Home Refinance Calculator

Monday, July 27, 2015

Mish's Global Economic Trend Analysis

Stench from Chicago so Bad, Fitch Finally Smells It
Final Second Quarter "GDPNow" Forecast 2.4% vs. Bloomberg Consensus 2.9%
Witch Hunt is On; Foolish Ideas on Stopping the Shanghai Carnage; US Bubble Will Burst Too
Chinese Stocks Plunge 8.5%, Biggest Decline Since February 2007

Stench from Chicago so Bad, Fitch Finally Smells It

Posted: 27 Jul 2015 03:32 PM PDT

At long last, the stench from Chicago is so strong that Fitch can finally smell it. Fitch just now downgraded Chicago Board of Education General Obligation bonds to junk status.

Fitch and the S&P were holdouts because there's money to be made by purposely pretending a manure factory is a rose garden.

MarketWatch reports Fitch Downgrades Chicago Board of Ed (IL) ULTGOs to 'BB+'.

Fitch Ratings has downgraded the Chicago Board of Education, IL's (the board) approximately $6.1 billion of unlimited tax general obligation (ULTGO) bonds to 'BB+' from 'BBB-'. The rating has been placed on Negative Watch.

Rating Drivers

Continued financial stress
Dependency on borrowing
Cash flow drain
Pension liability weakness
Poor labor history
Unfavorable debt position
Structural imbalances
Mounting fixed costs
Limited options to address large budgetary gaps
Growing gap for fiscal year 2016
Liquidity concerns
Negative cash balances
Swap termination triggers

Fitch can finally smell enough stench from the above rating drivers to label the bonds as junk.

The "J" Word

The downgrade from BBB- to BB+ is a downgrade to a "non-investment" rating, commonly labeled "junk". Curiously, MarketWatch just could not bear the say the "J-Word".

MarketWatch reports "Fitch would downgrade the rating further if there is not clear and meaningful progress over the next several months in reducing the large structural imbalance."

I think we can count on that.

Deep Into Junk

On May 20, I spoke with Sean Egan at the rating agency Egan-Jones how he would rate these bonds. His reply was "Deep Into Junk".

For details, please see CNBC's Santelli and Mish Discuss Municipal Bonds; Egan-Jones on Chicago; S&P Blames Moody's; Message to Bondholders.

Rate Shop Whores

S&P noses are still immune to the stench. On July 2, the S&P cut Chicago Board of Education's GO rating to 'BBB', still investment grade.

And on July 8, the S&P Lowered Chicago GO Bonds one notch to "BBB-Plus", also investment grade.

When the smell hits the collective noses at the S&P remains to be seen, but I suspect quickly. Rate shop whores simply can never be first with downgrades.

For a discussion of how the SEC is to blame for the current environment of Fantsayland bond ratings please see Rate Shopping Whores and Chicago's Bond Rating.

Solutions

Instead of tackling the underlying problems, Chicago Mayor Rahm Emanuel nickels and dimes businesses to death, further makes Chicago an uncompetitive place to do business, and threatens massive property tax hikes. Emanuel also expects $500 million from the state even though the state budget (which Governor Bruce Rauner correctly refuses to sign) is $4 billion in the hole.

For details and recommended solutions, please see Santelli Exchange with Mish: Public Debt, Taxation, Legacy Issues.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Final Second Quarter "GDPNow" Forecast 2.4% vs. Bloomberg Consensus 2.9%

Posted: 27 Jul 2015 01:44 PM PDT

The Atlanta Fed second quarter GDPNow final estimate came in at 2.4%.

The second quarter GDP official "advance" estimate from the BEA is due out Thursday, July 30 along with the annual revision of the National Income and Product Accounts (NIPA).

The Bloomberg Consensus Estimate for second quarter GDP is 2.9%, a half percentage-point higher than the Atlanta Fed model.

I will take the under.

First quarter GDP releases by the BEA have been all over the map. The initial reading was +0.2%, revised to -0.7%, then revised again to -0.2%.

Whatever number comes out Thursday, expect revisions, possibly in both directions. I expect the final first quarter and/or second quarter GDP to be revised lower.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Witch Hunt is On; Foolish Ideas on Stopping the Shanghai Carnage; US Bubble Will Burst Too

Posted: 27 Jul 2015 12:08 PM PDT

Nearly 1,800 stocks, over 60% of issues traded on the Shanghai and Shenzhen stock exchanges fell by the daily limit of 10% and were halted according to a Financial Times report.

When contacted by the Financial Times, the China Securities Regulatory Commission refused to answer any questions.

The amusing comment of the day comes from Zhu Ning, deputy dean at Shanghai Advanced Institute of Finance: "If [the government] does nothing then all its previous efforts will have been wasted but if they continue with the rescue efforts then the hole will get bigger and bigger. We hope the regulators will respect the market and the rules of the market."

In reality, previous efforts were wasted the moment they were tried. Price discovery is now lacking, and that is a huge problem in and of itself.

