Home Refinance Calculator

Thursday, September 24, 2015

Mish's Global Economic Trend Analysis

3rd Quarter GDP Now Forecast Ticks Down to 1.4%
Why I'm Never Going to "Two-Bit" China
Durable Goods Orders Decline 2%, Led by Transportation; QE Bounce Effect is Over; Recession on the Way?
Japan Manufacturing PMI Borders on Contraction as New Export Orders Plunge

3rd Quarter GDP Now Forecast Ticks Down to 1.4%

Posted: 24 Sep 2015 01:04 PM PDT

The Atlanta Fed GDPNow Forecast model ticked slightly lower today following recent economic reports.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.4 percent on September 24, down slightly from 1.5 percent on September 17. The decline occurred on Monday when the model's forecast for third-quarter real residential investment growth fell in response to the existing home sales release from the National Association of Realtors.

I thought today's Durable Goods report (see Orders Decline 2%, Led by Transportation; QE Bounce Effect is Over; Recession on the Way?) would have knocked a tick or two off the model forecast, but it was actually existing home sales that did it.

Mike "Mish" Shedlock

Why I'm Never Going to "Two-Bit" China

Posted: 24 Sep 2015 11:01 AM PDT

I would never go to China, even if someone paid for the trip and all expenses.

My reason can be explained in one headline: China Arrests US Citizen for 'Endangering National Security'.

An American businesswoman has been formally arrested in China on suspicion of "endangering national security" just days before Chinese President Xi Jinping arrives in the US for his first official state visit.

Phan Phan-Gillis, 55, who also uses the name Sandy, disappeared in late March while traveling as part of a delegation made up of local officials from her home town of Houston, Texas.

Her husband, Jeff Gillis, told US media he later discovered she had been detained by China's Ministry of State Security and that she was suspected of espionage and stealing state secrets.

Judging from news reports and corporate websites, Ms Phan-Gillis has been an active promoter of Sino-US ties.

During her trip to China in March she identified herself as executive president of the America Asia Trade Promotion Association (AATPA) and president of the Houston Shenzhen Sister City Association.

Missing Since March

Gillis went missing on March 19. We are only hearing about it just now because her husband was afraid publicity might jeopardize her chances of being released.

Since then, he has awakened to reality: He is at the mercy of merciless, corrupt Chinese leaders.

As noted by the Financial Times, "In China the definition of state secrets is broad and vague and often encompasses things that would be considered public information in other countries. Authorities regularly detain foreign citizens they suspect of spying but ethnically Chinese foreign citizens are far more likely to be held and charged."

Reader Questions

When I write about China I frequently get comments along the lines "What do you know about China? Have you ever been there?"

In the not-so distant past, such questions were accompanied by comments like "China is booming. Have you seen all the building cranes? They are everywhere. Every city is expanding ..."

My reply was along the lines of "There were cranes all over Florida as well, right before US real estate collapsed."

Now reports of vacant cities, malls, and corruption are all over news about China. Capital flight is the order of the day. China has to prop up the yuan or it might sink.

One does not need to go to China to see the pollution or understand the untenable fraud inherent in its massive State Owned Enterprise (SOE) schemes.

National Security Risk

I am an outspoken critic of planned government, GDP lies, pollution, and in general everything associated with China's corrupt central planning model.

It is questionable whether I could last a day without being arrested.

In regards to Gillis, I have to ask: WTF was a delegation from Houston in China for in the first place? Most likely it was a taxpayer boondoggle.

Regardless, Gillis was no more danger to China's "national security" than I am. But that's the problem, isn't it?

I do not get to decide, nor does an unbiased jury get to decide what constitutes "national security". In China, some unelected Communist bureaucrat attempting to prop up his regime gets to decide what constitutes not only national security, but anything and everything else.

If the state decides to burn Gillis at the stake, then that's precisely what will happen.

How China is Ruled

The BBC explains "How China is Ruled".

The Chinese Communist Party has ruled the country since 1949, tolerating no opposition and often dealing brutally with dissent.

The country's most senior decision-making body is the standing committee of the politburo, heading a pyramid of power which tops every village and workplace.

Politburo members have never faced competitive election, making it to the top thanks to their patrons, abilities and survival instincts in a political culture where saying the wrong thing can lead to a life under house-arrest, or worse.

Two-Bit China

The idea that a centrally planned communist country will soon be the preeminent economic power and its currency the world's reserve currency is laughable.

No one in their right mind believes Chinese growth estimates. And much of the growth we do see is nothing but malinvestment. China does not have a large, open, or liquid bond market that a global reserve currency requires. Heck, China dare not even float the yuan.

As noted above, those in China better be careful about what they say. Anyone who bothers to bluntly speak the truth, like I just did, would not last a day in China.

China may be a big economic power, but at the heart of it all, China is nothing but a two-bit, scandalous, central planning dictatorship when it comes to property rights, human rights, freedom of speech, and freedom of press.

Those who gloat over China's miracle growth and think the yuan will soon supplant the US dollar are mistaken on both counts.

Mike "Mish" Shedlock

Durable Goods Orders Decline 2%, Led by Transportation; QE Bounce Effect is Over; Recession on the Way?

Posted: 24 Sep 2015 08:45 AM PDT

Those looking for "lift off" material for Fed hikes will not find it in the latest Durable Goods report from the US Department of Commerce.

Durable Goods orders declined 2.0% in line with Bloomberg Consensus Estimates, but details and year-over-year numbers weak.

Transportation equipment, specifically aircraft orders, are once again skewing durable goods orders which fell 2.0 percent in August as expected. Excluding transportation, durable goods were unchanged which is slightly lower than expected. Weakness here in part reflects a pause for core capital goods as nondefense ex-auto orders slipped 0.2 percent following two prior months of very solid growth.

