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Tuesday, January 5, 2016

Mish's Global Economic Trend Analysis

Former Dallas Fed Governor Richard Fisher Goes to Squawk Box Confessional: "We Frontloaded a Tremendous Market Rally"; Transcript of Video
December US New Car Sales "Down, Exceptionally Weak" Says Bloomberg; WSJ Says Up and Strong
Diving Into the Revisions: Construction Spending Revised Lower 7 Consecutive Months! 2015 GDP Will Decline vs. Estimates: By How Much?

Former Dallas Fed Governor Richard Fisher Goes to Squawk Box Confessional: "We Frontloaded a Tremendous Market Rally"; Transcript of Video

Posted: 05 Jan 2016 01:05 PM PST

Fed governors sometimes tell the truth, but generally only after they leave office, and always after the damage has been done.

In that regard, former Dallas Fed governor Robert Fisher admits "We frontloaded a tremendous market rally to create a wealth effect ... The Federal Reserve is a giant weapon that has no ammunition left."

The embedded video will not play in-line, but you can view it on You-Tube by clicking a second time on the notice.

Partial Transcript

Fisher: What the Fed did, and I was part of that group, we frontloaded a tremendous market rally starting in march of 2009. It was sort of a reverse Wimpy factor. Give me two hamburgers today for one tomorrow. We had a tremendous rally and I think there's a great digestive period that's likely to take place now. And it may continue. Once again, we frontloaded, at the federal reserve, an enormous rally in order to accomplish a wealth effect. I would not blame this [the 2016 selloff] on China. We are always looking for excuses. China is going through a transition that will take a while to correct itself. But what's news there? There's no news there.

Squawk Box: I guess the question Richard is: How ugly will it get? If you do see this big unwind of Fed Policy which fueled a 6 and one-half year bull market, what does it look like on the way down?

Fisher: Well, I was warning my colleagues, don't go [inaudible] if we have a 10-20% correction at some point. ... These markets are heavily priced. They are trading at 19 and a half time earnings without having top line growth you would like to have. We are late in the cycle. These are richly priced. They are not cheap. .... I could see a significant downside. I could also see a flat market for quite some time, digesting that enormous return the Fed engineered for six years.

Squawk Box: Richard, this digestive period, does it usher in an era where assets can't perform in the absence of accommodation?

Fisher: Well, first of all, I don't think there can be much more accommodation. The Federal Reserve is a giant weapon that has no ammunition left. What I do worry about is: It was the Fed, the Fed, the Fed, the Fed for half of my tenure there, which is a decade. Everybody was looking for the Fed to float all boats. In my opinion, they got lazy. Now we go back to fundamental analysis, the kind of work that used to be done, analyzing whether or not a company truly on its own, going to grow its bottom line and be priced accordingly, not expect the Fed tide to lift all boats. When the tide recedes we're going to see who's wearing a bathing suit and who's not. We are beginning to see that. You saw that in junk last year. You also saw it even in the midcaps, and the S&P stripped of its dividends. The only asset that really returned anything last year, again if you take away dividends, believe it or not, was cash at 0.1%. That's a very unusual circumstance.

Squawk Box: Richard. This has been an absolutely extraordinary interview. For you to come on here and say "I was one of the central bankers who engineered the frontloading of the banks, we did it to create a wealth effect" and then you go on and tell us, with a big smile on your face that we are overpriced, which is the word that you used, and there would be some digestive problems, are you going to take the rap if there is a serious correction in this market? Will you equally come on and say "I'm really sorry we overinflated the market", which is a logical conclusion from what you've said so far in this interview.

Fisher: First of all I wouldn't say that. I voted against QE3. But there's a reason for doing this. Let's be fair to the central banks. We had a horrible crisis. We had to pull it out. All of us unanimously supported that initial move under Ben Bernanke. But in my opinion we went one step too far, which is QE3. By March 2009 we had already bought a trillion dollars of securities and the market turned that week. To me, personally, as a member of the FOMC, that was sufficient. We had launched a rocket. And yet we piled on with QE3, but the majority understandably worried we might slide backwards. I think you have to be careful here and frank about what drove the markets. Look at all the interviews over the last many years since we started the QE program. It was the Fed, the Fed, the Fed, the European central bank, the Japanese central bank, and what are the Chinese doing? All quantitative easing driven by central bank activity. That's not the way markets should be working. They should be working on their own animal spirits, but they were juiced up by the central banks, including the federal reserve, even as some of us would not support QE3.

Mish Comments

Finally, but too late, we have a frank admission by a Fed governor explicitly stating some things that needed to be said.

The markets are seriously overvalued
The Fed purposely sponsored bubbles, specifically for the wealth effect

So here we are, back with another enormous bubble, on purpose, with the economy clearly weakening again.

The wealth effect primarily benefited the already wealthy, at the expense of everyone else. In the process, corporations are more debt-leveraged than ever before, and houses are not affordable for those most in need of buying them.

The process was entirely counterproductive, especially from QE3 on.

Mike "Mish" Shedlock

December US New Car Sales "Down, Exceptionally Weak" Says Bloomberg; WSJ Says Up and Strong

Posted: 05 Jan 2016 09:45 AM PST

Domestic Car Sales Cap Record Year With Up (and Down) Month

US car sales are going to have a record year in 2015, clearly one of the bright spots in the US economy. Judging from revisions in construction spending, perhaps the only bright spot left besides very lagging jobs data.

December New Car Sales Decline

Today I note from Bloomberg that Domestic New Car Sales Declined in December.

"The Big Three are in and December sales are running below expectations, down about 5 percent from November vs expectations for a 1 to 2 percent decline. Car sales are especially weak with sales of light trucks down only slightly. The Big Three account for roughly half of all sales. Foreign brands will be posting their results through the session."

December New Car Sales Rise

One sees a completely different portrayal in the Wall Street Journal article U.S. Car Sales Poised for Their Best Year Ever.

U.S. new-car sales accelerated through December as auto makers remained poised to report their highest annual sales ever, shattering the record set in 2000.

Car sales are on track for their best-selling month of the year and their best December ever.

General Motors Co. estimates the seasonally-adjusted annual selling rate for light vehicles was 17.8 million units in December and predicted 17.5 million vehicles were sold in the year, surpassing the 2000 record of 17.4 million.

Ford Motor Co. reported sales increased 8.3% to 237,606 vehicles for the Detroit auto maker's best December. Sales of F-Series pickups rose above 85,000 for a 10-year high, and Ford brand SUV sales saw their best December since 2003.

GM, meanwhile, logged a 5.7% increase to 290,230 vehicles as Chevrolet Silverado and GMC Sierra sales momentum continued through the final month of the year.

Sales Purportedly Up (and Down)

Can sales be up and down? Clearly not, so who is correct?

The answer is Bloomberg. The reason pertains to the number of selling days.

December 2015 had 28 selling days vs. 26 selling days in December 2014 according to JD Power.
November 2015 only had 23 selling days and only four selling weekends for the first time since 2012 according to JD Power.

Based on selling days alone, month over month car sales should be up 5/23 or 21.74%. They weren't. Other seasonal adjustments apply, such as the average December vs. the average November, but the bottom line is the reported month-over-month sales are not what they appear to be at first glance.

