to what happens over the long haul when valuations get as stretched as these.

The important point is neither sentiment nor valuation is a timing mechanism. To that one can add baby step interest rate hikes that are fundamentally meaningless.

I strongly advise market participants to not act as if they know that which is simply unknowable.

Mike "Mish" Shedlock

Lincolnshire, Illinois Approves Right-to-Work Ordinance; Battle Headed for Courts

Posted: 15 Dec 2015 11:33 AM PST

Congratulations to the village board of Lincolnshire, Illinois for having the courage to stand up to union bullies by passing right-to work legislation at the local level.

The Daily Herald reports Lincolnshire Creates Right-to-Work Zone that Unions Oppose.

Lincolnshire has become the first town in the Chicago area to establish itself as a right-to-work zone, a move critics have assailed as anti-union.

To create the zone, the village board approved an ordinance preventing local employers from requiring workers to pay union dues with payroll deductions.

That proposal was a major tenet of Gov. Bruce Rauner's controversial Turnaround Agenda for Illinois, which many people have blasted as being anti-union.

Elements of the Turnaround Agenda -- especially the right-to-work proposal -- have been criticized as unconstitutional, too.

In a formal opinion issued in March, Illinois Attorney General Lisa Madigan said federal labor law allows such policies to be enacted only on a statewide basis.

But that didn't stop Lincolnshire's village board Monday, which quickly approved the plan after listening to an hour of public comments.

Courage to Take a Stand

Unions packed the village halls as they normally do for such affairs.

Coercion, threats, and backroom deals with corrupt politicians to get their way are all part of union tactics.

But in a 5-1 vote, the board had the courage to do the right thing.

"This is union busting," Chicago resident and union organizer Ken Edwards told the board. "You the trustees are being used. The 1 percent are using you to get to us."

Ted Dabrowski, vice president and spokesman for the Illinois Policy Institute, a group that has promoted right-to-work legislation responded with the simple truth.

"This isn't about unions, it's about individual freedoms. It's also about the right to not join a union," said Dabrowski who is part of a group that created a model ordinance that Lincolnshire officials used to draft their own.

As a senior fellow of the Illinois Policy Institute, I applaud the trustees courage to take the correct stand.

Right to Not Belong

I champion national right-to-work legislation as well as elimination of prevailing wage laws that tie many states to unions or union wage scales even in right-to-work states.

No one should be able to force anyone to belong to a union to get a job. That is the heart of the matter.

Is this union busting? Of course it is.

But forced membership against one's free will constitutes slavery. So by all means, let's bust up the biggest slavery racket in the world: forced unionization.

Union busting of this nature is long overdue here, there, and everywhere.

Tide is Turning

Lisa Madigan will challenge the ruling. Should Madigan prevail in Illinois, I expect the US Supreme Court to hear the case with potential nationwide implications.

In July of 2014, the US Supreme Court Rules Government Cannot Force-Unionize Workers Into State Entitlement Programs.

In Harris vs. Quinn, the court's 5-4 decision ruled in favor of plaintiff Pam Harris over then Illinois governor Pat Quinn.

Harris a mother from suburban Chicago who did not want to be part of a union or pay union dues. She takes care of her disabled son and participates in a state Medicaid program.

The justices ruled that Medicaid beneficiaries and people participating in state entitlement programs are not state employees, and cannot be forced into a union or forced to pay union dues.

Paul Kersey at the Illinois Policy Institute explained:

For more than a decade, government unions have been forcing people who are not state workers – moms and dads caring for children with developmental disabilities, home day-care providers for low-income children and others – to pay dues to a union as a condition of receiving help from their state governments. Both Gov. Pat Quinn and now-disgraced former Gov. Rod Blagojevich issued executive orders allowing the unionization of people who were not state workers. This resulted in Illinois government unions making $20 million a year from these workers, many of whom never wanted to join or pay dues to a union in the first place.

Fortunately, today the U.S. Supreme Court has affirmed that plaintiff Pam Harris won't have to jeopardize and limit her son's care by being forced to join a union she does not want, agree with or support.