Looking at transportation equipment, both aircraft and motor vehicles were weak. Orders for civilian aircraft fell 12 percent in the month while vehicle orders fell 1.5 percent. Vehicle shipments were down 1.6 percent but follow July's big 4.7 percent surge.

Total shipments were flat in the month but follow solid gains in July and June. Core capital goods shipments, like orders, slipped 0.2 percent but also follow prior gains. Still, the dip in core shipments will not be lifting third-quarter GDP estimates. Factories held inventories unchanged in August and worked off backlog orders slightly, down 0.2 percent.

Shipments and Orders Current vs. Prior

The transportation decline was expected. The decline ex-transportation was not expected.

Also note the revision to last month's ex-transportation number. These numbers certainly will not add to third quarter GDP estimates.

Durable Goods New Orders

Durable Goods New Orders vs. Year Ago

Note the over-sized effect that transportation has on order. Yet the picture is not pretty even when transportation is excluded.

Durable Goods New Orders vs. Year Ago Detail

Recession on the Way?

The effect of QE, and central bank stimulus in general, is over (assuming it was ever really in play in the first place).

If the strength in autos is over, and I suppose a global scandal on Volkswagen would mark a fitting top, then recession cannot be too far off.

Mike "Mish" Shedlock

Japan Manufacturing PMI Borders on Contraction as New Export Orders Plunge

Posted: 24 Sep 2015 02:54 AM PDT

Japan's Manufacturing PMI is still growing, but barely.

Key Points

Flash Japan Manufacturing PMI™ at 50.9 (51.7 in August). Operating conditions improve at slower rate.
Flash Japan Manufacturing Output Index at 51.4 (51.1 in August). Growth in production little changed from August's modest pace.

Markit Comment

Amy Brownbill, economist at Markit, which compiles the survey, said: "September PMI data pointed to a general slowdown in the expansion of the Japanese manufacturing sector. New order growth moderated, having increased in August at the fastest rate since January. Underpinning the slowdown in total new order growth was a sharp reduction in international demand as new export orders dropped to the greatest extent for 31 months. A number of panelists blamed a fall in sales volumes from China leading to a decrease in new exports. Subsequently, employment levels declined for the first time since March."

Japan PMI Charts

Treading Water

Japan is clearly treading water here as 50 is the break-even rate. Right now it looks like China will pull Japan down with it. And what about prices?

Glad you asked.

Both input and output prices are back in negative territory. Wasn't Abenomics supposed to cure that problem?

Indeed it was, not that it posed any real problem though. The only problem is going into debt to fight deflation. All you get out of it is more debt.

Mike "Mish" Shedlock

Wednesday, September 23, 2015

Mish's Global Economic Trend Analysis

LA Pledges $100 Million to Fight Homelessness: Why Stop There? Why Not $1 billion? Why Not $20 Billion?
Chicago Tax Collector Hath Arrived With Massive Tax Hike: Emanuel Says "No Stone Unturned ... Not Done Yet"
Bubble Debate; Equity Allocations vs. Shiller PE; Simple World

LA Pledges $100 Million to Fight Homelessness: Why Stop There? Why Not $1 billion? Why Not $20 Billion?

Posted: 23 Sep 2015 02:33 PM PDT

Public Emergency

In yet another example that proves economic stupidity has no bounds, Los Angeles Puts $100 Million Into Helping Homeless.

Flooded with homeless encampments from its freeway underpasses to the chic sidewalks of Venice Beach, municipal officials here declared a public emergency on Tuesday, making Los Angeles the first city in the nation to take such a drastic step in response to its mounting problem with street dwellers.

The spending proposal will need to be approved by the City Council and allocated by its Homelessness and Poverty Committee. The $100 million figure was chosen in part for its symbolism, said Herb J. Wesson Jr., the City Council president, to show county, state and federal officials that the city was willing to make a significant contribution to an urgent problem.

"Encampments used to be contained to Skid Row, where city officials would try to control or ignore them," said Gary Blasi, a law professor at the University of California, Los Angeles, who has studied homelessness in the region for years. "Plans have been made, and never made it off the paper they're written on. It's not clear what will be delivered. And do the math here — it doesn't amount to much at all."

In New York, Mr. Blasi said that hundreds of existing housing vouchers went unused because homeless people could not find landlords who would accept them.

Ding Ding Ding

Ding, ding, ding, we have a math winner!

I am not quite certain if Blasi is arguing for more or less spending, but he is the first person other than me, that I am aware of, to bring math into the equation.

LA vs. EU

Question of the day: Other than a sense of scale, is the homelessness crisis in Los Angeles that much different than the refugee crisis in Europe?

Unlimited Demand for Free Services

In LA, as in the EU, there is a virtually unlimited demand for free food, free shelter, and free services.

Offer $100 million and the need will grow overnight to $1 billion. Offer $1 billion and the need will grow overnight to $20 billion.

Offering free food, free services, and free shelter cannot possibly cure a problem caused by free services, especially in a desirable temperate climate.

Blasi says: "Do the math here — it [$100 Million] doesn't amount to much at all."

On Tuesday, in regards to Europe (but it may just as well have been LA), I wrote EU Ministers Ram Through Quota Plan; Mish Does "The Math" .

By all means, let's have a math discussion.

Mike "Mish" Shedlock

Chicago Tax Collector Hath Arrived With Massive Tax Hike: Emanuel Says "No Stone Unturned ... Not Done Yet"

Posted: 23 Sep 2015 11:05 AM PDT

On May 4th I wrote Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering.