Despite the hoopla, December car sales are actually down vs. November. Moreover, sales are "especially weak", given "sales of light trucks are down only slightly".

Mike "Mish" Shedlock

Diving Into the Revisions: Construction Spending Revised Lower 7 Consecutive Months! 2015 GDP Will Decline vs. Estimates: By How Much?

Posted: 04 Jan 2016 11:58 PM PST

Understanding the Construction Revisions

Yesterday I commented Government "Processing Error" Sinks Housing Reports for Entire Year.

In that article, I stated 2015 GDP would be revised lower. Some disagree.

For example, MarketWatch reports IHS Global Insight US economist Patrick Newport wrote in a research note "The upward revision to spending in 2014 is enough to raise growth that year from 2.4% to 2.6%-2.7%. The revisions are likely to boost growth for 2015 as well."

Let's investigate that claim with a look at the actual revised construction data as posted by the Census Bureau.

Note: Don't study this table too long. Instead, skip to the analysis and tables that follow.

Initially Reported vs. Revised - Seasonally Adjusted Data

Date	Total Construction		Total Residential		Total Private Construction		Private Residential
	Previously Published	Revised January 4, 2016	Previously Published	Revised January 4, 2016	Previously Published	Revised January 4, 2016	Previously Published	Revised January 4, 2016
Oct-15	1,107,381	1,127,040	405,604	433,313	802,435	829,729	399,036	426,784
Sep-15	1,096,637	1,123,892	401,658	432,381	795,841	824,201	395,021	425,703
Aug-15	1,089,801	1,121,907	395,401	427,507	788,698	820,804	388,636	420,742
Jul-15	1,080,358	1,114,716	388,681	423,039	781,249	815,607	382,063	416,421
Jun-15	1,074,314	1,113,424	382,553	421,663	773,489	812,599	376,055	415,165
May-15	1,068,424	1,107,569	379,735	418,881	776,452	815,598	373,063	412,208
Apr-15	1,044,641	1,084,961	373,346	413,666	757,209	797,529	366,837	407,157
Mar-15	1,006,351	1,052,899	363,879	410,428	729,713	776,261	357,512	404,061
Feb-15	993,465	1,037,527	366,651	410,713	720,819	764,880	360,575	404,636
Jan-15	990,051	1,033,261	364,833	408,043	716,185	759,396	358,940	402,151
Dec-14	989,118	1,031,635	360,323	402,840	707,551	750,069	354,834	397,351
Nov-14	976,888	1,016,054	352,509	391,674	699,344	738,510	347,159	386,325
Oct-14	979,573	1,015,977	347,242	383,645	692,127	728,530	342,114	378,517
Sep-14	959,182	992,349	342,529	375,695	684,862	718,028	337,109	370,275
Aug-14	955,017	986,876	335,035	366,894	676,325	708,184	330,001	361,860
Jul-14	952,468	984,990	334,543	367,065	673,787	706,309	329,531	362,054
Jun-14	950,282	983,906	334,459	368,083	674,049	707,673	329,510	363,134
May-14	957,641	990,737	338,268	371,364	681,986	715,082	333,522	366,618
Apr-14	964,738	992,914	345,879	374,054	691,365	719,540	341,109	369,284
Mar-14	964,995	989,496	347,470	371,970	696,050	720,551	342,607	367,107
Feb-14	968,303	985,280	351,366	368,343	704,219	721,196	346,436	363,413
Jan-14	961,002	973,655	354,047	366,700	696,718	709,370	349,142	361,795

Construction Spending Revised Lower 7 Consecutive Months!

For two years, construction spending went up vs. previous reported data. The net effect is GDP did indeed rise more than reported in 2014. The flip side is 2015 GDP will be lower than previous reported.

To understand why, we need to look at month over month differences as compared to previously reported numbers. Let's take a look.

Total Construction Spending vs. Previous Reports

Date	Total Construction Spending
	Previous M/M Increase	Revised M/M Increase	Difference
Oct-15	0.98%	0.28%	-0.70%
Sep-15	0.63%	0.18%	-0.45%
Aug-15	0.87%	0.65%	-0.23%
Jul-15	0.56%	0.12%	-0.45%
Jun-15	0.55%	0.53%	-0.02%
May-15	2.28%	2.08%	-0.19%
Apr-15	3.80%	3.05%	-0.76%
Mar-15	1.30%	1.48%	0.18%
Feb-15	0.34%	0.41%	0.07%
Jan-15	0.09%	0.16%	0.06%
Dec-14	1.25%	1.53%	0.28%
Nov-14	-0.27%	0.01%	0.28%
Oct-14	2.13%	2.38%	0.26%
Sep-14	0.44%	0.55%	0.12%
Aug-14	0.27%	0.19%	-0.08%
Jul-14	0.23%	0.11%	-0.12%
Jun-14	-0.77%	-0.69%	0.08%
May-14	-0.74%	-0.22%	0.52%
Apr-14	-0.03%	0.35%	0.37%
Mar-14	-0.34%	0.43%	0.77%
Feb-14	0.76%	1.19%	0.43%
Jan-14	0.11%	1.21%	1.10%

Total Residential Construction Spending vs. Previous Reports

Date	Total Residential Construction Spending
	Previous M/M Increase	Revised M/M Increase	Difference
Oct-15	0.98%	0.22%	-0.77%
Sep-15	1.58%	1.14%	-0.44%
Aug-15	1.73%	1.06%	-0.67%
Jul-15	1.60%	0.33%	-1.28%
Jun-15	0.74%	0.66%	-0.08%
May-15	1.71%	1.26%	-0.45%
Apr-15	2.60%	0.79%	-1.81%
Mar-15	-0.76%	-0.07%	0.69%
Feb-15	0.50%	0.65%	0.16%
Jan-15	1.25%	1.29%	0.04%
Dec-14	2.22%	2.85%	0.63%
Nov-14	1.52%	2.09%	0.58%
Oct-14	1.38%	2.12%	0.74%
Sep-14	2.24%	2.40%	0.16%
Aug-14	0.15%	-0.05%	-0.19%
Jul-14	0.03%	-0.28%	-0.30%
Jun-14	-1.13%	-0.88%	0.24%
May-14	-2.20%	-0.72%	1.48%
Apr-14	-0.46%	0.56%	1.02%
Mar-14	-1.11%	0.98%	2.09%
Feb-14	-0.76%	0.45%	1.21%
Jan-14	-1.25%	1.69%	2.94%

4th Quarter GDPNow Forecast

The GDPNow forecast for 4th quarter is now down to 0.7% from 1.3% on December 23.

2015 GDP Will Decline vs. Previous Estimates: How Much?

The question is not whether 2015 GDP will rise vs. previous estimates, but rather by how much it will sink.

Let's start with the GDPNow forecast.

Of the decline since December 23, 0.5 percentage points came following the Census Bureau's release on construction spending and the ISM report, both on January 4.

I do not know how to separate ISM from construction, but the net result was as follows:

Nonresidential structures declined by 0.10
Residential declined by 0.14
PCE declined by 0.13.

That's a total of decline for those three components of 0.37 percentage points.

Part of that decline was based not only on revisions, but also on a month-over month decline in November construction spending of 0.4 percentage points.

