Home Refinance Calculator

Wednesday, January 27, 2016

Mish's Global Economic Trend Analysis

Chicago Board of Education Yanks $875 Million Bond Sale Over 7.75% Yield; Five Questions for Chicago
Oil Inventory Hits "Levels Not Seen in 80 Years"; Crude Jumps on News Russia May Cooperate with OPEC
New Home Sales Surge but Prices Down Sharply; Prices Have Room to Fall; Is Everybody In?

Chicago Board of Education Yanks $875 Million Bond Sale Over 7.75% Yield; Five Questions for Chicago

Posted: 27 Jan 2016 06:45 PM PST

On Wednesday, the Chicago Board of education pulled the plug on a proposed $875 Million Bond Sale.

Facing hefty yields, the financially ailing Chicago Public Schools (CPS) postponed Wednesday's planned $875 million bond sale and will evaluate the timing on a day-to-day basis, a school official said.

The nation's third-largest public school system is struggling with a structural budget deficit of at least $1 billion. Its fiscal woes led Illinois Governor Bruce Rauner and Republican lawmakers last week to push for a state takeover and potential bankruptcy for CPS - moves that were quickly shot down by Chicago Mayor Rahm Emanuel, who controls the school system, and leaders of the Democratic-controlled legislature.

A pre-pricing marketing scale circulated by underwriters on Tuesday for the "junk"-rated general obligation bonds showed yields topping out at 7.75 percent with coupons of 7.25 percent for bonds due in 2041 and 7 percent for bonds due in 2044. That yield indicated a so-called credit spread over Municipal Market Data's benchmark triple-A yield scale of as much as 506 basis points.

That spread was wider than the 464 basis-point spread the school system's 19-year bonds were fetching in secondary market trading last week.

Five Questions for Chicago

Will the yields be any lower tomorrow? Next week? Why?
How the heck is the school district going to close a hole of at least $1 billion?
Will Emanuel push for yet another massive tax hike just to pay teacher pensions?
How can another tax hike do anything but postpone the problem?
Since the most likely outcome is bankruptcy, why was the yield offering so good?

Reflections on Bankruptcy

In regards to question number five, 7.75% seems very attractive given the high likelihood those bonds will soon be worthless.

Heck, even 10% would be a bargain for the city and a horrid deal for the bondholders.

But that's not the way markets work. No one thinks bankruptcy is coming until it's a few weeks away. And of course, for bankruptcy to be possible, the Illinois legislature has to approve it.

Governor Bruce Rauner needs to hold firm until Emanuel begs the union-controlled Illinois legislature to pass a municipal bankruptcy bill.

"I'll Be a Better Mayor"

In his mayoral victory speech, Emanuel promised "I'll Be a Better Mayor".

Stepping back, recall that Emanuel defeated Cook County Commissioner Jesus "Chuy" Garcia in a runoff on April 7, 2015.

In debates ahead of the runoff, Emanuel said Garcia's promises would require tax hikes to fund them. Emanuel called tax hikes failed "politics of the past."

Emanuel forgot to say he would undertake the same failed measures as Garcia, only much bigger.

Six months later, Emanuel passed the largest property tax hike in Chicago history. And in the understatement of the year, Emanuel commented "It's Not a Piece of Art".

With that I have one final question for the mayor.

Bonus Question

Hello Rahm, when will you put city taxpayers and the good of the city itself ahead of the unions and your perpetual reelection campaign that's currently nothing but lies and deceit followed by monstrous tax hikes?

Mike "Mish" Shedlock

Oil Inventory Hits "Levels Not Seen in 80 Years"; Crude Jumps on News Russia May Cooperate with OPEC

Posted: 27 Jan 2016 12:49 PM PST

"Levels Not Seen in 80 Years"

The supply glut in oil storage continues as crude. Inventories hit new all-time highs this past week.

The above charts from EIA Weekly Supply Data shows the crude inventory of 494,920,000 (not counting strategic reserves) passed the previous high of 490,912,000 set on April 24, 2015.

Reserves, including the Strategic Petroleum Reserve (SPR), reached 1,190,038 barrels, also a record high.

Comments From EIA Weekly Report

Here are some interesting comments from the Weekly EIA Report.

"At 494.9 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 3.5 million barrels last week, and are well above the upper limit of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories decreased by 4.1 million barrels last week but are near the upper limit of the average range for this time of year. Propane/propylene inventories fell 6.2 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories decreased by 1.0 million barrels last week."

Crude Jumps on News Russia May Cooperate with OPEC

Despite the record inventory surge, crude jumped a bit from extremely oversold levels on news Russia Dangles Prospect of OPEC Cooperation.