Six months ago, Chicago Mayor Rahm Emanuel warned that without state legislation to modify the structure of police and fire pensions and implement a "smart funding formula," Chicago property tax bills would "explode" in 2016.

Today I report, the tax man hath arrived.

Mayor Rahm Emanuel says Now is the Time to Hike Taxes.

The "explosion" that Emanuel warned about in mid-March hit Chicago Tuesday as the mayor unveiled his $7.8 billion budget for 2016, and it wasn't pretty — even with the risky assumption that Gov. Bruce Rauner will sign legislation giving Chicago 15 more years to ramp up to 90 percent funding of police and fire pensions.

Emanuel's $712 million package of tax and fee hikes includes a four-year $588 million property tax increase for police and fire pensions and school construction; a $9.50-a-month garbage collection fee; $13 million in higher fees for building permits; a $1 million tax on e-cigarettes and $48 million in fees and surcharges on taxicabs and ride-sharing services that have siphoned business away from them.

The phased-in property tax increase would be the largest in Chicago history. Even so, the garbage fee has emerged as the biggest lightning rod — and Emanuel fully understands why.

It's a new fee for a service many homeowners believe, "is kind of baked in" to the normal property tax bill that would add $114 to the annual cost heaped on 613,000 Chicago owners of single-family homes, two-, three- and four-flats that still get city pickups. Senior citizens would get a 50 percent discount.

Emanuel said the dire alternative to a property tax increase is 2,500 police layoffs, 2,000 fewer firefighters, 48 fire station closings and twice-a-month garbage collection, instead of weekly pickups.

[Alderman Will] Burns agreed there is simply no other way out, but to place the burden squarely on homeowners — with both the $588 million property tax increase and the garbage collection fee.

"I am out of magic beans and magic pixie dust," Burns said.

Dire Predictions

The Chicago Tribune reports Emanuel Paints Dire Future Without Record Property Tax Hike.

Mayor Rahm Emanuel called on the city's 50 aldermen Tuesday to summon the courage to pass the largest property tax increase in modern Chicago history, and told them they could sell it to voters by painting a dire, if not quite dystopian, alternative.

If Emanuel cut the budget instead of raising taxes, then one out of five police officers would be dismissed. Half the fire stations shuttered. Rats would overrun graffiti-ridden alleys filled with overflowing Dumpsters as the city stopped rodent control and trash got picked up just twice a month. Streets would be riddled with even more potholes and little money to fix them.

"Our city would become unlivable," Emanuel said. "That would be totally unacceptable."

The reception was tepid, and at one point Emanuel had to repeat an applause line before the hand-clapping commenced.

The political reality is this: Emanuel is asking aldermen to put their jobs on the line and vote for a massive property tax hike while the mayor himself has not decided whether he too will face the voters again. Even if Emanuel does seek a third term, he has taken a step many politicians take: stack all the unpopular tax hikes and fee increases in the first year of the new term, the one furthest away from the next election.

Not Done Yet

Chicagoans beware! Emanuel explicitly warned he's "not done raising property taxes".

Emanuel also pledged "No Stone Unturned".

"We are going to address our challenges, and I think when the governor looks at the whole budget he will see that we didn't leave any stone unturned. It is fair, it is equitable. It's progressive," said Emanuel.

Not Fair, Not Equitable

What are taxes for if not services like garbage pickup, street sweeping, etc? The answer of course is untenable police, fire, and school pensions.

Yes, it's "progressive" all right, "progressive idiocy". Emanuel did not do, nor has he ever done anything to fix the structural problems.

The proper way to fix the school problem is for the school district to declare bankruptcy, a tactic Emanuel does not want to take.

Actually, the school district cannot take that action because Illinois does not allow municipal bankruptcies. However, if the mayor were behind the idea, it would likely pressure the Illinois legislature into action.

Emanuel claims he is being courageous. Passing tax hikes immediately after an election is not courageous. Admitting the school system is broke, unions are the reason, and taxpayers should not bear the brunt of the costs would be courageous.

Emanuel is both a coward and a pickpocket. With his dire warning about Chicago becoming unlivable, he is also a fear monger.

There is one thing you can count on, however. Emanuel is not yet done picking the pockets of Chicagoans. When Emanuel promised, "no stone unturned" you can bet your last tax dime on that.

Mike "Mish" Shedlock

Bubble Debate; Equity Allocations vs. Shiller PE; Simple World

Posted: 23 Sep 2015 01:16 AM PDT

Yale University market scholar Robert Shiller entered the bubble debate last week as noted in the Financial Times article Fears Grow Over US Stock Market Bubble.

The Nobel economics laureate told the Financial Times that his valuation confidence indices, based on investor surveys, showed greater fear that the market was overvalued than at any time since the peak of the dotcom bubble in 2000.

"It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market," he said.

Prof Shiller added there was no historical evidence for a link between interest rates and share prices. "You would think that when interest rates are higher people would sell stocks, but the financial world just isn't that simple."

He defended his now famous measure of valuation, often referred to as the Cape (for cyclically adjusted price/earnings multiple), which compares share prices to average earnings over the previous 10 years. This adjusts for the cyclicality of earnings.

Mr Shiller pointed out the fall in earnings in 2008 came as part of a severe recession. "Companies like to take write-offs right away during a recession. Then their earnings can recover from there. If I average over 10 years I don't see that as a problem. The average includes the actual losses that companies have made."

He said changing accounting standards could create difficulties for his model but added: "I think we're better off with changed accounting standards than if we ignored all the changes that happened since 1871."

Equity Allocations vs. Shiller PE

Michael Green at Ice Farm Capital emailed the above chart as well as the reference to the Financial Times article.