Absurd Cries for More Intervention and Liquidity

On Monday, Zhu Baoliang, director of the economic forecast department of the State Information Centre, a government research agency, told Reuters the stock market crash was having a deep impact on the real economy and that it was "essential for the authorities to cut interest rates and loosen monetary policy further."

Bear in mind that it was excessive liquidity that created China's property bubble followed by the stock market bubble.

Thus, Zhu Baoliang is another charlatan promoting the inane notion that the cure is the same as the disease. In effect, Baoliang wants to give alcohol to alcoholics.

Witch Hunt is On

The witch Hunt is on. That means the ridiculous notion of blaming the shorts is in full swing.

Chinese regulators even launched a website encouraging people to name the shorts, further stating those found guilty will be "dealt with severely".

Loss of Control

ZeroHedge discusses shorts in What Loss of Control Looks Like.

Actually, regulators were never in control in the first place. It only appears that way when things are going well.

Shorts Not the Problem

Shorts are not the problem here. Nor were shorts the problem in 2000 and 2008 in the US. Indeed it was the shorts who understood the true nature of the stock market:

Dotcom companies in 2000-2001 with no earnings were absurdly priced.
Financial corporations, home builders, etc. were in the same situation in 2008.

"Real Economy" Worries

Chinese officials are worried the crash will hurt the "real economy". That's something they should have worried about before they blew the bubble.

Moreover, the notion that the "real economy" was doing well in the first place is silly. Rather, speculative activities, and unrealized profits on those activities only made it appear the "real economy" was doing better that it really was.

It's too late to do anything now.

The only policy that makes any sense is to stand back and do nothing. Doing anything else just fosters more "moral hazard" speculative behaviors.

Pointing the Finger in the Right Direction

The Fed had a direct role in fostering US speculation in 2000 and 2008, just as the Chinese "regulators" fostered speculation in real estate and stocks in China over the past few years.

US stocks are back in bubble territory and the only reason why that is not perfectly obvious is the crash has not yet started here.

US Bubble Will Burst Too

When the US bubble bursts, we will see more blame the shorts mentality here, just as we see in China now, and also as happened in 2000 and 2008 in the US.

The Fed will never point the finger where it belongs: At themselves.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Chinese Stocks Plunge 8.5%, Biggest Decline Since February 2007

Posted: 27 Jul 2015 01:23 AM PDT

The crash in Chinese stocks continued today following a respite last week.

Shares on the Shanghai index plunged 8.48%, the Biggest One-Day Plunge Since February 2007.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 8.6 percent, to 3,818.73, while the Shanghai Composite Index SSEC lost 8.5 percent, to 3,725.56 points.

The drops were the biggest since Feb. 27, 2007.

It wasn't immediately clear what caused such a sharp tumble in the afternoon session. At midday, the two indexes were down about 2.5 percent.

"The recent rebound had been swift and strong, so there's need for a technical correction," said Yang Hai, strategist at Kaiiyuan Securities.

Immediately Clear

It should be immediately clear stocks are in a bubble, so there is no need to search for a "reason" for the plunge.

If anything, one might wonder why the stocks rose to such absurd valuations in the first place.

$SSEC Shanghai Index

Stock rose from about 2300 in November to 5178 in June. That was an advance of 125% or so in about seven months. Today's decline is shown by the second blue arrow.

Since the plunge in June, China stepped in to directly buy stocks, prohibit short selling, halted trading on half the companies, and prohibited large shareholders from selling any shares for six months.

Expectation of such moral-hazard maneuvers coupled with cheap money is exactly what fuels bubble activity in the first place.

Amusingly, margin buying is still at or near record levels.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Sunday, July 26, 2015

Mish's Global Economic Trend Analysis

Record Eurozone Borrowing: Public Debt Rises With Recovery; Greece a Small Sideshow Compared to Italy

Posted: 26 Jul 2015 04:55 PM PDT

The eurozone is supposedly in a state of recovery. However, in spite of that recovery, public debt and debt-to GGP levels are still rising. Austerity is difficult to find in any realistic sense.

Please consider Eurozone Borrowing Rises to Record as Recovery Remains Weak.

The European Central Bank's programme of quantitative easing has pushed down interest rates to ultra low levels, encouraging governments to borrow more in the early part of this year, despite turmoil in Greece.

Across countries that use the euro, average debt to gross domestic product reached 92.9 per cent in the first quarter of 2015, up from 92 per cent in the previous quarter and 91.9 per cent in the same period last year, according to figures from Eurostat, the EU's statistical agency.

Greece remains the EU's most indebted nation, with debt equal to 169 per cent of annual GDP, but Italy, Belgium, Cyprus and Portugal also carry government debt that exceeds 100 per cent of economic output.

The rise in debt comes despite a pickup in the pace of recovery in the eurozone, with the region's economy expanding 0.4 per cent in the first quarter of this year — while the US saw a contraction.

Targets vs. Reality

The "Growth and Stability" pact on which the Eurozone was founded limits debt to 60% of GDP and deficits at no more than 3%.