If 3/4 of the decline in those components is due to construction spending, then I estimate third quarter GDP will be revised about .57 percentage points lower, second quarter .56 percentage points lower, and first quarter .21 percentage points higher.

Those are very crude calculations that may be wildly off the mark.

If accurate, first quarter GDP would be 0.0%, second quarter GDP 3.3%, third quarter GDP would be 1.4%. And if the Atlanta Fed model holds with no changes from here, fourth quarter GDP would be 0.7%.

In that case, 2015 GDP would be about 1.35% with the Fed hiking and GDP decelerating rapidly.

Mike "Mish" Shedlock

Monday, January 4, 2016

Mish's Global Economic Trend Analysis

Denmark "Temporarily" Tightens Border Controls; Trains Cancelled; Cascade of Border Controls Grows; Understanding the Problems
Government "Processing Error" Sinks Housing Reports for Entire Year; Where to From Here?
Flattening of the Yield Curve in Pictures; Is an Inversion Necessary to Signal a Recession?
Manufacturing ISM Sinks to January 2009 Low; Don't Count on Services or Housing to Save the Day

Denmark "Temporarily" Tightens Border Controls; Trains Cancelled; Cascade of Border Controls Grows; Understanding the Problems

Posted: 04 Jan 2016 06:33 PM PST

There are so many "temporary" border controls in the EU I have lost count. Fences, train checks, walls, payoffs to Turkey, pressure on Greece, are among the methods.

Today we can add another "temporary" measure to the list as Denmark Tightens Border Controls with Germany.

Denmark has imposed controls on its southern frontier with Germany in a move that is intended to stem the flow of migrants but will also deepen concerns about Europe's fraying commitment to the free movement of people.

Lars Lokke Rasmussen, Danish prime minister, said the decision was prompted by Sweden's move hours earlier to introduce identity checks for all passengers arriving by train, bus or ferry from Denmark.

"The new Swedish requirement for ID checks poses a serious risk of a large number of asylum seekers accumulating in a short time, for example in and around Copenhagen, threatening public order and safety. We do not want this," he said at a hastily called press conference on Monday.

The Danish controls are temporary and will last for the next 10 days but can be extended. Distinct from the Swedish measures, they will involve random checks and will not automatically require all cars and passengers crossing from Germany to show their passports. Mr Rasmussen said Angela Merkel, German chancellor, and the European Commission had been notified.

Sweden was long regarded as Europe's most generous country to asylum-seekers, offering permanent residence in recent years to Iraqis and then Syrians. But after a surge in the number of asylum seekers last year, Sweden's centre-left government buckled under pressure from local authorities and the public to crack down on immigration.

The controls have stoked tensions between Sweden and Denmark, where the centre-right government and its centre-left predecessor have been critical of Stockholm's generous immigration policies.

Hans Christian Schmidt, Denmark's transport minister, said: "It is sad that Swedes have run a failed immigration policy which now means that they are forced to do this. It is sad and annoying for the whole region."

The anti-immigration Danish People's party that acts as the main support for Mr Rasmussen's government in parliament, has long called for border controls and celebrated their arrival.

"A step in the right direction . . . Schengen has collapsed. The illusion of external borders has burst. Why does it take such a long time to recognise this?" Kristian Thulesen Dahl, the party's leader, wrote on Facebook.

Cascade of Border Controls Grows

The Wall Street Journal reports Sweden and Denmark Step Up Border Controls in Bid to Slow Flow of Migrants

Sweden began enforcing tighter border controls Monday to curb the influx of asylum seekers, prompting Denmark to begin similar checks in a further weakening of Europe's principle of open borders.

Sweden warned weeks ago that it would impose systematic identification checks at its borders, saying that the country of close to 10 million people was already straining to cope with the estimated 160,000 migrants who arrived in the Nordic nation last year.

Fearing that it would become the new destination for migrants unable to reach Sweden, Denmark said Monday that it was stepping up controls along its border with Germany.

To the north, Sweden, Denmark and Norway have chosen to erect administrative barriers, rather than physical ones. In Storskog, the Arctic border post between Norway and Russia—along an Arctic route some refugees and other migrants have chosen as more obstacles emerge on the trail through southeastern Europe—Norwegian authorities have stopped allowing in asylum seekers since Nov. 30.

Germany, one of the main destinations for migrants pouring into Europe, has also sought to stem the human tide also by imposing document checks at some of its borders.

Transport companies have complained that the controls place too much responsibility on their shoulders, that their staff are poorly prepared to check documents and that stations aren't designed to restrict pedestrian access to trains and buses. Swedish train operator SJ has suspended services to Denmark until it can iron out such problems.

Schengen Agreement Not the Problem

Problems are many, but the Schengen agreement that allows free movement between participating countries is not one of them. Here is a synopsis of the key issues.

Six Fundamental Problems

The US and UK destabilized the Mideast. Meddling in Iraq created ISIS. US backing of alleged "moderate" Al Qaeda terrorists expanded the civil war in Syria. The US attempt to oust Syrian president Assad with no stable replacement was an enormous mistake.
There are insufficient border controls between Schengen countries and non-Schengen countries.
A ridiculous EU rule states that refugees must register in the country of first entry. That puts tremendous pressure on the peripheral countries. Greece is not up to the task.
The high level of guaranteed benefits for refugees in German and Sweden acts as a magnet, near and far.
There is no clear distinction between political refugee, economic refugee, and war refugee. Someone who has escaped the war in Syria to Lebanon or Turkey, has by definition already escaped. Further migration to Germany or Sweden makes them economic refugees, not political or war refugees.
Welcoming refugees with open arms as did German chancellor Angela Merkel and Swedish prime minister Stefan Löfven openly invited trouble. And trouble arrived by the millions.

Given there is an unlimited demand for free services, free food, and free shelter, the refugee crisis will not go away until those six fundamental problems are fixed.

No key political leader in Europe understands the problem, especially chancellor Merkel. This refugee crisis will be her downfall.

Mike "Mish" Shedlock

Government "Processing Error" Sinks Housing Reports for Entire Year; Where to From Here?

Posted: 04 Jan 2016 12:47 PM PST

Huge "Processing Error" in Government Housing Data

When I saw some of the upwardly revised GDP estimates in 2015 I thought they were too good to be true, and that downward revisions were coming.

I had almost given up on that idea, but I was correct all along. Last month, construction spending was reported to be up 1%. Today we see it was only 0.3%. Economists, being perpetual optimists, came up with a consensus estimate for this month of +0.7% The actual result is -0.4%, over a full percentage point below the consensus and nearly a pull point lower than the lowest estimate of +0.5%.

Construction spending had been a highlight of the U.S. economy but less so with November's report where the headline fell 0.4 percent, far below the Econoday consensus for plus 0.7 percent. The year-on-year gain for spending, at 10.5 percent, is the lowest since April last year. Today's report also includes sharp downward revisions to prior months, the result of a processing error going back to January last year. October's initial 1.0 percent monthly gain is now cut 7 tenths to 0.3 percent while September is now at plus 0.2 percent vs an initial plus 0.6 percent.

The processing error, unfortunately for the housing outlook, is centered in the residential component where prior strength has been cut back. Still, residential spending rose 0.3 percent for a second month in a row that follows September's very solid 1.2 percent gain. Spending on new single-family homes has been rising strongly with the year-on-year rate at a very solid plus 9.3 percent. Spending on multi-family homes did fall in November but has been in fact booming in prior months, up 24.5 percent year-on-year.