The chart shows equity allocations on the left axis vs. the Case-Shiller smoothed PE ratio on the right.

It is based on Ice Farm analysis using Shiller's and Fed Flow of Funds data.

Simple World

I had seen the Shiller piece before, but something caught my eye when I read it a second time.

"You would think that when interest rates are higher people would sell stocks, but the financial world just isn't that simple," said Shiller.

I am a big fan of Shiller's model. However, the above statement makes no sense because quite frankly, what Shiller suggests is impossible!

Simple Math

Here's a simple economic truism: Someone must hold every equity share and every bond 100% of the time.

In aggregate, it's impossible for people to sell stocks to buy bonds when interest rates are high (or vice versa). For every buyer of common stock there is a seller. Likewise, for every buyer of bonds there is a seller.

Sentiment can change (and pricing with it), but because of simple math, if there was an aggressive sentiment shift towards getting out of stocks in favor of high-yielding bonds, then bond yields would plunge.

At an individual level one can make changes, but at an aggregate level it is impossible.

Thus, the financial math is indeed simple. It's the timing of sentiment changes that makes it difficult for the individual and impossible for the aggregate investor.

Stocks vs. Bonds

Individually, one can sell stocks to buy bonds or vice versa. But what about the possibility that neither is the place to be?

Seven-Year Asset Class Real Return Projections

As of 2015-08-31 (posted on September 15), GMO sees things like this:

Purple highlights mine.

I like to repeat GMO's disclaimer so I do not misrepresent the chart.

*The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward‐looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forwardlooking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Care to Trade?

Care to trade US stocks for US Bonds?

If so, be prepared to trade negative 1.1% real returns in equities for negative 0.9% returns in US bonds.

If that were for a single year, no one would care. But that is the forecast every year for the next seven years on average.

In practice, it will not happen that way. For example, there easily could be a 40% plunge over the next year or so followed by a slow trudge sideways for three years then a rally back to where we are today over the next two years.

The possibilities are endless, that's just one example.

Note that GMO "real" returns assume mean reversion to 2.2% inflation over the next 15years. Nominal returns could be slightly better or worse, depending on how quickly the 2.2% inflation target is hit.

Pension Plan Assumptions

In general, pension plans assume 7.5% or so returns every year. Many pension plans, especially those in Illinois will be close to bankrupt if GMO's forecast is in the ballpark.

I personally think GMO is somewhat optimistic. I expect negative real returns for about 10 years.

Mike "Mish" Shedlock

Tuesday, September 22, 2015

Mish's Global Economic Trend Analysis

China Manufacturing PMI Sinks to 78 Month Low
Rate Hike Odds Shift to March 2016
EU Ministers Ram Through Quota Plan Over 4 Objections; Fairy Tale Material; Mish Does "The Math"
Richmond Fed Region Unexpectedly Bad; New Orders, Backlogs, Workweek Plunge
Fed Household Spending Survey Projections in Firm Downtrend

China Manufacturing PMI Sinks to 78 Month Low

Posted: 22 Sep 2015 11:12 PM PDT

If you think a global economic rebound is just around the corner, then please note China Manufacturing PMI is in contraction, and at a 78 month low.

Key Points

Flash China General Manufacturing PMI at 47.0 in September. 78-month low
Flash China General Manufacturing Output Index at 45.7. 78-month low

In support of the idea that economic cheerleaders are nearly everywhere one looks ...

Commenting on the Flash China General Manufacturing PMI™ data, Dr. He Fan, Chief Economist at Caixin Insight Group said:

"Overall, the fundamentals are good. The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices. Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front. Patience may be needed for policies designed to promote stabilization to demonstrate their effectiveness."

Good Grief

Mike "Mish" Shedlock

Rate Hike Odds Shift to March 2016

Posted: 22 Sep 2015 04:38 PM PDT

Today we saw another stock market decline and yet another shift further away from rate hikes this year.

I put this table together from CME FedWatch data.

FOMC Meeting Date	No Hike Probability on Sep 22	No Hike Probability on Sep 21
28-Oct-15	88.5	86.2
16-Dec-15	64.5	56.2
27-Jan-16	55.3	45.4
16-Mar-16	40.3	33.1

The above table is a bit simplified because there is a chance of hikes higher than a quarter point. However, I believe it is safe to discount multiple hikes until we at least see the first one.

December 16, 2015 Probability

January 27, 2016 Probability

As noted in the table at the top, one has to go all the way to March 16, 2016 before the Fed Fund Futures imply a quarter point hike.

Also, and as I have pointed out before, when the Fed does move, there is no good reason to assume the first hike will be to the range 0.25% to 0.50% from the current 0.00% to 0.25%.

Even if the Fed sticks with quarter-point ranges, the first hike (assuming there is one), may very well be to 0.125% to 0.375.

That range would give the Fed a quarter point to play with and it would change the implied "no-hike" odds. The key point now however, is the increasing chance there is no hike at all.

Mike "Mish" Shedlock

EU Ministers Ram Through Quota Plan Over 4 Objections; Fairy Tale Material; Mish Does "The Math"

Posted: 22 Sep 2015 01:02 PM PDT

EU Solidarity has splintered widely as Ministers Ram Through Refugee Quota Plan over the objections of numerous countries.

EU interior ministers on Tuesday imposed a plan to relocate 120,000 refugees across the EU, outvoting four eastern European countries strongly opposed to the scheme.

The use of majority voting to push ahead with the burden-sharing scheme — regarded as politically unacceptable in some capitals — is a rare move in a bloc that typically acts by consensus on sensitive issues. It is certain to amplify tensions over the migrants crisis.

Slovakia's Robert Fico was defiant, saying he would not be bound by the decision. "As long as I am prime minister, mandatory quotas will not be implemented on Slovak territory," he told MPs in Bratislava.