Average Debt-to-GDP is 92.9% and rising.

Eurostat Data shows Ireland, Greece, Spain, France, Cyprus, Portugal, Belgium, Slovenia, and Finland all exceeded 3% budget deficit requirement in 2014.

France and Spain have been given warnings and extensions on numerous occasions.

Greece Sideshow

By any realistic measure, Greece is just a sideshow for what is to come.

Pater Tenebrarum at the Acting Man blog pinged me with this comment: "The true reason for the bust of Greece and other countries - apart from their truly atrocious socialist policies and abominable corruption - is fractional reserve banking. The euro has of course enabled an even bigger credit boom and bust than would have been the case otherwise, but it is not the fixed exchange rate that is at fault, it is the underlying economic policies and the monetary system as such."

While the politicians are are scrambling to "save" Greece, please note Italy's Non-Performing Loans Hit a New Record High.

The real danger to the euro area probably doesn't emanate from Greece, but from two of its heavyweights, namely France and Italy. A small note in the European press reminds us that all is not well in at least one of these countries, least of all with its banks (currently this is only a "page 16 story", but it has great potential to eventually move to the front page).

The note reads as follows: "According to Italy's banking association ABI, non-performing loans amounted to 193.7 billion euro in May, 25.1 billion more than in the same month in 2014. This is the highest level since 1996. Non-performing loans represent 10.1 percent of all loans granted by Italian banks, ABI said on Tuesday."

Gigantic Accidents

Pater displays many other interesting charts and tables, concluding with ...

Greece is really a side-show. The euro zone remains full of accidents waiting to happen and some of them have the potential to become truly gigantic accidents. Italy has a twin debt problem and it is probably only a question of time before its giant government debtberg becomes a concern again – this would put the country's banks into an untenable situation, given they have amassed a great deal of government since early 2012.

As long as the ECB continues to pump €60 billion in newly created money into the system every month, such problems can probably be kept at bay. However, this comes at a price, as monetary pumping distorts prices and falsifies economic calculation, which in turn leads to malinvestment and capital consumption that is masquerading as an "economic recovery". The structure on which all this debt rests becomes ever weaker.

Illusion of Recovery

Papering over problems with cheap money, deficit spending, and give an illusion of recovery. To keep the illusion going, the ECB made Corporate Bond Purchases QE Eligible.

According to the ECB's Website is Italian utilities Enel SpA, Snam SpA and Terna SpA - Rete Elettrica Nazionale were on the updated list of QE eligible purchases.

What's next is anyone's guess, but anything needed to keep the illusion alive will likely be given serious consideration.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Santelli Exchange with Mish: Public Debt, Taxation, Legacy Issues

Posted: 26 Jul 2015 12:27 PM PDT

I had the pleasure of being on CNBC last Friday with Rick Santelli. It was the third time we discussed the sorry state of Chicago and Illinois finances. The focus for this interview was legacy issues.

Public Debt, Taxation, Legacy Costs

Who wants to move to Illinois, with its high taxes, when the vast majority of those taxes are just to support legacy issues like pensions?

Chicago mayor Rahm Emanuel recently mentioned hiking Chicago's already obscene property tax structure. Moreover, Emanuel who claims to want to make Chicago a technology hub, just imposed a 9% data streaming tax, effectively nickel and diming businesses and residents alike when pension issues for Chicago alone are close to $30 billion.

At the state level, "progressives" in the Illinois legislature have their eyes on your pocketbook as well. They seek to hike Illinois income taxes.

It is impossible to say everything that needs to said in a 3 minute time window, but that is all the studio allows. So we focus on one key item, and the central theme this time was taxation solely to support legacy issues.

What Needs to Be Done

To spare the citizens of Illinois massive tax hikes, the only reasonable course of actions are as follows:

Halt defined benefit pension plans for new employees
Eliminate collective bargaining of public unions
Scrap Davis Bacon and all prevailing wage laws so that cities do not have to overpay for services
Enact right-to-work legislation
Pass bankruptcy legislation allowing cities, municipalities, and other taxing bodies the right to declare bankruptcy

Had options 1-4 been done a decade ago, Illinois would not be as bad off as it is today. Now, even those measures cannot and will not fix the problems.

Additional Reading

Instead of tackling the underlying problems, Emanuel nickels and dimes businesses to death, further makes Chicago an uncompetitive place to do business, and threatens massive property tax hikes. Emanuel also expects $500 million from the state even though the state budget (which Governor Bruce Rauner correctly refuses to sign) is $4 billion in the hole.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Saturday, July 25, 2015

Mish's Global Economic Trend Analysis

Fed Staff Accidentally Posts Bearish Economic Forecast and Prediction Inflation Would Not Hit 2% by 2020; Upset Over Leaks? Why?

Posted: 25 Jul 2015 02:27 PM PDT

The Fed created quite a stir by inadvertently posting documents on its website. The documents revealed some expected things, as well as a few startling (but not to Mish readers) projections.

Please consider Fed Inadvertently Publishes Staff Forecast for 2015 Rate Hike.