Spending on nonresidential construction has also been solid, down in November but with the year-on-year rate at plus 13.6 percent. Public spending has been led by the educational component, up 15.2 percent year-on-year, with highway spending behind at plus 5.6 percent.

A processing error of this size is rare for government data but even after the downward revisions, construction spending remains a central plus and a reminder that domestic demand is the economy's most important driver.

GDP Revisions Coming Up

As a result of the discovery of a "processing error", huge by even government standards, not only will GDP estimates for the current quarter sink, so will reported GDP from prior quarters.

Downward revisions are coming. The next GDP reports will reveal by how much.

Bloomberg puts a positive spin on things pointing out the year-over-year gains. The more important question is: Where to from here?

Total Construction Spending

Total Construction Spending: Nonresidential

Total Construction Spending: Residential

Breakdowns

Total: $1.122 Trillion
Residential: $431 Billion
Nonresidential: $688 Billion

Nonresidential Breakdown

Commercial: $69 Billion
Highway and Street: $91 Billion
Healthcare: $41 Billion
Education: $91 Billion
Religious: $3 Billion
Manufacturing: $84 Billion
Office: $59 Billion
Amusement and Recreation: $21 Billion
Sewage and Waste: $24 Billion
Transportation: $4 Billion
Power: $86 Billion
Lodging: $22 Billion
Water Supply: $13 Billion
Communication: $22 Billion
Public Safety: $9 Billion
Conservation: $8 Billion
Other: $41 Billion

Where to From Here?

It's difficult to judge many of those categories.

The federal government did add a few more billion to highway funds for 2016, but that is a trivial amount in the grand scheme of things.
Affordability of housing has dropped and millennials are struggling for numerous other reasons including rising healthcare costs and need to take care of aging boomer parents. Thus, I do not expect much out of new single-family construction.
Manufacturing is weak. With a strong US dollar, there is no reason to believe a US manufacturing turn-around is on the horizon.
Will taxpayers be willing to shoulder tax hikes for more schools?
Do we have a growing need for office space? Lodging? Mall space? Will we build more anyway?
Many big box retailers are struggling and minimum wage hikes will make employees more expensive to hire. Thus, I expect a slowdown in new retail stores and restaurants. In turn, that will reduce demand for shipping of merchandise to fill those stores, and it will reduce the need for new employees as well.

Certainly there are a lot of questions, but risks seem way skewed to the downside. It's looking more and more to me like the economy has already peaked.

Mike "Mish" Shedlock

Flattening of the Yield Curve in Pictures; Is an Inversion Necessary to Signal a Recession?

Posted: 04 Jan 2016 10:24 AM PST

Curve watchers Anonymous has an eye on the yield curve. Here is a snapshot of year-end-closing values from 1998-12-31 through 2015-12-31.

Yield Curve Year End Closing Values 1998-2015

Unlike 1999-2000 and again 2007-2007, no portions of the yield curve are inverted today (shorter-term rates higher than longer-term rates).

Inversion is the traditional harbinger of recessions, but with the low end of the curve still very close to zero despite the first Fed hike, inversions are unlikely.

Yield Curve Differentials: 3-Month to Longer Durations

Yield Curve Differentials: 1-year to Longer Durations

Yield Curve Differentials: 2-year to Longer Durations

In general, albeit with some volatility, the yield curve has been flattening and spreads shrinking since 2013.

If the economy was truly strengthening, one would expect the yield curve to steepen, with rates rising faster at the long end of the curve rather than the short end of the curve. But that's certainly not happening.

Is an Inversion Necessary to Signal a Recession?

Many believe no recession is on the horizon because the yield curve is not inverted.

Pater Tenbebrarum at the Acting Man blog dispels that myth in A Dangerous Misconception.

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:

There are very few market indicators that can predict recessions without sending out false positives. The yield curve is one of them. 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.

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!

When Perfect Indicators Fail

The so-called "perfect track record" Mr. Kleintop emphasizes is pretty much worthless once the central bank enforces ZIRP on the short end and has already begun implementing massive debt monetization programs. Here is a chart showing the relationship between 3-month and 10 year Japanese interest rates since 1989, with all six recessions since then indicated:

Over the past 25 years, the "perfect forecasting record" has worked exactly 1 out of 6 times in Japan – and that was in 1989.

There is no "holy grail" indicator that can be used to make perfect economic and market forecasts. It is true that if there is a yield curve inversion, it definitely indicates trouble is on the horizon. Alas, we don't remember hearing many real time warnings (in fact, we don't remember any) from Wall Street analysts when such inversions actually occurred in the past (such as e.g. in 1999/2000 and 2006/2007), which makes this new preoccupation especially funny. Obviously, the only time to pay attention to this indicator is when it suggests that a bubble can keep growing!

There is only one thing that is certain: things will continually change. There is no indicator that is fool-proof.

I captured the charts at the beginning of this post on December 31. With the 2016 opening equity carnage today, the curve will be flatter at the end of the day.

The yield curve does not believe the economy is strengthening, and neither do I.

Mike "Mish" Shedlock

Manufacturing ISM Sinks to January 2009 Low; Don't Count on Services or Housing to Save the Day

Posted: 04 Jan 2016 09:59 AM PST

The perpetual optimists who month after month believe a manufacturing recovery is at hand are wrong once again.

The Econoday Consensus Estimate called for a bit of stabilization following last month's damaging report.

Instead the reading dipped further into contraction, below the lowest estimate of 48.5.

ISM's manufacturing sample is reporting the weakest conditions since July 2009. At 48.2, December is much lower than Econoday's 49.2 consensus and is only the third sub-50 reading of the recovery. Yet the story, nevertheless, is much the same as it was in November which came in at 48.6 with both months showing slight contraction underway for both new orders and production. Employment in the sample, however, is noticeably weaker than November, at 48.1 for a more than 2 point decline and the second sub-50 reading in the last three months. A sizable 4.5 point rise for new export orders to 51.0 is a positive in the report. Inventories are steady and low but the sample still say inventories are a little bit high which betrays caution in their outlook. Prices for raw materials continue to contract, a reminder that low oil and commodity prices are making it difficult for the Fed to reach its 2 percent inflation target. This report points to ever softer conditions for a sector that, held down by energy and weak foreign demand, showed very little life during 2015.

ISM 2013 to 2015

Don't Count on Services or Housing

I have been pointing to this same chart for months. Something clearly turned late third or fourth quarter of 2014.

The consensus opinion was manufacturing did not matter and the service economy and housing would carry the day. I did not buy that theory then, and I sure don't buy it today.

Housing has been weakening for many months, and the Chicago PMI, a measure of both services and manufacturing points to upcoming carnage in services in my opinion.

December 31, 2015: Chicago PMI Crashes, New Orders and Backlogs Plunge to May 2009 Level; Service Economy Headed for a Slowdown?