Milan Chovanec, the Czech interior minister, tweeted that the policy would not work: "Soon we will find out that the emperor has no clothes. Reason lost today."

EU diplomats said Hungary, Slovakia, Romania and the Czech Republic voted against the plan, with Finland abstaining, but they were unable to stop its proponents, led by Germany and France.

Syrian, Iraqi and Eritrean asylum-seekers would qualify for the programme, but the logistics of how they will be distributed are still to be worked out.

Jean Asselborn, the Luxembourg minister who chaired the meeting, said ministers "would have preferred to have an agreement by consensus", but said the EU expected the objectors to abide by the redistribution plan, as required under EU law.

Fairy Tale Material

The statement by Asselborn that the "EU expected objectors to abide by the redistribution plan, as required under EU law" is fairy tale material given statements by the Czech Republic and Slovakia and actions by Hungary.

Actions Speak Loudly

On Monday evening, Hungary, a transit country, stepped up its confrontational approach, passing a law that allows the army to use rubber bullets, tear gas and nets against migrants. Viktor Orban, prime minister, warned that the flow of people was "breaking the doors down on top of us". Budapest has previously taken steps to close its borders with Serbia, Croatia and Romania to try to stop the flows of migrants.

"The Math"

The Financial Times noted that another 3,000 to 4,000 migrants hit Greece every day. But there is no work in Greece and no money either. Ranko Ostojic, Croatia's interior minister, said he would call on Athens to stop moving Middle Eastern refugees to other parts of the EU.

Excuse me for asking the obvious, but what the hell is Greece supposed to do with an influx of three to four thousand refugees a day but pass them on?

And please do the math on that. 3,000 times 30 is a rate of about 90,000 a month. 4,000 times 30 is 120,000 refugees a month.

The EU imposed a plan to relocate 120,000 refugees over the course of a year. Its plan will cover the inflow for a month or so.

What then?

As I have stated numerous times, there is an unlimited demand for free services. And please bear in mind there are some 4 million refugees waiting in the wings in Turkey, Lebanon, and other places.

Potential EU Refugees

The Mercy Corp provides this map to consider.

Map updated as of September 2015.

More Math

Counting just those in Turkey and Lebanon, there is a potential for another 3,111,752 refugees who may find free handouts from Germany and Sweden to their liking.

If just 1/4 of them try, that's another 778,000 or so. Make it easy enough, and hand out enough free food, shelter, and services, and every one of them would jump at the chance.

We are not talking about 120,000 a year. Rather we are talking about the possibility of relocating 3,111,752 refugees over the course of a year. That would be about 259,000 a month for a full year. Needless to say, quotas cannot possibly work.

Question of the Day

How is it that the EU nannycrats cannot figure out this simple math? Or have they figured it out but simply do not care, hoping it will solve the alleged "deflation problem" or further some ridiculous socialist goal?

Mike "Mish" Shedlock

Richmond Fed Region Unexpectedly Bad; New Orders, Backlogs, Workweek Plunge

Posted: 22 Sep 2015 11:29 AM PDT

The already bleak manufacturing reports took another step for the worse today as evidenced by the Fifth District Survey of Manufacturing Activity by the Richmond Fed.

Volume of new orders, backlog of new orders, capacity utilization, and average workweek have crashed making the report details far worse than the headline reading.

Nonetheless, manufacturers remain optimistic.

"Producers anticipated positive business conditions for the six months ahead. They continued to expect steady growth in shipments and in the volume of new orders. The indexes for expected shipments and new orders strengthened to readings of 48 and 42, respectively."

It's been amusing watching the look ahead projections in these reports. They have been consistently wrong for months on end.

Economists Overoptimistic Too

Manufacturers and economists alike have been overoptimistic about manufacturing. The Bloomberg Consensus reading for the Richmond Fed region was for a strengthening to +3.

Early indications on the September factory sector are negative and now include a minus 5 headline from the Richmond Fed. New orders, unfortunately, are even more deeply in the negative column at minus 12 which points to even weaker activity in the months ahead. Shipments are already in the negative column for a second straight month at minus 3. And manufacturers in the region have already worked down their backlogs to keep up production with backlogs in deep contraction at minus 24 and minus 15 the last two months. Employment is in the plus column but just barely at 3 and it won't stay there for long if orders and production continue to weaken. Price readings are moderating further to round out an unpleasant picture of unexpected slowing.

More regional reports will be out in the next week or so. There is no reason to expect any of them to be good.

Mike "Mish" Shedlock

Fed Household Spending Survey Projections in Firm Downtrend

Posted: 22 Sep 2015 02:43 AM PDT

Fed Survey of Households

Every month the New York Fed interviews a rolling group of 1200 people to produce a detailed Survey of Consumer Expectations.

Interested parties can download the Survey Questionnaire PDF.

The Fed states:

Where existing surveys look at consumer sentiment and the decisions households make, their coverage of household expectations is limited; the Survey of Consumer Expectations seeks to collect information on a wide variety of consumer expectations – including inflation, future earnings, household income, house prices, access to credit, layoff risk and reemployment prospects, and US economic conditions overall. Through a set of quarterly special surveys it also aims to focus in depth on special topics such as household finances as well as labor and housing market issues and outcomes.

NY Fed - One Year Look Ahead Spending Survey Projections

click on chart for sharper image

Projections

High-end spending projections have been slowly drifting lower for quite some time, but the decline became more noticeable about a year ago.
Median spending projections took a sustained turn for the worse in December of 2014.
Low-end spending projections took a sustained dive starting November of 2014.