Not Far Enough

Want to be a public school teacher, plumber, electrification, etc., etc. in Illinois? If so, you have to pay union dues.

In essence, you cannot work many trades unless you agree to be a union member, paying union dues. That needs to end right now.

My only problem with the 2014 ruling was that it did not go far enough. The court did not make the final step of mandating national right-to-work practices and eliminating forced union dues altogether.

An Illinois challenge by Madigan will give the US Supreme court another chance to do what they should have done in 2014: kill forced unionization across the board.

Mike "Mish" Shedlock

Empire State Manufacturing Contracts Fifth Month, Employment and Workweek Worst Since 2009

Posted: 15 Dec 2015 09:35 AM PST

Empire State Manufacturing Employment and Workweek Worst Since 2009

As expected, the Empire State Manufacturing Index is in contraction for the fifth consecutive month. Employment and workweek both collapsed.

Economists pretty much got the index correct with a Consensus Estimate of -7.00 vs. the actual reading of -4.59.

Factory activity continues to contract in the New York manufacturing region and especially, unfortunately, employment and the workweek. The Empire State index posted its fifth negative reading in a row, minus 4.59 for December which however is the least weak reading of the run. New orders, at minus 5.07, are down for a seventh month in a row but here to the degree of contraction is easing. Not easing, however, is employment which is deeply negative at minus 16.16 for the fourth contraction in a row and the deepest since July 2009. The workweek is another disappointment, at minus 27.27 for the worst reading since even further back, to April 2009.

But there are pluses in this report led by a big gain for the six-month outlook, to 38.51 from 20.33. The gain reflects greater optimism for new orders and shipments but no greater optimism for employment where hiring is expected to be no more than moderate.

Turning back to negatives, prices received are down for a fourth month in a row, at minus 4.04. Contraction in prices for finished goods points to price concessions and lack of demand.

The recovery worst readings for employment and the workweek are definitely worrisome signs. Yes, this report has been running lower than other regional manufacturing reports but today's results do not point to any year-end lift for the factory sector which is being hit by low exports and low prices.

Six-Month Outlook Useless

There were no positives in this report. The six-month outlook is generally useless as I have proven before.

Bottoms tend to form just as everyone throws in the towel. Only following extreme negative sentiment, after everyone gives up, does the future outlook tend to be too pessimistic.

Thus, increasing optimism in the face of these negative readings is best viewed as worrisome, not a positive.

Manufacturing Overoptimism

Following is a chart of the Empire State Survey from last month showing expected conditions six months from now.

In the second chart below, I shifted the actual results to show what happened.

Current Business Conditions vs. Expected Conditions Six Months From Now

To see if there is any merit in tracking future projections, I downloaded the data, and shifted the projections ahead by six months to plot current conditions vs. what the manufacturers expected to happen.

Current Business Conditions vs. Expected Business Conditions (For Now - Made Six Month Ago)

Perpetual Overoptimism

The perpetual overoptimism is impossible to miss. Here are the readings for 2015.

Month/Year	Current Conditions	Expected Conditions
1/2015	7.78	46.10
2/2015	6.90	46.08
3/2015	-1.19	42.39
4/2015	3.09	46.84
5/2015	-1.98	39.31
6/2015	3.86	48.35
7/2015	-14.92	25.58
8/2015	-14.67	30.72
9/2015	-11.36	37.06
10/2015	-10.74	29.81

In 167 months [now 168], nearly 14 years of data, there were only five months (just under 3% of the time) in which current conditions exceeded projections made six months previous!

Month/Year	Current Conditions	Expected Conditions
2/1/2002	13.80	-11.92
6/1/2009	0.28	-3.65
7/1/2009	12.56	-5.55
8/1/2009	20.93	3.53
9/1/2009	33.68	28.27

Persistent Overoptimism Three Ways

For more on overoptimism, please see ...

Mike "Mish" Shedlock

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Mish's Global Economic Trend Analysis

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