Mish's Global Economic Trend Analysis

Bank of Japan Adopts Negative Interest Rates: Surprise, Surprise We Lied Again; Meaning of "Now"
World's First Robot-Run Lettuce Farm to Produce 30,000 Heads Daily; Tipping Point for Workerless Agriculture
Shocking Crash: Durable Goods Orders Plunge 5.1%, Shipments Drop 2.2%, Huge Negative Revisions; Recession Here?
Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Bank of Japan Adopts Negative Interest Rates: Surprise, Surprise We Lied Again; Meaning of "Now"

Posted: 28 Jan 2016 11:03 PM PST

Meaning of "Now"

Eight days ago, the Bank of Japan governor Haruhiko Kuroda, said No Plan to Adopt Negative Rates Now.

Well, that was then, and this is now.

Negative Rates Announced

Today we learn Bank of Japan Adopts Negative Interest Rates.

The Bank of Japan has slashed interest rates to minus 0.1 per cent in a shock move that adds a new dimension to its record monetary stimulus.

Showing its willingness to expand the policy further, the BoJ said it "will cut the interest rate further into negative territory if judged necessary".

"The bank will lower the short end of the yield curve by slashing its deposit rate on current accounts into negative territory and will exert further downward pressure on interest rates across the entire yield curve."

However, the BoJ will use a complicated three-tier system, which makes the negative rate much weaker than comparable moves by the ECB and other European central banks.

Crucially, it will only pay negative rates on any new bank reserves resulting from its programme of asset purchases. All existing bank reserves — which amount to about $2.5tn or 50 per cent of gross domestic product — will continue to be paid interest at 0.1 per cent.

That means there is unlikely to be any impact on bank profits or bank depositors in the short term. The negative interest rate will only have an impact over time as the BoJ keeps buying assets and creating new bank reserves.

The move will add to Mr Kuroda's reputation for surprises, suddenly adopting policies he has vehemently denied were even possible. Eight days ago he told parliament the BoJ was "not seriously considering" a negative rate.

Surprise, Surprise, We Lied Again

If any of these surprises ever accomplished anything, we wouldn't keep having them.

Mike "Mish" Shedlock

World's First Robot-Run Lettuce Farm to Produce 30,000 Heads Daily; Tipping Point for Workerless Agriculture

Posted: 28 Jan 2016 01:18 PM PST

Future of Farming

The future of farming has arrived. It's vertical, soilless, and run by robots.

Tech Insider reports World's First Robot-run farm will harvest 30,000 heads of lettuce daily.

The Japanese lettuce production company Spread believes the farmers of the future will be robots.

So much so that Spread is creating the world's first farm manned entirely by robots. Instead of relying on human farmers, the indoor Vegetable Factory will employ robots that can harvest 30,000 heads of lettuce every day.

Don't expect a bunch of humanoid robots to roam the halls, however; the robots look more like conveyor belts with arms. They'll plant seeds, water plants, and trim lettuce heads after harvest in the Kyoto, Japan farm.

The Vegetable Factory follows the growing agricultural trend of vertical farming, where farmers grow crops indoors without natural sunlight. Instead, they rely on LED light and grow crops on racks that stack on top of each other.

In addition to increasing production and reducing waste, indoor vertical farming also eliminates runoff from pesticides and herbicides — chemicals used in traditional outdoor farming that can be harmful to the environment.

The new farm, set to open in 2017, will be an upgrade to Spread's existing indoor farm, the Kameoka Plant. That farm currently produces about 21,000 heads of lettuce per day with help from a small staff of humans. Spread's new automation technology will not only produce more lettuce, it will also reduce labor costs by 50%, cut energy use by 30%, and recycle 98% of water needed to grow the crops.

Go Vertical

What starts with lettuce, won't stay with lettuce. Strawberries, cabbage, tomatoes, beans, eggplant, and many other vegetables can be grown this way.

Potatoes, peanuts, and things that grow in the ground may be off limits. Corn is too tall with acreage requirements too big.

Vertical Farms Half the Size of a Wal-Mart

Also consider Indoor Vertical Farm Half the Size of a Wal-Mart.

Matt Matros reads about the 34,000 bags of spinach Dole just recalled and shudders. A Salmonella contamination never would have happened on his farm.

Matros is CEO of FarmedHere, the largest indoor vertical farm in North America. At 90,000 square feet, the Bedford, Illinois farm is a leader in a growing agriculture movement that grows crops without soil and sunlight. Instead, these crops are grown indoors, where they're always monitored and kept away from harmful bacteria.

FarmedHere also prioritizes locally sourcing its produce, Matros says. It wants to deliver its herbs and leafy greens to consumers living at most 200 miles away, as part of a larger mission to reduce its carbon footprint.

In Matros' eyes, the move follows in the footsteps of the fast-casual chain Chipotle, which recently updated its mission to source from farms at most 350 miles away.