Given the Fed places so much faith in various consumer confidence numbers, I have a simple question: Why don't they believe their own survey?

Mike "Mish" Shedlock

Monday, September 21, 2015

Mish's Global Economic Trend Analysis

Existing Home Sales Down 4.8%, Decline More Than Expected; "Still Healthy and Trending Higher" Says Bloomberg - Let's Investigate

Posted: 21 Sep 2015 12:56 PM PDT

Existing Home Sales Decline More Than Expected

Existing home sales in August dipped 4.8% month-over-month to a seasonally adjusted rate of 5.31 million units.

Although a decline of 1.7% was anticipated, the actual number was below any estimate in the Bloomberg Consensus Range of 5.4 to 5.6 million.

Though slowing in August, existing home sales are still healthy and trending higher. Existing home sales came in at a lower-than-expected 5.31 million annual rate in August which is the lowest since April. July was revised down just slightly but is still an 8-year high at 5.58 million. At 6.2 percent, growth in year-on-year sales is the lowest since February. The year-on-year median price, up only 4.7 percent to $228,700, is the lowest since August 2014. The report cites no special reasons behind August's softness, but notes that it follows prior strength, in fact six months of strength.

With the in dip sales, supply relative to sales is less tight, at 5.2 months from 4.9 months in the prior two months. But there's still a lack of homes on the market, evidenced by a comparison with the year-ago supply at 5.6 months.

Details show high mid-single digit declines across regions except the Northeast where the August sales rate was unchanged. Year-on-year, data are very well balanced with high mid-single gains for all.

Despite low mortgage rates and soft prices, the housing sector isn't exactly on fire. Watch for FHFA house prices on tomorrow's calendar, which are expected to rise, and also for new home sales on Thursday which are also expected to rise.

Still Healthy?

What caught my eye in the analysis was the statement by Bloomberg that sales were "still healthy and trending higher." Let's investigate that claim two different ways.

Existing Home Sales in Number of Units

click on any chart for sharper image

For several years prior to and shortly after the 2001 recession, existing home sales were trending at about 5.2 million units at a seasonally-adjusted annualized rate.

During the bubble years, existing home sales rose as high as 7.26 million homes in September of 2005. In July of 2010, sales fell to 3.45 million units, less than half of the peak bubble rate.

Home sales are now back to about where they were between January 1999 and August 2002.

Existing Home Sales in Number of Units Population Adjusted

In the above chart, I take the civilian noninstitutional population into consideration.

The civilian noninstitutional population is defined as people 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (penal, mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

On a population-adjusted basis, the number of units sold per thousands of people was pretty steady at about 25 units from 1999 to August 2002. It hit a bubble peak of 32 in September of 2005 and crashed to 14.5 in July of 2010.

For August, the number is 21.15 per 1,000 people, a significant gap to years just prior to the housing bubble.

Trending Higher or Chopping Around?

In the second chart I was pretty generous to Bloomberg in reference to the idea that existing home sales are trending higher.

There was certainly a clear trend between July 2010 and July 2013. Since then, existing home sales have mainly been chopping around sideways.

It's often easy to play games with trend lines to support one's view.

Mike "Mish" Shedlock

Millennials Surpass Boomers: Why are They Still in the Basement? Eight Reasons; Attitudes and Pendulums

Posted: 21 Sep 2015 06:07 AM PDT

Millennials Overtake Boomers

According to Pew Research Millennials will overtake Baby Boomers this year.

This year, the "Millennial" generation is projected to surpass the outsized Baby Boom generation as the nation's largest living generation, according to the population projections released by the U.S. Census Bureau last month. Millennials (whom we define as between ages 18 to 34 in 2015) are projected to number 75.3 million, surpassing the projected 74.9 million Boomers (ages 51 to 69). The Gen X population (ages 35 to 50 in 2015) is projected to outnumber the Boomers by 2028.

Why are So Many Millennials Still in the Basement?

Bloomberg has some interesting charts and commentary in its report Here's Evidence That Millennials Are Still Living With Their Parents.

In 2015, 15.1 percent of 25 to 34 year olds were living with their parents, a fourth straight annual increase, according to an analysis of new Census Bureau data by the Population Reference Bureau in Washington. The proportion is the highest since at least 1960, according to demographer Mark Mather, associate vice president with PRB.

The tough job market for young people since the recession ended in June 2009 is also contributing to a lower mobility rate. Adults under 30 are typically the most mobile part of an American workforce, constantly on the move since the 19th century. That mobility has been seen as a key advantage of the flexible U.S. labor market compared with places like Europe.

The latest Census data show just 3.1 percent of Americans from 25 to 29 relocated in the last year between states, just half the share of 2002. While moves between counties in the same state — less likely to be for jobs — have increased some, they too remain below pre-recession levels, according to PRB's analysis.

Goldman Sachs economists, who examined the phenomenon of "kids living in the basement" in an August report, found a few reasons to explain it.

Millennials, the 82 million people born between 1981 and about 2000, have been plagued by chronic underemployment since the recession — consider the college grad working as coffee barista — and rising student debt is proving to be a lasting burden.

"Above-average youth underemployment rates alone account for about one-third of the increase in the share of young people living with their parents, and lagged effects of the recession probably account for a bit more," Goldman's David Mericle and Karen Reichgott wrote.

Goldman Sachs just touched on the reasons. I think we can do much better. Let's expand the list.

Eight Reasons Millennials Living With Parents

Student debt
Soaring Tuition Costs
Unaffordable home prices
Shrinking real earnings
Participation rate of those aged 25-34
Demographics of aging
Changing attitudes towards debt
Changing attitudes towards family formation

Student Debt

Problem number 1, student debt is well understood.