Staff economists at the Federal Reserve expect a quarter-point U.S. interest rate increase this year, according to forecasts the Fed mistakenly published on its website in a gaffe that drew criticism about its ability to keep secrets.

Federal prosecutors are currently probing an alleged leak at the Fed of market-sensitive information to a private financial newsletter in 2012.

"It regrettably appears once again that proper internal controls are not in place to safeguard confidential Federal Reserve information," said Representative Jeb Hensarling of Texas, a Republican who chairs the House Financial Services Committee and is pressing Fed Chair Janet Yellen for documents regarding the 2012 leak.

The Fed said in a statement that the forecasts were "inadvertently" included in a computer file posted to its website on June 29.

Fed officials said the disclosure was due to procedural errors at a staff level and that the mistake was discovered on Tuesday this week. The matter has been referred to the Fed's inspector general.

"It is baffling that these leaks continue to occur," said Congressman Randy Neugebauer, a Texas Republican who chairs the House subcommittee on financial institutions and consumer credit.

Unintentional Projections

One hike in 2015: The staff expected policymakers would raise their benchmark interest rate, known as the Fed funds rate, enough for it to average 0.35 percent in the fourth quarter of 2015. That implies one quarter-point hike this year, as the Fed funds rate is currently hovering around 0.13 percent.
Inflation: the staff did not expect inflation to ever reach the Fed's 2.0 percent target. By the fourth quarter of 2020, they saw the PCE (personal consumption expenditure) inflation index rising 1.97 percent from a year earlier.
Growth: The Fed's staff also took a dimmer view of long-run economic growth, expecting gross domestic product to expand 1.73 percent in the year through the fourth quarter of 2020. The views of Fed policymakers for long-term growth range from 1.8 percent to 2.5 percent.

Upset Over Leaks - Why?

Congress is upset over leaks. Is that what people should really be upset over?

Why? We should be happy to have a glimpse of what this secret sect thinks, discusses, and wants to hide vs. the spoon-fed crap they want us to hear.

What To Be Upset Over

I propose people should be upset at a group of clowns who actually believe they can steer the economy like a truck, when it's obvious they cannot.
We should also be upset because the documents suggest that Fed official statements are nothing but souped-up nonsense to appease the financial markets and Fed egos about what they don't know but pretend to.

History Lesson

History proves that the Fed produces bubbles and busts of increasing amplitude over time, to the detriment of the middle class.

Indeed, the Fed, along with public unions and corrupt politicians are the very sponsors of the income inequality that Janet Yellen, the unions, and politicians rail against.

It's amusing what the Fed staffers came up with. Fed officials say it's not what they believe. Does the denial ring true? Not to me. But it doesn't really matter.

The fact of the matter is the Fed and central banks in general have no idea where interest rates should be, what the money supply should be, what unemployment should be, how many cars should be produced, how many houses should be built, or what the price of assets should be.

A group of clowns sitting in a room cannot possibly decide these things. And in attempting to do so, they send out all sorts of false economic signals about demand, creating bubbles in the wake. The housing boom-bust is a perfect example. Right up until the housing bust, it actually appeared as if there was a housing shortage. The same thing happened outside the US.

Increasing Interference

Central banks worldwide have long distorted markets with government bond price manipulation.

Now, central banks in Asia and Europe stretched the bounds by investing in corporate bonds and equities.

We can say for certain these preposterous manipulative efforts will blow sky high. What we cannot state is when. Nor can we say how much additional damage these central bank manipulators cause in the meantime.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Friday, July 24, 2015

Mish's Global Economic Trend Analysis

Hedge Funds Net-Short Gold First Time in History; Contrarian Views

Posted: 24 Jul 2015 01:52 PM PDT

After being net long all the way from $1900 to $1100, Bloomberg reports Hedge Funds Are Holding First-Ever Gold Net-Short Position.

Hedge funds are holding the first ever bet on a decline in gold prices since the U.S. government started collecting the data in 2006.

The funds and other speculators shifted to a net-short position of 11,345 contracts in New York futures and options in the week ended July 21, according to figures from the U.S. Commodity Futures Trading Commission.

Gold futures on Friday fell to the lowest since 2010 on the Comex, and the short wagers show investors expect the rout to deepen.

Goldman Sachs Group Inc.'s Jeffrey Currie says the worst is yet to come for gold, and that prices could fall below $1,000 an ounce for the first time since 2009. "The risks are clearly skewed to the downside," Currie, the bank's New York-based head of commodities research, said in a phone interview Tuesday.

Currie isn't alone in predicting more declines. ABN Amro Bank NV's Georgette Boele and Robin Bhar of Societe Generale AG say bullion will approach $1,000 by December.

Contrarian Views

From a contrarian point of view, this sure seems like good news to me.

Also, my friend Pater Tenebrarum at the Acting Man blog pinged me with this thought: "Yesterday, the entire gold futures curve out to December traded in backwardation to cash. This is never supposed to happen in gold, and is a sign that physical demand is far stronger than futures prices would indicate."