Oil futures surged on Wednesday, after Russia said it was discussing the possibility of co-operation with OPEC, fanning hopes that a deal was in the works to reduce oversupply that sent prices the lowest levels in a dozen years last week.

Russia's energy ministry said possible coordination with the Organization of the Petroleum Exporting Countries (OPEC) was discussed at a meeting with Russian oil companies on Wednesday.

"I remain skeptical, at the end of the day, about that happening as the oil producers are looking at the other guy to cut production while maintaining their own levels," Andrew Lipow of Lipow Oil Associates said.

Crude was looking firm before the Russia news on the back of a U.S. Energy Department report showing a surprise spike in demand for refined products like heating oil last week, when a massive blizzard hit the U.S. Northeast.

The U.S. Energy Information Administration said inventories of distillates, fell more than 4 million barrels, trumping expectations for a rise of about 2 million.

Economists Surprised Again

Despite the small drawdown in fuel oil please recall the report stated "Distillate fuel inventories are near the upper limit of the average range for this time of year."

Economists can be surprised by anything including the possibility blizzards and cold weather may increase the demand for fuel oil in the Northeast!

Mike "Mish" Shedlock

New Home Sales Surge but Prices Down Sharply; Prices Have Room to Fall; Is Everybody In?

Posted: 27 Jan 2016 10:17 AM PST

December new home sales surged well over the high end Econoday estimate.

The outlook for the housing sector just got a boost from a sharp jump in new home sales, up 10.8 percent to a 544,000 annualized rate that is 44,000 over the Econoday consensus and 24,000 over the high estimate. The gain, however, may have been boosted by discounting as the median price slipped 2.7 percent to $288,900 for a year-on-year rate of minus 4.3 percent.

With builders slow to bring new homes to market, low supply remains a central factor holding back sales. Supply did rise 6,000 in the month to 237,000 but supply relative to sales fell back to 5.2 months from 5.6 months. A reading of 6.0 months is considered to be the balance point between supply and demand.

Regional data show a 32 percent sales surge in the Midwest where the year-on-year rate of 39 percent is the strongest. Sales in the West and Northeast both rose 21 percent in the month with the year-on-year rate in the West, which is a key region for new housing, up 22 percent while the Northeast, which is a very small region in this report, down 6.5 percent on the year. The South, which is the largest region, shows a fractional gain in the month and no change on the year.

For full year 2015, new home sales rose 14.7 percent to 501,000 from 437,000 in 2014. Sales of new homes have been noticeably higher than prices, suggesting that prices have room to accelerate. This report follows special strength in existing home sales with both perhaps benefiting from December's warm weather but with both pointing nevertheless to new momentum for 2016.

Negative Momentum

Why did sales surge 39% in the Midwest? Because this was one of the warmest December on record even discounting global warming silliness.

Bloomberg calls this "new momentum" for 2016. Indeed it is, but that momentum is negative.

This statement by Bloomberg caught my eye: "Sales of new homes have been noticeably higher than prices, suggesting that prices have room to accelerate."

Prices Have Room to Fall

I suggest home prices have room to fall. Curiously so does Bloomberg, albeit in different ways, and in a different article.

Please consider Bloomberg's article The Surge in U.S. Mansion Prices Is Now Over, published just two days ago.

The world's economic woes -- from China to Russia to South America -- are damping sales in the high-end real estate market. Haywire overseas stock markets and dropping currency values caused in part by plummeting oil prices are dulling demand for mansions, penthouses and winter escapes.

Luxury Pfft

Prices for the top 5 percent of U.S. real estate transactions remained flat in 2015 while all other houses gained 4.9 percent, according to data from Redfin Corp., a real estate brokerage and data provider.

Stronger Dollar

The stronger dollar is driving South American buyers away from the 23,000 condos in the pipeline for Miami's downtown area, said Peter Zalewski, owner of South Florida development tracker CraneSpotters.com. Buyers signed about one-fourth fewer pre-construction contracts last year than in 2014, according to Anthony M. Graziano, senior managing director at Integra Realty Resources Inc., which tracks condo data for the Miami Downtown Development Authority.

In nearby Sunny Isles, Florida, faraway currency fluctuations are endangering the sale of a $3.7 million condominium.

In Houston, the plunge in oil prices to a 12-year low is killing the luxury boom. Sales for homes priced at $500,000 or more dropped 17 percent in December from a year earlier, according to the Houston Association of Realtors.

Manhattan resale prices for the top 20 percent of the market peaked in February and have fallen every month since, according to an analysis through October by listings website StreetEasy.