But note that the trend towards living at home started rising sharply in 2000, well before the 2007 recession and well before the current student debt crisis. We must go well beyond student debt to explain the trend.

Tuition

The trend towards living at home took a sharp jump higher just as tuition costs, went through the roof.

Chart from Doug Short's Thoughts on Student Debt.

What else happened in the 2000-2002 time frame?
The answer is home prices went through the roof.

Real Home Prices

The above from Doug Short at Advisor Perspectives.

Home Prices vs. Owners' Equivalent Rent

The above chart from my article Housing Prices, "Real" Interest Rates, and the "Real" CPI.

Now let's look at real earnings, not just jobs.

Here are some snips from my article Real Median Earnings for Men at 1971 Level, Women at 2001 Level

Earnings of Men vs. Women - Fulltime Workers

Earnings Progress

The female-to-male earnings ratio is at an all-time high of 79 percent
Real median earnings of male fulltime workers is at a 1971 level
Real median earnings of female fulltime workers is at a 2001 level

By the way, those "real earnings" numbers assume you believe the government's measure of inflation. Note that the CPI does not reflect home prices or property taxes, and is at best a crude, inefficient, measure of prices.

Participation Rate

Those aged 18-24 typically do not buy houses and more millennials than ever before are in school. But let's remove school from the equation by looking at the participation rate of those aged 25-34.

Once again we see bad news starting in or around 2000, just as home prices soared.

Aging Demographics

Until this year, "boomers" were the largest group demographically speaking. Boomers are aging. Many are in poor health, cannot take care of themselves, and cannot afford or do not want to be placed in a nursing home.

This need forces many millennials to move in with their parents, simply to take care of them.

Silver Lining?

Goldman's David Mericle and Karen Reichgot see a "silver lining" based on the idea children will one day leave their parents' basements, and that household formation will prove to be a huge boost to a subpar housing recovery.

I take the opposite view based on changing attitudes, real earnings, and a certain inevitability.

The inevitability is death. As boomers die off many will simply choose to stay where they are living. This especially holds true where homes are not fully paid off.

And there is no reason to believe the trend in real earnings is about to change.

So how are the "young and not-so restless" supposed to suddenly get restless unless real earnings take a sharp rise higher?

Finally, neither Bloomberg nor Goldman discussed points seven and eight regarding attitudes.

Changing Attitudes

The Fed has been perplexed as to why its policies have not worked.The explanation is pretty easy. I have been writing about it ever since the housing bust.

Kids see their parents and grandparents arguing over debt and ability to pay bills. Many lost their houses to foreclosure.

Divorce, suicides, and clinical depressions over the loss of jobs or homes are widespread. And the once widely-held notion that one's home is a retirement nest-egg has been smashed on the hard rocks of reality.

Millennials (at least those hit hard in the crisis) don't want to be like their parents, chasing the suburban dream, ill-equipped to take on debt when they have poor-paying jobs and a mountain of student debt on top of it.

Pendulums

Attitudes are like pendulums in that they move from one extreme to the other before reversing. Unlike pendulums, attitudes take a very long time to go from one end to the other. It took multiple generations for people to fully forget the great depression.

Many who were wiped out in the stock market crash of 1929 never got back in. In contrast, boomers had no recollection of the crash. Instead they have recollection of the Fed bailing them out time, after time, after time.

Those 18-34 have no recollection of being bailed out of anything. They see the problems that debt caused their parents, and a significant number do not want any part of chasing the boomer's dreams.

Eventually the boomers will die and the number of millennials living with their parents will start to reverse. Just don't expect an economic boom from it any time soon.

Attitudes towards debt have changed. There is no economic nor demographic reason that suggests the attitude pendulum is close to a reversal.

Mike "Mish" Shedlock

Sunday, September 20, 2015

Mish's Global Economic Trend Analysis

Tsipras Wins Reelection in Low Turnout, Same Coalition to Govern; Rule Number One

Posted: 20 Sep 2015 11:23 PM PDT

Syriza party leader Alexis Tsipras who resigned in the wake of his cave-in to the troika is back in office following Sunday's snap elections.

The election was supposed to be extremely close, but it wasn't.

Greek polls are notoriously unreliable. Tsipras won his first election by a huge vote even though polls were close. On Sunday the result was the same.

Pollsters had New Democracy running neck-and-neck but in a low turnout Syriza received 35.5 per cent of the vote to 28 percent for New Democracy.

Greek election rules give a huge block of parliament to the plurality vote, so in parliament the score is 145-75 out of a total of 300.

145 is short of a majority, but close enough so Tsipras can form a coalition with the Independent Greeks party (Anel), just as Syriza did after the last election.

Syria Wins Again

145 + 10 = 5 seat majority.

Whether the coalition proves stable is anyone's guess.

The Financial Times provided the above chart (purple highlights mine) and this commentary.

Alexis Tsipras's radical left Syriza party secured a clear victory in Sunday's Greek general election, suggesting his gamble on snap elections after striking a deal on a new €86bn bailout had paid off.

With 90 per cent of the votes counted, Syriza was on 35.5 per cent of the vote, giving it 145 seats in the 300 member parliament, well ahead of centre-right New Democracy on 28 per cent and 75 seats.

Mr Tsipras's win cements his place as the pre-eminent figure in Europe's far-left anti-austerity movement and is likely to galvanise sympathisers including Spain's Podemos and Jeremy Corbyn, the hard-left leader of Britain's Labour party.

Mr Tsipras insisted Syriza would govern for a full four-year term, even though his revived coalition with the small nationalist Independent Greeks party (Anel), announced on Sunday night, looks far from stable with only a six-seat majority in parliament.