September 30, 2015: Chicago PMI Unexpectedly Dives to Negative Territory; Production at Lowest Since July 2009; Emanuel's Tax Hikes Will Make Matters Worse

Mike "Mish" Shedlock

Sunday, January 3, 2016

Mish's Global Economic Trend Analysis

Yuan Movements Highlight China's Attempt to Halt 10th Month of Export Contraction; Major Currency War Coming Up?
More Currency Intervention Madness: Sweden Draws Line in Sand with Euro
Core Capital Spending Down 10 Consecutive Months; Soft Rebound in 2016?

Yuan Movements Highlight China's Attempt to Halt 10th Month of Export Contraction; Major Currency War Coming Up?

Posted: 03 Jan 2016 08:42 PM PST

Chinese manufacturers see further deterioration in business conditions, down 10 consecutive months as noted in the latest Caixin China General Manufacturing PMI release.

Operating conditions faced by Chinese goods producers continued to deteriorate in December.

Adjusted for seasonal factors, the Purchasing Managers' Index™, operating conditions in the manufacturing economy registered below the neutral 50.0 value at 48.2 in December, down from 48.6 in the previous month. Business conditions have now worsened in each of the past 10 months. That said, the latest deterioration was modest overall.

Production declined for the seventh time in the past eight months, driven in part by a further fall in total new work. Data suggested that client demand was weak both at home and abroad, with new export business falling for the first time in three months in December. As a result, manufacturers continued to trim their staff numbers and reduce their purchasing activity in line with lower production requirements. Meanwhile, deflationary pressures persisted, as highlighted by further marked declines in both input costs and selling prices.

Manufacturing companies continued to cut their payroll numbers at the end of 2015 and at a moderate rate. According to panelists, lower staff numbers were the result of company downsizing policies and cost-saving initiatives. Fewer employees contributed to an accumulation of outstanding work in December, with the rate of growth quickening to an eight-month high.

December data signaled a further fall in average cost burdens faced by Chinese manufacturers. Moreover, the rate of reduction eased only slightly since November and remained sharp overall. Panelists that reported decreased input costs widely attributed this to lower raw material prices. Manufacturers generally passed on their cost savings to clients in the form of lower selling prices, while some companies mentioned that greater market competition had led them to cut their tariffs

China Manufacturing PMI

Chinese manufacturing has spent far more time in contraction than expansion since mid-2011.

Yuan Devaluation Continues

China is not exactly pleased to see manufacturers struggle and decided to do something about that last August. In a surprise August move, China Joins Currency War With Surprise Devaluation, Biggest One-Day Move on Record.

Back in March, Chinese Premier Li Keqiang told the Financial Times: "We don't want to see further devaluation of the Chinese currency, because we can't rely on devaluing our own currency to boost exports."

That lie bit the dust in August. Not to worry, at the time of the devaluation, China said it was a one-time move.

Yuan-US Dollar Weekly Chart

Somehow that does not have the look and feel of a one-time move. But let's put things in proper perspective.

Yuan-US Dollar Monthly Chart

From August 2005 the yuan rallied from 8.09 per US dollar to 6.05 per US dollar in November of 2013. That's a yuan strengthening of just over 25%.

Since November of 2013, the yuan declined to 6.49 per US dollar. That's a weakening of about 6.8%.

Nonetheless, that move represents quite a reversal for hedge funds and others who believed the Yuan would continue to rally vs. the dollar.

More fundamentally, the reversal means China has joined the beggar-thy-neighbor approach of weakening a currency hoping to gain or at least stabilize exports.

Yuan weakening may also ignite protectionism in Congress. Donald Trump is campaigning on that issue right now.

Major Currency War Coming Up?

Japan, China, the ECB, Sweden, Brazil, and Switzerland have all been involved with direct or indirect attempts to weaken their currencies.

Realistically, it's safe to include the US in that list when the Fed was first country outside of Japan to slash rates to zero.

Mathematically, it's impossible for every country to weaken its currency vs. every other currency. That basic fact hasn't stopped a growing list of countries from trying.

With the end of QE coupled with rate hikes, the US is no longer in the debasement by force camp, but if the US economy weakens, the Fed is likely to do anything.

A huge currency crisis of some nature is undoubtedly coming up. The timing of the crisis and where it starts are both unknown.

Mike "Mish" Shedlock

More Currency Intervention Madness: Sweden Draws Line in Sand with Euro

Posted: 03 Jan 2016 10:11 AM PST

In an irrational attempt to sponsor inflation, the Swedish central bank, Riksbank, slashed interest rates to -0.35% and conducted several rounds of QE.

Those misguided efforts failed to produce the desired 2% rate inflation, so the central bank now threatens currency intervention while drawing a line in the sand with the valuation of the Swedish Krona vs. the Euro.

Bloomberg reports Sweden Seen Closer to Krona Intervention to Tame Exchange Rate.

Some of Scandinavia's biggest banks are warning investors not to underestimate the risk that the central bank is preparing to intervene in the currency market.

Nordea and SEB both say the Riksbank won't allow the krona to strengthen beyond 9 against the euro. It traded at 9.187 on Friday. The prediction follows a Dec. 30 warning from the central bank that it's ready to act if persistent krona strength gets in the way of its 2 percent inflation target.

With a benchmark interest rate already at an historic low of minus 0.35 percent and several rounds of bond purchases behind them, policy makers are under pressure to consider other measures to live up to their inflation mandate. Underlying inflation has been below the Riksbank's target since the beginning of 2011 and headline price growth has hovered below zero for much of the past three years.

Though Sweden has resorted to extreme policy measures, its negative rates and quantitative easing have been overshadowed by far more dramatic monetary stimulus programs from the European Central Bank. Against the euro, Sweden's krona has strengthened about 4 percent over the past 12 months.

"If the exchange rate strengthens earlier and more rapidly than forecast, it will be more difficult to push up inflation towards the target," Governor Stefan Ingves said on Dec. 30. "The Riksbank is therefore highly prepared to intervene on the exchange market whenever we deem it necessary." The comments pushed the krona off a nine-month high versus the euro.

Krona vs. Euro Monthly

Since February 2009 the Krona strengthened from a high of 11.788 per Euro to 9.1725 to the Euro. That's an increase of 22%. Swedish shoppers are no doubt pleased to get more for their money but the central bank isn't pleased at all.

Why the panic? The Krona is right where it was between 2004 and 2008 before it weakened dramatically.

Was 2009-2010 Nirvana for Sweden following that weakening?

Failure to Learn

Brazil begged for inflation, got it in spades and now is very unhappy.

Japan tried to hit an inflation target of 2% for decades and failed. In the process, Japan accumulated the highest debt-to-GDP ratio of any advanced country.

Switzerland instituted a currency peg and unleashed massive volatility when it was forced to abandon the peg.

Why does the Riksbank think it will succeed when nearly every currency intervention in history has failed?

The answer is simple. Central bankers are trained, arrogant fools. They believe in all kinds of things the market has proven does not work.

Challenge to Keynesians

The simple fact of the matter is "Inflation Benefits the Wealthy" (At the Expense of Everyone Else) .

Those who disagree can respond to my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"

Mike "Mish" Shedlock

Core Capital Spending Down 10 Consecutive Months; Soft Rebound in 2016?

Posted: 03 Jan 2016 06:28 AM PST

Core Capital Spending Down Every Month Since January

Year-over-year core capital spending by manufacturers has been in negative territory for the last 10 months. Core capital spending is defined as nondefense capital goods, excluding aircraft.