Even in San Francisco, where the market for luxury properties remains strong, the inventory of listings for $2 million or more jumped in October to a record level, said Patrick Carlisle, chief market analyst for Paragon Real Estate.

"More sellers are jumping in and more buyers are holding off because they're worried about where the volatility is going," Carlisle said.

Buyers are now on the hunt for deals, said Nela Richardson, chief economist at Redfin.

"There's a limit even to what a wealthy person will spend," she said.

Is Everybody In?

Bloomberg did not make the necessary connection, but they did provide the chart. Let's tie up some loose ends.

In bonds, rot starts with junk and spreads to the core. With homes, price rot starts at the high end.

With Chinese West-coast buyers now not feeling so wealthy after a 47% plunge in the stock market, and with "Temporary" Capital Controls likely on the way, that segment of the high-end market is toast.

The strong dollar is having the same effect in Florida. And in New York, well ... "There's a limit even to what a wealthy person will spend."

And every decrease in the price at the high end, affects every level below it. A mansion that was $1,000,000 but is now $900,000 will affect the price of homes listed for $850,000 to $900,000, etc., all the way down the ladder.

Is Everybody In?

Let's return to the Econoday "room to accelerate" misanalysis.

If homebuilders could sell more expensive homes, they surely would. And at the very high end, it appears we have hit the peak. That group is "all in".

It was one hell of a bubble-reblowing effort by the Fed, but another slide lower awaits. New homes prices will likely get cheaper and cheaper with more and more features added.

In turn that will lower the price of similar existing homes. This stuff does cascade. We have seen it before.

Lack of Supply

There's plenty of talk about lack of supply. Actually, there's an ample supply of homes. There's just no supply at prices people are willing and able to pay.

Expect lower, not higher prices. And if you need to get out, beat the rush, if you still can.

Mike "Mish" Shedlock

Tuesday, January 26, 2016

Mish's Global Economic Trend Analysis

Financial Engineering Chart of the Day: Fed Balance Sheet vs. S&P 500
French Taxi Drivers Burn Tires Block Airports in Mass 24-Hour Strike; 20% of French Flights Cancelled
How Healthy Is the Labor Market, Really?
Retail Sales vs. Consumer Confidence; Unwarranted Fed Faith in Wrong Surveys

Financial Engineering Chart of the Day: Fed Balance Sheet vs. S&P 500

Posted: 26 Jan 2016 11:25 PM PST

Fed Balance Sheet vs. S&P 500

I was playing around with some ideas on the St Louis Fed "Fred" database and came up with this.

Mike "Mish" Shedlock

French Taxi Drivers Burn Tires Block Airports in Mass 24-Hour Strike; 20% of French Flights Cancelled

Posted: 26 Jan 2016 06:24 PM PST

Unfair Competition

The nation pastime in France is striking against "unfair competition". To French socialists, the term "unfair competition" means any competition.

On Tuesday French unions decided once again to do something about the unfairness: make everyone miserable as best they can.

Flights Cancelled

Bloomberg reports Taxi Drivers Take to the Streets in 24-Hour French Strikes.

France endured mass strikes on Tuesday as taxi drivers, air traffic controllers, civil servants and teachers demanded more purchasing power, job creation and an end to disruptive competition to traditional industries.

Hundreds of taxi drivers took to the streets of Paris, burning car tyres and blocking routes to principal airports in a demonstration that spread disruption across the capital.

A protest by air traffic controllers prompted France's Civil Aviation Authority to ask airlines to cancel 20 per cent of their flights in France.

The strikes stand to create further problems for President François Hollande and his socialist government as he battles with low economic growth and record unemployment. Mr Hollande has promised not to run for re-election in 2017 if he does not manage to reverse the upward trend in joblessness.

On Tuesday, hundreds of taxi drivers blocked the road at Paris's Porte Maillot, one of the capital's principal entry points. By early morning, they had already succeeded in blocking one direction of the eight-lane highway. Television images showed the strikers lighting fireworks and dragging metal barriers in front of commuter cars desperate to pass.

Waving flags and burning tyres, the taxi drivers were protesting about the rise of disruptive competition such as Uber, the US ride-sharing application, and Heetch, a French ride-sharing app that has become popular among young people.

Among other things, they argue that minicab drivers working with services such as Uber do not have to pay the elevated prices for a regular licence — which have reached as high as €240,000 — and therefore compete under different conditions.

In June last year, police in riot gear used tear gas to break up a protest by taxi drivers, who had all but stopped transport to and from the capital's airports.

Economic Emergency

With today's strike, the economic emergency in France just got bigger. On January 18, I noted Hollande Declares "Economic Emergency" to Save Jobs - His.