Strong negative sentiment is a prerequisite for a strong rally. It would be far worse if everyone was bullish during this decline.

However, and as I have noted before, sentiment is not a timing issue. And to answer reader questions in advance, I am still holding. If I were to do anything here it would be to add. I still like the long-term prospects.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

New Home Sales Unexpectedly Decline 6.8%, April and May Revised Lower; Writers Still Upbeat

Posted: 24 Jul 2015 09:18 AM PDT

New home sales unexpectedly plunged 6.8% to 482,000 annualized units, far below any Bloomberg Consensus Estimate.

Volatility is common for new home sales and there's plenty of it the June report where the headline plunged 6.8 percent to a far lower-than-expected annual rate of 482,000 and where revisions erased 40,000 from the prior two months.

But there is some good news in the report and that's a surge in supply of new homes on the market, up 3.4 percent in the month to 215,000. Greater supply points to greater sales ahead. On a sales basis, supply is at 5.4 months vs 4.8 and 4.7 in June and May.

Prices look soft in the report, at a median $281,800 which is up 0.5 percent in the month but down 1.8 percent year-on-year. The latter reading points to deep discounting compared to the year-on-year sales gain of 18.1 percent.

Regional data show big drops in the West and the Midwest in the month and a smaller drop in the South. But the Northeast is showing life with a second straight solid gain. Year-on-year, the South and Northeast lead with respective sales gains of 23.7 and 23.1 percent with the West and Midwest lagging at 10.9 and 5.7 percent.

Key Numbers

The Bloomberg consensus range was 535,000 to 570,000 annualized.
The consensus estimate was 550,000 (over-optimistic by 68,000).
Actual new home sales were 482,000.
May was revised from 546,000 to 517,000 (downward revision of 29,000).
April was revised lower by 11,000.

Seven Month Low

Reuters reports New home Sales at Seven-Month Low.

New U.S. single-family home sales fell in June to their lowest level in seven months and May's sales were revised sharply lower, in what appeared to be a minor setback for the housing market recovery.

New home sales dropped 6.8 percent to a seasonally adjusted annual rate of 482,000 units, the lowest level since last November, the Commerce Department said. May's sales pace was revised down to 517,000 units from the previously reported 546,000 units.

"You never want to see the data regress, but we remain optimistic that we're still on a long-term upward trajectory," said Tom Wind, vice president of home lending at EverBank in Jacksonville, Florida.

Despite two straight months of declines in new home sales, the overall housing market recovery remains intact.

Writers Upbeat

Reuters called this a "minor setback", further stating the "overall housing market recovery remains intact."

Is the recovery intact? How could the writer possibly know?

Bloomberg says "Greater supply points to greater sales ahead."

Is that what greater supply points to, or does it point to builder over-optimism coupled with another round of homes built on spec in hope that buyers show up later?

Which is it? How could the Bloomberg writer possibly know?

While pondering those questions, let's put a little perspective on new home sales and new homes for sale.

New One-Family Homes Sold

New One Family Homes for Sale

That's "the good news" in perspective.

Problems With the Good News Scenario

The key problem with these upbeat forecasts is that homes are not affordable for the one set of buyers that matter most: millennials.

Millennial family formation is low because of student debt overhang, low wages, high prices, and changing attitudes.

In regards to changing attitudes, millennials have seen what debt has done to their parents and do not want to follow the same path. Millions have moved back home with their parents because that's all they can afford.

And instead of chasing the suburban dream like their parents, millions more prefer to live in cities close to where they work.

To top it off, mortgage rates have been rising. Fed rate hikes may push rates even higher. And the higher rates go, the less house one can afford.

Yet, allegedly the housing recovery is "intact".

Is it? How can anyone possibly know?

Here's one thing we do know: This report will shave a bit off 2nd quarter GDP estimates. It will also give the Fed another reason to not hike in September.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Thursday, July 23, 2015

Mish's Global Economic Trend Analysis

China Manufacturing PMI Hits 15-Month Low: Is This a Big Deal?
What Happens When Public Unions Control Everything for Decades? (Hint: Look at Chicago and the State of Illinois)
Gearing Up for More War in Ukraine?
Weekly Unemployment Claims Lowest in 41 Years
What's the Rise in People Without Fulltime Employment Since 2009? What "Should" It Be?

China Manufacturing PMI Hits 15-Month Low: Is This a Big Deal?

Posted: 23 Jul 2015 11:09 PM PDT

I have been bearish on China manufacturing and growth in general for years. It is no surprise to me that news is generally negative.

For example, on news today that China's PMI "unexpectedly" declined Yahoo!Finance reported China Factories Falter, Commodities Take the Hit.

Activity in China's factory sector seemingly contracted at the fastest pace in 15 months in July, a preliminary private survey showed on Friday in a blow undercutting recent signs of stabilization in the struggling economy.

The drop confounded forecasts for a rise to 49.7, from June's final reading of 49.4, and slugged the Australian dollar to a six-year low.