The current year-over-year decline is about 1.78%. Part of the decline is due to the oil industry collapse. Another part is due to corporations deciding to invest in share buybacks rather than their actual businesses.

Core Capital Spending Since 1994

Big declines in core capital spending occurred in the last two elections, but this dip does not yet measure up.

Signs of a Soft Rebound?

The Wall Street Journal discusses the 2016 forecast in Will Business Spending and Profits Rebound This Year?

Unconvincing Forecast

The text of the article does not sound as convincing. Here are a few snips.

The Federal Reserve had enough confidence in the economic recovery to raise interest rates in December, but it remains unclear whether global growth will be buoyant enough to reverse weak business investment.

Many big companies are reining in spending. 3M Co. , with thousands of products from Scotch tape to smartphone materials, forecasts capital spending roughly unchanged from 2015. Telecom companies AT&T Inc. and Verizon Communications Inc. both plan to hold capital spending generally level in the coming year. Meanwhile, industrial giants like General Electric Co. and United Technologies Corp. are aggressively cutting costs and seeking to squeeze more savings from suppliers.

Capital expenditures by members of the S&P 500 index fell in the second and third quarters of 2015 from a year earlier, the first time since 2010 that the measure has fallen for two consecutive quarters, according to data from S&P Dow Jones Indices. Another measure of business spending on new equipment—orders for nondefense capital goods, excluding aircraft—was down 3.6% from a year earlier in the first 11 months of 2015, according to data from the U.S. Department of Commerce.

More broadly, only 25% of small companies plan capital outlays in the next three to six months, according to a November survey of about 600 firms by the National Federation of Independent Business. That compares with an average of 29% and a high of 41% since the surveys began in 1974.

"Our guys are in maintenance mode," said William Dunkelberg, chief economist for the trade group. "This recovery still stinks."

"This Recovery Still Stinks"

That sentence corresponds with my take.

However, the Journal notes a December tax bill makes permanent the research-and-development tax credit and faster capital-equipment write-offs for small businesses and a highway bill provides $305 billion of federal funding for roads and other transportation projects over five years.

Chad Moutray, chief economist of the National Association of Manufacturers, had this to say: "The tax legislation eliminates annual uncertainty over whether these incentives will be renewed. You can start planning for what you're going to be investing in 2016 and 2017, and that's huge."

Backwards?

It seems to me Moutray has things backwards. Any uncertainty over whether incentives would be removed should have pushed demand forward, not backwards.

If companies thought tax credits would expire, they would have had a tendency to spend in 2015, not 2016.

Is Moutray is just another cheerleader like we see at the National Association of Realtors?

Yet, the Journal quotes Robert Sires, CEO and owner of Bay State Cable Ties LLC, a Crestview, Florida maker of nylon cable who said "I delayed some purchases, not knowing what would happen" with the tax situation.

That statement would make perfect sense if we were talking about new credits for 2106, not extensions to credits expiring in 2016.

Banana Peels

Sires next comment, and also the end of the Wall Street Journal article gets back on track: "Still, customers have been cautious recently, placing smaller orders. Everybody feels like they're standing on a banana peel," said Sires.

All in all, the Journal seems rather unconvinced about the "Soft Rebound" thesis, and I am even more skeptical.

Mike "Mish" Shedlock

Saturday, January 2, 2016

Mish's Global Economic Trend Analysis

Blaming Others: Reflections on "The Big Short"

Posted: 02 Jan 2016 05:50 PM PST

Reflections on "The Big Short"

I have not yet seen "The Big Short" movie. Everyone tells me it was excellent. I intend to see it, but I already know what happened in detail, how, and why.

The Fed has not yet admitted its role, nor have banks, nor have the rating agencies, nor has Congress with its ludicrous affordable housing programs, nor has Bush with the "Ownership Society".

I could go on and on and on. But I left off one key set of people: Individuals blaming everyone else but themselves.

Blaming Others

An article just came my way expressing that same viewpoint. It's a New York Magazine Interview With Michael Burry, Real-Life Market Genius From The Big Short, head of Scion Asset Management.

NY: Were you surprised no one went to jail?
Burry: I am shocked that executives at some of the worst lenders were not punished for what they did. But this is the nature of these things. The ones running the machine did not get punished after the dot-com bubble either.

NY: When I spoke to some of the other real-life characters from The Big Short, I was surprised to hear that they thought that financial reform was pretty effective and that the system was much safer. Michael Lewis disagreed. In your opinion, did the crash result in any positive changes?
Burry: Unfortunately, not many that I can see. The biggest hope I had was that we would enter a new era of personal responsibility. Instead, we doubled down on blaming others, and this is long-term tragic. Too, the crisis, incredibly, made the biggest banks bigger. And it made the Federal Reserve, an unelected body, even more powerful and therefore more relevant. The major reform legislation, Dodd-Frank, was named after two guys bought and sold by special interests, and one of them should be shouldering a good amount of blame for the crisis. Banks were forced, by the government, to save some of the worst lenders in the housing bubble, then the government turned around and pilloried the banks for the crimes of the companies they were forced to acquire. The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough. And the interest the Federal Reserve pays on the excess reserves of lending institutions broke the money multiplier and handcuffed lending to small and midsized enterprises, where the majority of job creation and upward mobility in wages occurs. Government policies and regulations in the postcrisis era have aided the hollowing-out of middle America far more than anything the private sector has done. These changes even expanded the wealth gap by making asset owners richer at the expense of renters. Maybe there are some positive changes in there, but it seems I fail to see beyond the absurdity.

NY: How do you think all of this affected people's perception of the System, in general?
Burry: The postcrisis perception, at least in the media, appears to be one of Americans being held down by Wall Street, by big companies in the private sector, and by the wealthy. Capitalism is on trial. I see it a little differently. If a lender offers me free money, I do not have to take it. And if I take it, I better understand all the terms, because there is no such thing as free money. That is just basic personal responsibility and common sense. The enablers for this crisis were varied, and it starts not with the bank but with decisions by individuals to borrow to finance a better life, and that is one very loaded decision. Yet so few took responsibility for having any part in it, and the reason is simple: All these people found others to blame, and to that extent, an unhelpful narrative was created. Whether it's the one percent or hedge funds or Wall Street, I do not think society is well served by failing to encourage every last American to look within. This crisis truly took a village, and most of the villagers themselves are not without some personal responsibility for the circumstances in which they found themselves. We should be teaching our kids to be better citizens through personal responsibility, not by the example of blame.

NY: Where do we stand now, economically?
Burry: Well, we are right back at it: trying to stimulate growth through easy money. It hasn't worked, but it's the only tool the Fed's got. Meanwhile, the Fed's policies widen the wealth gap, which feeds political extremism, forcing gridlock in Washington. It seems the world is headed toward negative real interest rates on a global scale. This is toxic. Interest rates are used to price risk, and so in the current environment, the risk-pricing mechanism is broken. That is not healthy for an economy. We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook.

Glass-Steagall Scapegoat

I have seen so many people blaming mortgage companies, big banks, and especially the repeal of the Glass-Steagall act. All three were peripheral agents, at best.

Actually, I do not think the repeal of the Glass-Steagall act had anything to do with the crisis at all.

I commented on the Glass-Steagall Fallacy on January 21, 2010.