Emergency Effort to Save Hollande's Job

With a national election 15 months away and unemployment not falling, a crisis in France emerged: French president Francois Hollande's own job is at risk.

Having promised to step down as president if unemployment in France fails to drop this year, Hollande took the necessary action.

He declared a state of emergency to save jobs, namely his.

Hollande's job creation proposal centered around training schemes and apprenticeships. Few if any jobs would be created with such schemes. However, unemployment would drop because people in those programs are not considered unemployed.

How to Create Jobs

The primary reason French companies will not hire workers is that it's so damn hard to get rid of them later if they do.

Add to that mountains of regulations including inane laws that tell businesses when they can or cannot open the doors.

If Hollande wants to create jobs, this is what he needs to do.

Make it easier for businesses to fire workers.
Let any business that wants to do so, open the doors on Sunday.
Reduce unemployment benefits.
Get rid of countless regulations telling businesses what they can and cannot do.
Get rid of tariffs and subsidies.
Cut taxes, both corporate and personal. Become a pro-business country.

He won't do that because it would cost Hollande his job.

And saving one's ass is always the top priority, so much so, it's now a national emergency.

Mike "Mish" Shedlock

How Healthy Is the Labor Market, Really?

Posted: 26 Jan 2016 05:08 PM PST

What's the "official" unemployment rate vs. economic reality?

In my analysis of the monthly jobs reports on the first Friday of the month, I make a statement similar to this:

"The official unemployment rate is 5.0%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is 9.9%. Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job."

There is no way to track disability fraud for sure, But I suspect it's 75% of those on disability.

Hornstein-Kudlyak-Lange Non-Employment Index (NEI)

While not addressing disability fraud or forced retirement issues, Richmond Fed economists Andreas Hornstein and Marianna Kudlyak, and McGill University economist Fabian Lange came up with the Non-Employment Index (NEI) as a better way to track the true health of the labor market.

The NEI differs from the standard unemployment rate as a measure of resource utilization in two important ways:

1. It counts not only the unemployed, but also those out of the labor force. The latter is a diverse group that includes individuals who want a job (such as the marginally attached who are willing and able to work and sought employment in the past, but have stopped searching) and those who do not want a job (such as retirees, the disabled, students, and those who are neither retired, nor disabled, nor in school).

2. It weights the different groups of non-employed (that is, both the unemployed and people out of the labor force) according to their labor market attachment, or the likelihood that a non-employed person will transition back into the job market. Specifically, each group is weighted by its historical transition rate to employment relative to the highest transition rate among all groups (the transition rate of the short-term unemployed).

An additional version of the NEI is calculated to include people who are working part time but would like to work full time, a category called "part time for economic reasons" (NEI+PTER).

During the period prior to June 2007, there was a close linear relationship between the standard unemployment rate and the NEI.

Why Does it Matter for Policy?

The decline of the unemployment rate after the 2007-09 recession has coincided with an increase in the number of individuals out of the labor force. These observations lead to the question: Post-2007, is there substantial labor market weakness beyond what is measured by the unemployment rate? For example, discouraged individuals who are not counted in the labor force aren't included in the standard unemployment measure, but they do factor into labor market resource utilization. Economic research has shown that discouraged workers are not as distinct from those counted as unemployed as they might appear. They return to work at rates similar to those who have been unemployed for longer than 26 weeks. Therefore, excluding discouraged workers or similar groups from the standard unemployment measure may misstate the degree to which resources in the labor market are utilized.

NEI Chart

The above chart is from the Fred Blog How healthy is the labor market, really?

The article gives you the means to recreate the chart. It does not allow you to see how the authors determined the weights.

My suspicion is that their index undercounts massive disability fraud (those people who would want a job had they not been able to bilk the system). Then again, those people are not likely to be looking for a job, until the fraud stops.

Fraud and similar issues aside, this chart is a step in the right direction in terms of understanding how over-hyped the decline in the unemployment rate has been.

For those interested in how disability fraud has artificially lowered the labor force I can provide numerous examples.

Disability Fraud

I have written about Disability Fraud at least a dozen times.

60 Minutes: Mainstream Media Finally Catches on to Disability Fraud: 60 Minutes Reports on "Disability USA"

Steve Kroft on 60 Minutes reports on the alarming state of the federal disability program, which has exploded in size in the last six years and could become the first federal benefits program to run out of money.

NPR: Unwilling to Work; 25% in Hale County AL Collect Disability, 14 Million Nationwide

How Easy is it to Get Disability?