"Today, it's big, bad news with this number well below consensus," said analyst Helen Lau of Argonaut Securities in Hong Kong. "It shows there's no signs of recovery in small and mid-sized business in China, but I think it's also related to the summer weak season for demand."

China Rehash

In a complete rehash of the above, but under a different title Yahoo!Finance reported one hour later Asian Shares Tumble as Weak China PMI Revives Demand Concerns.

There's actually less information in the second article than the first.

PMI Report

Let's go straight to the Markit Report for the results of the latest Flash China General Manufacturing PMI™.

Key Points:

Flash China General Manufacturing PMI™ at 48.2 in July (49.4 in June). 15-month low.
Flash China General Manufacturing Output Index at 47.3 in July (49.7 in June). 16-month low.

PMI, Production, New Orders

The above chart shows Chinese manufacturing has been languishing for years. I do not believe, and have not believed Chinese GDP reports for at least as long.

Mainstream media appears to be catching on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What Happens When Public Unions Control Everything for Decades? (Hint: Look at Chicago and the State of Illinois)

Posted: 23 Jul 2015 05:14 PM PDT

I will be on CNBC again Friday, with Rick Santelli. This will be my third appearance, all discussing the sorry state of affairs in Chicago.

Spotlight will likely be on my post a week ago: Emanuel Fiddles While Chicago Burns; Public Schools Over the Edge; 9% Cloud Tax on Data Streaming; Emanuel Eyes Property Tax Hikes.

It is very difficult to say what really needs to be said in a 3-5 minute time horizon, typically 4 minutes, so expect an animated summary.

Pension Economics

Michael Bargo, writer for the American Thinker, provides more commentary for the mix.

Here is a lengthy snip from Bargo's recent, well-written article Public Pensions Prove Zero Sum Economics.

One of the major appeals in Democrat presidential campaigns is to explain to voters that they need Democrats in office to take money away from the rich. And since the rich own big corporations, they will pay workers as little as possible. This idea is what Barack Obama had in mind in 2008 when he said he will redistribute money to the working class and poor.

But so far this analysis has only been applied to the private sector; the "rich" who own stocks or run corporations. If public sector workers, particularly pensioners who are not working, are taking significant amounts of money from taxpayers, then this may also be seen as contributing to the shrinkage of middle class incomes.

Of course, Illinois is not the only state dominated by high Democrat taxes and public sector spending but it serves as a good case study of what Democrats do when they have total control of budgets for decades.

The results are startling. Today, Chicago's public sector unions are underfunded, according to the City itself, by $26.8 billion. This is just the City of Chicago. When the state debt is added, the total amount of debt owed by each Chicago household to the city and state rise, according to the Illinois Policy Institute, to $61,000. SEC Commissioner Gallagher stated the number is $88,000.

Pension payments to Chicago public union employees have become so high that today all the property taxes paid by the households of Chicago go exclusively to pensions. The operating expenses are paid by additional taxes on things from packs of cigarettes, to gasoline, sales tax, and cable TV bills. Given these facts about how Chicago's property taxes are used, it's not surprising that its new Republican governor wants to freeze property taxes to rescue the middle class's paychecks from Democrats.

Illinois Democrats have indentured the taxpayers of the state to turn over historic amounts of their incomes to government, shrinking Illinois' middle class.

All public debt creates taxation and the effects have an impact, sooner or later. The more time allowed for debts to go unpaid, the greater the amount of taxes eventually wasted on interest payments.

Chicago is now the slowest growing of all major cities. In 2014 Chicago only gained 82 people in population. Residents are fleeing Illinois, taking their purchasing power with them. Illinois is also the slowest state to recover from the recession.

Chicago households will have to pay, through taxes, muni bond and unfunded pension debt for decades to come. Far into their lifetimes, and the lifetimes of their children. Zero sum theory is true, but the lion's share of the proof shows that government spending, not private sector investing, takes money from average Americans.

Zero sum theory has been used by Democrats as nothing but a rhetorical tool used to exploit voters' emotions of envy and greed. But in the end, the greed is exercised by Democrats while taxpayers in Illinois find themselves deep into a hole of government-created debt.

The private Illinois Policy Institute has uncovered most of the facts used here, and often had to file FOIA requests. In some cases, they had to take state agencies to Federal court to find out how much they were earning, and how much debt they had accumulated. This is all planned, it is a strategy used by Democrats to con taxpayers into putting them into office; saying they want small class size and to help the elderly; while all along they were secretly passing huge public pension contracts and dumping the cost onto average middle class and poor taxpayers.

These facts show two things. One is that these payments are so high that all Chicago households are under a crushing debt burden that takes many thousands per year away from their household budgets. And secondly, these figures provide an opportunity to measure whether this transfer of wealth from households to public pensioners negatively impacts economic grow. Illinois has the most public debt, the lowest credit rating, and the slowest growth.

Who Really Runs Illinois?

Little or no legislation passes through the Illinois legislature without the approval of Michael Madigan.