Merits of Glass-Steagall

The idea that Glass-Steagall would have done much, if anything to prevent this crisis is potty. Goldman Sachs, Bear Stearns, and Lehman would all have done what they did. Wells Fargo would have kept its pool of option arms, and the rest of the banks would have followed their lend to securitize model and the regional banks would still be losing their asses on silly commercial real estate deals.

That said, I am in favor of these initiatives for the simple reason they help prevent fraud. Many of the large institutions hand out advice and trade against it. Goldman Sachs is accused of front-running trades. Their disclosure documents even allow it.

Paul Volcker on Glass-Steagall

Unconvinced? Then please consider Please consider Volcker's Quest To Reinstate Glass-Steagall.

The loudest argument to bring back Glass-Steagall usually goes something like this: Depository institutions (commercial banks) need to be very safe and stable. If you allow investment banks to take big risks with those deposits, bad things can happen.

Now let's take a step back. What are these risky securities we're talking about? They're bonds backed by real estate -- originated by commercial banks. So really, it was the commercial banks that took the crazy risks that almost broke the economy. If there was never securitization, and the same subprime loans were made, then we'd have very, very sick depository institutions, but investment banks would have been largely unscathed.

Of course, there was securitization, and that was done by the investment banks. Where might Glass-Steagall have helped here? Well, it wouldn't have. Securitization existed before the Act was repealed, and it would exist if it's brought back. Commercial banks can still sell mortgages into giant pools for investment banks to make securities out of, with or without the mortgage originators and bankers living under the same umbrella. Commercial banks also still would have retained lots of their mortgage exposure, and still been quite sick. Just ask Countrywide.

Fed the Key Enabler

Few mention the Fed as the key enabler. Even fewer see the role of individual people all rushing like mad to get into housing "before it's too late".

Those hurt in the crisis all tend to point a finger at someone else. Too few admit personal responsibility.

That said, bailing out the banks was criminal. So were lies by the bank executives. So was the role of the rating agencies. But who is responsible for making the rating agencies the beasts they are?

Those who do not know the answer will be surprised: The answer is the SEC.

I wrote about the rating agency mess before the crisis, September 28, 2007 to be precise. If you have not yet done so, please consider Time To Break Up The Credit Rating Cartel.

Here We Are Again

Here we are again, back in one hell of a bubble that almost no one sees. Most of those who do see the bubbles are still content to play the greater fool's game in belief they can get out on time.

Mathematically it's impossible for the masses to escape bubbles.

When the next downturn hits, everyone will cry out for the Fed to do something. The Fed already did: It enabled bubbles in 2000, 2007, and now.

People like bubbles, until they pop, then they blame everyone but themselves for participating in them.

Mike "Mish" Shedlock

Even-Handed Beheadings in Saudi Arabia; Friends Must Be Friends

Posted: 02 Jan 2016 12:00 PM PST

Saudi Arabia executed 47 people today in the biggest mass execution since 1980. Those executed include Sheikh Nimr al-Nimr, a prominent Shi'ite Muslim cleric.

Some were beheaded, others shot. Don't worry, there's nothing to be concerned about, the executions were "even-handed".

Please consider Saudi Arabia Executes Prominent Shia Cleric Nimr al-Nimr.

The execution on Saturday morning of Sheikh Nimr al-Nimr, a staunch opponent of the ruling Al Saudi family, has further stirred sectarian tensions in the Gulf and triggered threats from regional rival Iran.

The Iranian foreign ministry accused Saudi Arabia of supporting terrorist movements and extremists abroad while confronting domestic critics with oppression and execution. "The Saudi government will pay a high price for following these policies," the Iranian foreign ministry said.

One activist said that 45 of those executed were al-Qaeda members and sympathisers, with the other two being Shia.

Many of the charges related to terrorist attacks that took place during the al-Qaeda insurgency that was put down a decade ago.

Shia activists have denied that Sheikh Nimr was involved in violent resistance, but many Saudis argue that his incitement against the government was tantamount to terrorism and often defend his death sentence.

The activist said the government probably executed Shia dissidents at the same time as al-Qaeda sympathisers to back its claim to be taking an even-handed approach in its crackdown down on terrorism. The Shia minority in the oil-rich eastern province has for years complained of discrimination.

The Saudi Press Agency report, citing the Koran, said: "The recompense of those who wage war against Allah and His Messenger and do mischief in the land is only that they shall be killed or crucified or their hands and their feet be cut off from opposite sides, or be exiled from the land."

"Even-Handed" Defined

Sheikh Nimr al-Nimr's crime was speaking out against the government.

In order to get rid of al-Nimr, Saudi Arabia had to get rid of 46 others, mostly Al Qaeda or alleged Al Qaeda sympathizers.

As further proof of even-handedness, al-Nimr was not crucified for his alleged "mischief in the land."

We would not want to crucify people for mischief would we? Beheadings are far more appropriate.

Iran Warns of High Price to Pay

The Telegraph reports Saudi 'will pay high price' for execution of top Shia cleric, warns Iran.

Saudi Arabia executed prominent Shia Muslim cleric Sheikh Nimr al-Nimr on Saturday, stirring a chorus of condemnation and sectarian anger across the region.

Nimr was a talismanic figure in protests that broke out in 2011 in the Sunni-ruled kingdom's east, where the Shia minority complains of marginalisation. His arrest in July 2012 sparked days of protest.

Hundreds of Shias marched through Nimr's home district of Qatif in protest at the execution, eyewitnesses told Reuters news agency, chanting "down with the Al Saud" in reference to the Saudi ruling family.

Describing the executions as acts of "mercy" to prisoners who might have committed crimes on their release, Saudi Arabia's leading cleric, Grand Mufti Sheikh Abdulaziz Al Sheikh, said they were carried out in line with Islamic law and the need to safeguard the kingdom's security.

Acts of Mercy

There you have it. Not only were the executions "even handed", they were also "acts of mercy".

Global Response

Iran: Iran's foreign ministry spokesman accused Riyadh of hypocrisy. "The Saudi government supports terrorist movements and extremists, but confronts domestic critics with oppression and execution," said Hossein Jaber Ansari.

Lebanon: Lebanon's Supreme Islamic Shia Council called the execution a "grave mistake"

Iraq: Iraqi Prime Minister Haider al-Abadi said it would have repercussions on regional security.

Germany: A German foreign ministry official said Nimr's execution strengthened "existing concerns about increasing tensions and deepening rifts in the region".

UK: From Guardian: Liberal Democrat leader, Tim Farron, responded to news of the executions by describing capital punishment as abhorrent, and called on the prime minister to do more to pressure foreign governments into abolishing the death penalty. Britain's shadow foreign secretary, Hilary Benn, described the execution as "profoundly wrong". However, "prime minister David Cameron insists UK must have close ties with Saudi Arabia".

Bahrain: Striking image from one of the protests in Bahrain. The banner reads "to hell with you".

Protester holds a banner saying "to hell with you" as she takes part in a protest against the execution of Saudi Shia cleric Nimr al-Nimr by Saudi authorities, in the village of Sanabis. Photograph: Hamad I Mohammed/Reuters

US Response

In the US, there was deafening silence from president Obama as well as our state department. And why not? After all, those executions were "even-handed acts of mercy" by our Saudi friends. What else can possibly be said?