With 18 FarmedHere facilities, 75% of the US population would fall within that 200-mile radius, ensuring the produce can reach consumers quickly.

So far, the main crops are basil, mint, lettuce, and kale. Those are the low-hanging fruit that are easy to grow, Matros says.

Without the hassle of Mother Nature's changing climate, farmers can enjoy year-round growing seasons indoors, using less water, fewer pesticides, and avoid biological invaders that cause diseases like Salmonella, Escherichia coli (E. coli), and Listeria.

The company is anticipating an industry-wide tipping point a couple years down the line in which the winners are the local farmers who can provide nutritious food to nearby residents who need it, taking a big chunk of all long-haul trucks filled with produce off the road for good.

Tipping Point

Instead of digging deeper and deeper wells in the California desert to grow things, water in these farms is 95-98% recycled.

And commenting on labor issues, Matros points to Amazon's use of factory robots: "We're going to have that in our next farm, which will be open in about a year."

Japan will have similar technology in a similar timeframe.

The tipping point for worker-less agriculture has arrived.

Mike "Mish" Shedlock

Shocking Crash: Durable Goods Orders Plunge 5.1%, Shipments Drop 2.2%, Huge Negative Revisions; Recession Here?

Posted: 28 Jan 2016 10:35 AM PST

Crash!

Durable goods orders and shipments crashed in December.

The Econoday Consensus Estimate for durable goods new orders was a 0.2% rise. Here are the amazing results.

Crash vs. Thud

Econoday called the results a "giant thud". The words "giant crash" seem more appropriate. In retrospect, both terms may be inappropriate. Have we landed yet, or are we still falling?

Econoday reports ...

The factory sector ended 2015 with a giant thud. Durable goods orders fell 5.1 percent in December vs expectations for a 0.2 percent gain and a low-end estimate of minus 3.0 percent. Aircraft orders didn't help but they weren't the whole cause of the problem as ex-transportation orders fell 1.2 percent vs expectations for no change and a low-end estimate of minus 0.4 percent. Core capital goods, which exclude defense equipment and also aircraft, are especially weak, down 4.3 percent following a 1.1 percent decline in November. Shipments for core capital goods, which are an input into GDP, slipped 0.2 percent following a downward revised 1.1 percent decline in November (initially minus 0.4 percent).

Orders for civilian aircraft lead the dismal list, down 29 percent in December. The other main subcomponent for transportation, motor vehicles, also fell, down 0.4 percent in a reminder that vehicle sales were slowing at year end. Capital goods industries show deep declines: machinery down 5.6 percent, computers down 8.7 percent, communications equipment down 21 percent, and fabricated metals down 0.5 percent.

Other readings include a surprising 2.2 percent monthly drop in total shipments and a 0.5 percent drop in total unfilled orders. All this weakness isn't a plus for inventories which rose 0.5 percent to lift the inventory-to-shipments ratio sharply, to 1.69 from 1.64. The rise in inventories poses a headwind to the sector and will dampen future shipments as well as employment and is a reminder of the inventory warning in yesterday's FOMC statement.

Inventories Up 5 Consecutive Months

Those who wish to dive into the details can do so at the Census Bureau report Advance Report on Durable Goods Manufacturers' Shipments, Inventories and Orders December 2015.

Here are some additional inventory highlights:

Inventories of manufactured durable goods in December, up following five consecutive monthly decreases, increased $2.1 billion, or 0.5 percent, to $397.9 billion. This followed a 0.2 percent November decrease.
Transportation, up following three consecutive monthly decreases, led the increase, $1.8 billion or 1.4percent to $131.8 billion.

Autos Down 4th Quarter

Of other note, the auto sector that had been on fire in 2015 went negative in the fourth quarter.

October, November, December shipments for motor vehicles and parts were -2.9%, +1.1%, -0.4%.
October, November, December orders for motor vehicles and parts are -3.0%, +1.0%, -0.4%.

Recession Here?

In contrast to the preposterous Fed model that says the odds of a recession in all of 2016 is a mere 3.56%, this report strengthens the odds the US economy is already in recession.

For further discussion, please see Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Mike "Mish" Shedlock

Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Posted: 28 Jan 2016 12:39 AM PST

Of all the ridiculous opinions as to why the US is not about to enter a recession, the Fed's "Workhorse" Model is at the top of the list.

Torsten Sløk, chief international economist at Deutsche Bank, is taking the optimistic route by drawing attention to a certain economic model that currently puts the chance of an imminent contraction in the single digits. The Federal Reserve's so-called probit model looks at the difference between 10-year and three-month U.S. Treasury rates to gauge the probability of a U.S. recession over the next 12 months.

"The Fed has a workhorse recession model where [the] yield curve today is a predictor of future recessions, and running the Fed's probit model with today's values for 10-year and 3-month rates shows that there is currently a 4 percent probability of a recession over the next 12 months," Sløk said in an e-mail.