Wikipedia notes Madigan has been a House member since 1971, and Speaker in all but two years since 1983.

Chicago Magazine named Madigan the fourth-most-powerful Chicagoan in 2012 and second in 2013 and 2014, calling him "the Velvet Hammer—a.k.a. the Real Governor of Illinois."

Rich Miller, editor of the Capitol Fax Illinois political newsletter, wrote "the pile of political corpses outside Madigan's Statehouse door of those who tried to beat him one way or another is a mile high and a mile wide."

Taxes Not the Answer

The results of Madigan's tenure as the long-serving "real governor" of Illinois are as follows:

Pension holes in the hundreds of billions of dollars
Budget deficits
Corruption
Business exodus
Private taxpayer exodus
High taxes
Shrinking middle class

Tax hikes are clearly not the answer. Illinois has a spending problem, not a revenue problem.

Unfortunately for Illinoisans, other than kowtowing to public union demands, raising taxes is about the only thing Madigan knows how to do.

The results of Madigan's tenure speak for themselves.
Isn't it time to try a new tack?

Here's Where to Start

Bankruptcy legislation to allow municipal bankruptcies
Pass Right-to-Work legislation
Scrap prevailing wage laws
Property tax freeze
Freeze defined benefit pension plans
Pension reform
Fair redistricting
Reform worker's compensation laws

That's a big list of things that needs to be done, and Madigan is on the other side of every one of them.

As I said at the top, Emanuel Fiddles While Chicago Burns.

And at the state level, Madigan Fiddles While Illinois Burns.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Gearing Up for More War in Ukraine?

Posted: 23 Jul 2015 03:31 PM PDT

In spite of near continuous ceasefire breakages on both sides in Ukraine, media has turned its attention elsewhere, especially to Greece and China.

Today I have some Ukraine anecdotes from reader Steven, who lives in Prague. He has family ties to Ukraine. Steven writes ....

Hi Mish,

Here are two forced conscription "recruiting" news items.

Recruiters waited inside the doors of a large bread factory one morning last week as 300 workers were coming in. They checked the worker's documents and gave virtually all the males summons to report to the military.
In Odessa, the head of the Vojnkomat announced that all men between the ages of 20 and 60 are required to visit the recruiting offices! No one will go, of course.

Ukrainians who come to the West to work - usually illegally - are frequently subjected to enormous difficulties.

My new son-in-law, who is 19 1/2, came for our wedding and is trying to stay and work. The military would grab him on his 20th birthday and he wouldn't be permitted to cross the border again if he were to return now!

We found him an unskilled construction job (illegal) in the town of Pisek, CZ. The pay is Kc 90 per hour (unusually good) and the Ukrainian "mafia" employer provided a flat of about 50 sq meters free of charge (also highly unusual) with a few air mattresses.

Nine Ukrainian men live in that small flat. My son-in-law broke his foot on the 9th day. He has no health insurance, of course. The employer has been promising to pay everybody for the first month's work, but keeps postponing his visit.

No one can go to the police because they are working illegally. The expectation is that they will get paid, but you never know.

Steven

Here is a snip translated from Ukrainian on new rounds of forced recruitment. I don't have a link to the original article.

In the Reni, Odessa region of Ukraine, recruiter Igor Skrypnyck ordered men to show up for military service. The order applies to men aged 20 to 60 years who have not yet received a summons. The military commissar also prohibits men from changing their place of residence without notifying the military. Odessa lawyer Oleg Obukhov says the order is legal and not contrary to the Law of Ukraine on mobilization preparation and mobilization.

More War?

This latest expansion in forced recruitment all the way up to age 60 suggests one of two things.

Ukraine is planning another offensive
Ukraine believes the separatists are planning another offensive

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Weekly Unemployment Claims Lowest in 41 Years

Posted: 23 Jul 2015 10:16 AM PDT

Weekly initial unemployment claims fell to the Lowest level Since 1973, perhaps distorted by auto retooling summer shutdowns, or lack thereof.

The number of Americans filing new applications for unemployment benefits last week dropped to its lowest level in more than 41-1/2 years, suggesting the labor market maintained a sturdy pace of job growth in July.

nitial claims for state unemployment benefits fell 26,000 to a seasonally adjusted 255,000 for the week ended July 18, the lowest level since November 1973, the Labor Department said.

However, last week's drop likely exaggerates the strength of the labor market as claims are volatile during summer when automakers usually shut assembly plants for annual retooling.

"We believe that retooling shutdowns were likely much smaller in 2015 than in previous years due to lower auto inventories and very strong vehicle sales," said Cheng Chen, an economist at TD Securities in New York.

As such, that would suggest an acceleration in motor vehicle assembly this month, which would support the struggling manufacturing sector and lift industrial production.

The upbeat growth picture was also supported by another report from the Chicago Fed, which showed its National Activity Index rising to +0.08 in June after five straight months of negative readings. The gain was led by improvements in production and employment related indicators.

That last line is interesting. A rise of less than a tenth of a percent after five straight months of negative readings hardly seems worth crowing about.