When your friends sponsor terrorism and execute their own citizens simply for being dissidents, you just have to look away. Friends must be friends, otherwise they aren't friends. And in the drive for perpetual war, Saudi Arabia is the biggest friend we have.

Mike "Mish" Shedlock

Friday, January 1, 2016

Mish's Global Economic Trend Analysis

Millions of Foreign Visitors Overstay Visas: Precisely How many? No One Seems to Know; Does Obama Care?

Posted: 01 Jan 2016 03:01 PM PST

In the wake of terrorist activity in Europe and mass shootings in San Bernardino, Calif., that left 14 people dead and 22 wounded, some may be wondering: Are we tracking those in the US on Visas, and if so, how?

The answer, despite Federal laws that require tracking visa entrants, is the U.S. Doesn't Know How Many Foreign Visitors Overstay Visas.

The question from the congressman to the Obama administration official was straightforward enough: How many foreign visitors overstay their visas every year?

The reply was simple too, but not in a satisfying way. "We don't know," the official said.

The testy exchange during a recent congressional hearing between Representative Mark Meadows, Republican of North Carolina, and Alan Bersin, the assistant secretary for international affairs at the Department of Homeland Security, highlights what some law enforcement officials call a critical weakness in the United States foreign visa program.

Nearly 20 years ago, Congress passed a law requiring the federal government to develop a system to track people who overstayed their visas. After the attacks of Sept. 11, 2001, an entry and exit tracking system was seen as a vital national security and counterterrorism tool, and the 9/11 Commission recommended that the Department of Homeland Security complete a system "as soon as possible." Two of the 9/11 hijackers, Satam al-Suqami and Nawaf al-Hazmi, had overstayed their visas.

Since then, the federal government has spent millions of dollars on the effort, yet officials can only roughly estimate the number of people in the United States illegally after overstaying visas.

One widely cited statistic, from a 1997 report by the Immigration and Naturalization Service, puts the number of people who overstay their visas at 40 percent — which now would mean about 4.4 million of the estimated 11 million undocumented residents in the United States. Numerous lawmakers, including the Republican presidential candidates Marco Rubio and Ted Cruz, have used that figure when trying to describe the scope of the problem. But even that number has never been conclusively substantiated.

Federal agencies have not provided a new report to Congress on overstays since 1994, despite the congressional mandate.

In early 2013, Janet Napolitano, then the secretary of Homeland Security, testified before Congress that the agency planned to issue a report on overstay rates by December 2013. The agency did not follow through because officials said they did not have confidence in the quality of the data. Mr. Bersin said last month that the report would be issued in the next six months.

In 2004, lawmakers passed legislation that required Homeland Security officials to accelerate their efforts to create an automated biometric entry and exit data system.

Congress repeated its demand for a biometric exit system in 2007 and set a deadline for 2009. But the deadline passed, with the department putting into place only a handful of pilot programs.

Since then, the department has continued to struggle to meet this requirement. A 2013 report by the Government Accountability Office said the Department of Homeland Security had more than one million "unmatched" arrival records, meaning that those records could not be checked against other information showing that the individuals had left the country, but again the department could not offer a precise number.

Despite the call by some lawmakers for an exit system, airports and the airline industry have balked because it would cost airlines $3 billion, according to a 2013 Homeland Security estimate. The Department of Homeland Security issued regulations in 2008 requiring airports to collect biometric exit information, but carriers have largely ignored the regulation, and there have been no sanctions.

Questions Abound

What will the US do if someone doesn't leave who is supposed to? Ignore the problem hoping it goes away? Issue alerts? Round up the illegals and deport them?
What about the presumed 4.4 million already here on expired visas?
Is the US prepared for a Trump-like deportation proposal?
Is the US comfortable with an Obama-like welcome with no background checks?

Uncomfortable Questions

The above questions are uncomfortable, but must be asked.

Unless there is a comprehensive and workable overall plan, a biometric program will not do much in and of itself but add to expenses and increase delays.

This visa issue further compounds the issue of illegal aliens. Hillary prefers to label the illegals "undocumented".

Those here with expired visas were documented, and they entered the US legally. Both groups are now here illegally, so let's not mince words. The term "illegal" applies in both cases.

Political correctness aside, those who wish to differentiate might consider the phrase "illegal, undocumented alien" as the most accurate description for those who entered the US illegally, with no documents.

Popularity of Trump

Part of the popularity of Donald Trump is that he at least has some semblance of plan. That he doesn't care who his plan offends likely helps his campaign. Whether or not the plan is truly workable doesn't matter for now.

The primary alternative seems to be blanket amnesty for those already here combined with no background checks on refugees coming in.

Is there a middle ground somewhere? or not?

Mike "Mish" Shedlock

California Referendum Would Force Politicians to Wear Logos of Donors

Posted: 01 Jan 2016 10:59 AM PST

In California, citizens can propose a referendum on anything if they gather enough signatures.

John Cox, a wealthy attorney who made a fortune in real estate, is tired of politicians who are bought and owned by corporate interests.

He is putting up $1 million to gather signatures for a referendum that would Force Politicians to Wear Donor Logos.

A wealthy Republican wants to require unprecedented transparency in California by forcing state politicians to plaster their suits and dresses with the logos of their top 10 donors -- and voters fed up with those politicians may actually get the chance to vote on the idea in November.

The unusual dress code is offered in a proposed ballot initiative that backers say likely will be cleared for signature collection within the next week or two. Then, 365,880 valid signatures will have to be submitted for a spot on the ballot.

Initiative sponsor John Cox, an attorney who owes his fortune to real estate, says he doesn't foresee a challenge in the threshold, which is relatively low due to poor 2014 voter turnout. Cox says he expects a boost from popular anti-establishment sentiment reflected in the presidential race.

Cox says he's seeking the endorsements of GOP presidential front-runner Donald Trump and Democratic candidate Sen. Bernie Sanders, both of whom have rallied passionate supporters in part by denouncing their rivals as indentured servants to corporations and other wealthy donors.

"It's going to be immensely popular," Cox says. "We have a system under which people who want something from government fund the campaigns of the people who make those decisions. In any other solar system that would be considered corrupt."

"It actually would raise some fascinating issues if it were to be applied," says George Washington University law professor Jonathan Turley. "Politicians could challenge the law as applied in how the determination is made of the top donors when most money may come from individuals," he says, as "lobbyists often donate as individuals rather than as representatives of their companies or clients."

Timothy Zick, a law professor at the College of William and Mary, is more skeptical of the initiative's ability to survive a legal challenge. The idea, he says, "strikes me as a textbook case of invalid compulsory speech."

But Cox says he can't imagine who would want to have their name on any such lawsuit, and says that finding donor information online is too arduous.

Cut out the Middleman

I have commented on more than one occasion about waste inherent in the current system.

Since lobbyists write virtually every piece of legislation, my sarcastic proposal was to cut out the middlemen by directly electing lobbyists. At least we would have some bit of honesty.

Cox's referendum would accomplish nearly the same thing.

Truth in Lending Extension

Although Fed members are appointed, not elected, how about JP Morgan, Citigroup, Bank of America, and National Association of Realtors (NAR) logos on Janet Yellen and Ben Bernanke?

Mike "Mish" Shedlock