But he warned there would be no easy exit from the country's six-year recession. His first task as re-elected prime minister will be to implement more tough austerity measures demanded by creditors in return for a new €86bn rescue package.

Early results put turnout at only 55 per cent, suggesting many young leftwing voters angered by Mr Tsipras's decision to capitulate to Greece's creditors and accept more harsh austerity measures in return for a new bailout had declined to take part, as experts had predicted.

Radical Left?

The above comments by the Financial Times in regards to Tsipras being the "pre-eminent figure in Europe's far-left anti-austerity movement" should have every one laughing or gagging. Take your pick.

Tsipras first ran on a radical left platform, but this time his platform was virtually indistinguishable from that of "center right" New Democracy.

I have no sympathy for radical leftists (or leftists of any kind actually, but I also have no sympathy for blatant liars and hypocrites.

Rule Number One

The number one rule for politicians is "Say or even do anything necessary to stay in office".

With that comment, I congratulate Tsipras for pulling it off, while noting that his problems have really just begun. Good luck with that five-seat majority Alexis, you will need it.

Mike "Mish" Shedlock

Parade of Fed Parrots Squawk About Rate Hikes This Year; Toss Out the Script

Posted: 20 Sep 2015 11:13 AM PDT

In an effort to convince the market that rate hikes are coming, an amusing parade of Fed parrots squawked in full force over the weekend, within an hour or so of each other.

St. Louis Fed President James Bullard

Bullard Squawks: Bullard Says He Argued Against Fed's Call to Leave Rates on Hold.

"The case for policy normalization is quite strong, since Committee objectives have essentially been met," Bullard said in slides prepared for a speech in Nashville, Tennessee. "I argued against the decision at the FOMC meeting."

Bullard is not a voting member of the policy-setting Federal Open Market Committee in 2015, but will vote in 2016.

Richmond Fed Jeffrey Lacker

Lacker Squawks: Fed's Lacker Says Economy Strong Enough for Higher Rates.

"Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets," Lacker said in a statement.

He was the lone dissenter among the 10 Fed officials who voted at the meeting. Lacker said the Fed's target should rise by a quarter point.

Lacker has a history of dissent in Fed policy meetings. In 2012, he voted against eight straight policy decisions by the central bank. At the time he was urging the Fed to wind down asset purchases that were aimed at stimulating the economy.

San Francisco Fed President John Williams

Williams Squawks: Fed's Williams Still Sees 2015 Rate Hike After 'Close Call'

An interest rate hike will likely be appropriate this year given the U.S. Federal Reserve's decision last week to stand pat was a "close call," a top Fed policymaker said on Saturday.

John Williams, a centrist and president of the San Francisco Fed, said the arguments for and against beginning to tighten U.S. monetary policy are about balanced now that the economy is on solid footing, giving him confidence in continued economic and labor market growth.

Balancing Act

If the arguments for and against the hike are "balanced" and the case for a hike "quite strong" then why was the vote 9-1?

By the way, wasn't the case even stronger a year ago? If not, why?

The answer to that is the Fed had a script that said "hike in 2015".

These economic illiterates not only ignore obvious asset bubbles, they actually believe a quarter of a point hike can sink the real economy. They also did not want to surprise the market with early hikes.

Why All the Squawking?

The Fed parrots are out in force, loudly squawking the same tune, because Yellen really wants to hike, provided of course the market goes along. Lately however, the market has had other ideas.

The market did not go along with a hike in September so that forced Yellen to come up with a basket of excuses for not hiking. In response, the market has moved the hike odds to 2016, but the parrots don't like that.

Toss Out the Script

Bloomberg says Wall Street Tosses Out Bond-Trading Script After Fed Meeting

Neil Bouhan at BMO Capital Markets expected the Federal Reserve to raise interest rates this week. Now he's questioning all his views on the central bank.

He's not the only one. Strategists and traders across Wall Street are re-examining their approach to predicting the Fed's moves after officials kept their target near zero Thursday and released an unexpectedly dovish policy statement. Fed Chair Janet Yellen cited a range of concerns -- from slowing growth in China to global market volatility -- to explain the decision to hold the benchmark overnight rate at historic lows.

The tone of her comments in a press conference after the announcement surprised the bond market, fueling the biggest rally in two-year Treasuries since March 2009, when the Fed said it was expanding its bond-buying program. It also left many prognosticators struggling to pinpoint how to trade in the lead-up to the next policy meeting less than six weeks away.

"There is really no way to look at this market if you can't handicap Fed policy, and they've made that much more difficult," said Bouhan, a Chicago-based strategist at BMO. He doesn't expect the central bank will raise interest rates until 2016.

Lesson Learned

"What we learned from yesterday is that Treasuries are a buy either way," Guy Haselmann, head of capital market strategy with Scotiabank, wrote in a note to clients Friday.

John Briggs, head of strategy for the Americas at RBS Securities Inc., echoed the plea for more clarity. He compiled a list of 10 broad economic concerns that Yellen cited in the press conference, including energy prices, U.S. financial conditions and weaknesses in emerging markets.

"It's not common for the Fed to name all these things," he said from the firm's Stamford, Connecticut, office. "Where do they rank? Now we don't even know what to look at to determine whether they will raise rates or not."

Shifting Odds

Following the FOMC meeting, I reported Rate Hike Odds Shift to January 2016; 16.1% Chance of Hike in October.

The parrots are not happy with this shift in opinion, so they are squawking. They should have tried squawking at the meeting or before the meeting instead of now.

As a result, anyone with any bit of common sense wonders if the Fed will hike at all.

I concluded "By December, the economic data is likely to be weakening so much, that the Fed may not hike until the next recession is over."

Mike "Mish" Shedlock