The Model

Prepare to have your eyes gloss over because here is the model.

Highlights in yellow are mine. Note that two constants are estimated using data from January 1959 to December 2005. Not only that, the constants were fitted to match what happened. Lovely.

Practical Considerations

Those hand-picked constants happened to work in prior recessions with varying degrees of success as noted in a New York Fed paper appropriately called The Yield Curve as a Leading Indicator: Some Practical Issues.

The report failed to mention the most practical of practical issues: It's damn hard for the 3-month to invert with 10-year treasuries when the Fed has artificially held short-term yields closet to zero.

Of course there is a practical reason for the Fed not pointing out that practicality. The article was written in 2006 before short-term yields went to zero.

You might have thought chief international economists would have stopped to consider such practical issues, but you would be wrong.

One might also have thought such issues would have crossed the minds of the New York Fed, but please banish that thought as well.

The New York Fed research still promotes this ridiculous model on its page The Yield Curve as a Leading Indicator.

You can download the current data to play with in Excel. You can also download the current 12-month look-ahead probability chart.

Yield Curve and Recessions

Despite the obvious uselessness of the indicator under current conditions, others are on the same bandwagon.

Pater Tenebrarum at the acting man took them to task back in 2014 with his post Yield Curve and Recessions.

One popular theme gets reprinted in variations over and over again. Here is a recent example from Business Insider, which breathlessly informs us of the infallibility of the yield curve as a forecasting tool: "This Market Measure Has A Perfect Track Record For Predicting US Recessions" the headline informs us – and we dimly remember having seen variants of this article on the same site at least three times by now:
At a breakfast earlier today, LPL Financial's Jeffrey Kleintop noted that the yield curve inverted just prior to every U.S. recession in the past 50 years. "That is seven out of seven times — a perfect forecasting track record," he reiterated.

The yield curve is inverted when short-term interest rates (e.g. the 3-year Treasury) are higher than long-term interest rates (e.g. the 10-year Treasury yield). "The yield curve inversion usually takes place about 12 months before the start of the recession, but the lead time ranges from about 5 to 16 months," wrote Kleintop in a recent note. "The peak in the stock market comes around the time of the yield curve inversion, ahead of the recession and accompanying downturn in corporate profits."
This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve!

Holy Grail

No need to sell now. The holy grail has been perfected. When the yield curve inverts, wait another six months for stocks to peak then sell.

Tenebrarum points out the amazing success of that method for Japan.

The model last worked in1991. Since then, the yield-curve method has had a perfect track record of failure. In at least 6 recessions since, counting one in 2014 the above chart does not show, the model has failed.

Recession Odds

I think there is a 25% chance or better the US already went into recession as of December 2015 or January 2016. A couple of bad jobs reports will seal the deal, and it may not even take that. But that's just a guess. I have no economic formula for economists to go gaga over.

John Hussman does have a nice discussion in his latest post Wicked Skew: When Extreme Losses are Standard Outcomes.

On the economic front, I continue to believe that a U.S. recession is not only a risk, but is now the most probable outcome. As I noted last week, among confirming indicators that generally emerge fairly early once a recession has taken hold, we would be particularly attentive to the following: a sudden drop in consumer confidence about 20 points below its 12-month average (which would currently equate to a drop to the 75 level on the Conference Board measure), a decline in aggregate hours worked below its level 3-months prior, a year-over-year increase of about 20% in new claims for unemployment (which would currently equate to a level of about 340,000 weekly new claims), and slowing growth in real personal income.

Last week, new claims for unemployment jumped to 293,000, a level we've observed only once since last April. Even at this early point (given that employment measures are among the most lagging economic indicators), we already observe a pickup in claims from last year's lows. To put this increase into perspective, the chart below shows points where the ISM Purchasing Managers Index was below 50, the S&P 500 was below its level of 6 months prior, and the 4-week average of initial unemployment claims was at least 5% above its 12-month low. While a year-over-year increase in unemployment claims closer to 20% would be a more reliable confirmation of recession, it's clear that even here, the current combination of evidence is more associated with recession than not.

One Model is Wrong

Seven out of seven times we have been in these conditions, the economy was close to or in recession.

That's one possible model. It contrasts with the Fed's model which says the 12-month look ahead odds are only 3.56%.

Take your pick.

Some economists take the Fed's model.

Why? Because the Fed put a formula to it. That makes it official even though the model has no scientific basis under current conditions.

Simply put, some economists refuse to think.

Reflections on Economic Modeling

Constants α and β are on the verge of massive revisions. After the next recession (which we may already be in), the Fed will see fit to dream up a revised formula that will take into account conditions at zero bound.

That revision will work for the last two recessions but it may not work for the next three.

Mike "Mish" Shedlock

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Thursday, January 28, 2016

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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