Econoday on Weekly Claims

Bloomberg Econoday had this to say on today's Weekly Claims Report.

Auto retooling, and related temporary layoffs, is always a major wildcard for jobless claims in July and are likely at play in a startling 26,000 fall in initial claims in the July 18 week to a 42-year low of 255,000. A look at the 4-week average, which helps smooth out volatility, is less startling, down 4,000 to a 278,500 level that is little changed from the month-ago comparison.

Continuing data, where data lag by a week, also fell, down 9,000 to a new multi-year low of 2.207 million with the 4-week average down 10,000 to a 2.254 million level that is also little changed from a month ago. The unemployment rate for insured workers is steady at a very low 1.6 percent.

This report will raise talk of an upside surprise for the monthly employment for July where the sample week is the same as that for the latest initial claims data. Nevertheless, jobless claims data are hard to read at this time of year and there's no guarantee of similar strength for the monthly report.

Jobless Claims

Economists are now upbeat about the July Jobs report due out on August 7. We will find out soon enough.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What's the Rise in People Without Fulltime Employment Since 2009? What "Should" It Be?

Posted: 23 Jul 2015 12:04 AM PDT

Reader Roger asked me "What is the total number of people without full time work, compared to Jan 2009?"

That's actually an easy number to calculate. The problem is the number is totally misleading. First let's answer the question straight up.

Those Not Working Full Time

The above very scary-looking chart shows the civilian noninstititional population minus those usually working full time.

Noninstitutional means those over the age of 16, not in prisons, mental institutions, etc.

The current noninstitutional population is 129.61 million. At the beginning of 2009 it was 118.92 million and at the start of the recession in November of 2007 it was 111.06 million.

Since the beginning of the recession, the rise in the number of people not working fulltime is 18.55 million.

Calculation Discussion

The first problem with the above chart is that it fails to account for demographics. There is a huge rise in population as well as huge rise in boomer retirement.

Moreover, over time, there has been a legitimate rise in the number of people going to college after high school graduation.

Brief Word on the Unemployment Rate

As pertains to the much ballyhooed declining unemployment rate, there is also a non-insignificant number of people in college who really would rather be working.

Add to that, millions of people who would rather be working, but are not counted as unemployed because they stopped looking for a job.

That is why many, myself included, believe the unemployment rate is a joke.

Proper Comparison

To properly address Roger's question, one needs to factor in

Normal retirement age (say 65)
Rise in population
Relative rise in non-fulltime employment vs. the rise in population

The problem in producing the proper calculation is insufficient data. The St. Louis Fed repository (named Fred), that I used to easily create the above chart, does not have the data.

Not even the BLS has the data we need to properly answer the question. Information on the critical age group 55 to 64 is scant or missing.

However, we can look at age group 16-54 or 25-54 for meaningful comparisons. I selected the latter because it filters out the rising trend of people going to college.

Using BLS data, I produced the following charts.

Not Working Full Time - Age Group 25-54

click on chart for sharper image

A big hat tip goes to Calculated Risk for an example of how to add recession bars. These are the first charts in which I incorporated the idea.

Note the rise over time in this series. Also not the spikes during recessions. The intra-year patterns are because I used non-seasonally adjusted data (that's all that is available).

In regards to non-seasonally-adjusted data: Every year, there are more people working in November and December than January and February. Some hate seasonal adjustments but in general I have no problems with the concept. The charts would be smoother with seasonally-adjusted data, but it's not available.

Regardless, the overall trends are easy to spot.

In November of 2007, at the start of the recession, there were 36.65 million people in age group 25-54 who were not working full time. There are now 40.12 Million, a rise of 3.47 million.

However, that too, is a misleading number. It does not properly factor in population shifts. The following chart addressed the above problem by looking at rise and declines on a percentage basis.

Percentage of People Aged 25-54 Not Working Full Time

click on chart for sharper image

Key Dates and Percentages

32.08% June 2015
28.57% November 2007
26.88% April 2000
28.49% June 1990

The all-time low in this series is 26.88% in April of 2000. That coincides with peak entry of women in the work force coupled with the top of the internet boom.

The pre-recession levels in 2007 and 1990 were around 28.5%. If one uses 28.5% as a measure of normalcy, then in percentage terms we are still about 3.58 percentage points too low in fulltime employment.

If one uses the record low 26.88% as a target, then we are about 5.2 percentage points lower in fulltime employment than we should be.

How Much Lower is Fulltime Employment Than It Should Be?

With the above percentages, we can do the math.

The 25-54 population is 125,085,000.
3.58% of 125 million is roughly 4.48 million.
5.20% of 125 million is roughly 6.50 million.

In the age 25-54 demographic, this recovery lags somewhere between 4.5 and 6.5 million fulltime jobs.

Note that is just age group 25-54.

I am confident age groups 55-62 and 55-64 lag in fulltime employment as well, but I do not have the data to prove it.

We can make similar comparisons about those not working at all (i.e. "real" unemployment) and I will tackle that a bit later.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com