Hale county's Dr. Timberlake asks a simple question to all his patients. "What grade did you finish?" If you claim "back pain" and do not have a degree, Timberlake believes you are disabled.

The Disability Deal

Getting disability seems easy enough in some states, and especially easy in Hale County Alabama. But is disability better than minimum wage? The answer is yes. NPR author Chana Joffe-Walt explains: ....

States Promote Fraud: States Have an Incentive to Promote (Not Stop) Disability Fraud; So How Much Fraud Is There?

This all goes back to 1996 when president Bill Clinton promised to "end welfare as we know it". He did indeed do just that, and fraud is the result.

Why?

The federal government pays disability, but states pay part of welfare costs. This creates a huge incentive for states to actively promote disability fraud (simply to get people off state-sponsored welfare programs).

Results of Clinton Ending Welfare "As We Know It"

Every month 14 million Americans receive a disability check.
In 1961 the leading cause of disability was heart disease and strokes, totaling 25.7% of cases. Back pain was 8.3% of cases.
In 2011 the leading cause of disability was a hard to disprove back pain, totaling 33.8% of cases. The second leading cause was an equally difficult to disprove "mental illness" at 19.2%. Strokes and heart disease fell to 10.6%.
In West Virginia, a whopping 9% of the population collects disability checks. In Arkansas, 8.2% are on disability, and in Alabama and Kentucky, 8.1% collect disability. In Alaska, Hawaii, and Utah, the figure is 2.9%.
In Hale County Alabama 1 in 4 receive disability checks.
Nearly every case in Hale County Alabama has Dr. Perry Timberlake in common.
Those on Supplemental Security Income, a program for children and adults who are both poor and disabled is nearly seven times larger than 30 years ago.
Once people go onto disability, they almost never go back to work. Fewer than 1 percent of those who were on the federal program for disabled workers at the beginning of 2011 have returned to the workforce.

Dr. Timberlake asks a simple question to all his patients. "What grade did you finish?" If you claim "back pain" and do not have a degree, Timberlake believes you are disabled.

Timberlake gets paid for his "analysis".

States are willing to go along thanks to Bill Clinton who "ended welfare as we know it", creating an even worse disability fraud scheme in the wake.

There has been no president since, Republican or Democrat, willing to stop fraud at the federal level. And clearly Obama is doing his best to expand fraud.

Disability Deal Explained

If Democrats give enough free benefits to enough people, no one can ever vote them out of office.

Mike "Mish" Shedlock

Retail Sales vs. Consumer Confidence; Unwarranted Fed Faith in Wrong Surveys

Posted: 26 Jan 2016 11:32 AM PST

Conference Board Consumer Survey

The consumer conference board does a paper survey every month on consumer confidence.

The board's technical notes say (emphasis mine) "The targeted responding sample size - approximately 3,000 completed questionnaires - has remained essentially unchanged throughout the history of the CCI."

I called up the board with a simple question: How many surveys do you send out to get 3,000 completed questionnaires?

The very snooty person who answered the phone told me to look in the technical notes. However, the information isn't there or I cannot find it. I had already read the technical notes before I called. Besides, my question was quite simple.

Retail Sales vs. Consumer Confidence

The Fed places a lot of faith in this survey. Yellen cites strong consumer confidence frequently, as did Bernanke before her.

The numbers are out today. Consumer confidence is up. In general, confidence been high and rising for years.

Happy consumers are supposed to be shopping like mad, especially given the collapse in the price of gasoline.

Let's investigate those theories from today's Econoday Report.

Alleged ties of this survey to consumer spending appear to be a complete bunch of hooey.

I keep wondering if paper surveys are part of the problem. Are the people who respond to random paper surveys more likely to be happier than those who don't?

New York Fed Survey

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

Here are the results of the Fed's latest survey.

One Year Look Ahead Household Spending Projections

click on chart for sharper image

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, January 25, 2016

Mish's Global Economic Trend Analysis

"Temporary" Capital Controls Coming to China?

Posted: 25 Jan 2016 09:56 PM PST

Massive Reserve Hemorrhage

China hemorrhaged $663 billion of its reserves since June 2014 in a misguided attempt to prop up the yaun. Once the biggest buyer of US treasuries China Starts Dumping U.S. Government Debt.

Note the irony of that headline. Misguided analysts long clung to the belief that the US dollar would go to hell when China started dumping treasuries, "certificates of confiscation" as they were commonly called.

Instead, China has used a significant portion of its reserves to prop up the Yuan. It still has about $3.3 trillion left according to estimates, but China cannot keep the current pace up forever.

"Temporary" Capital Controls the Solution?

The Financial Times reports Capital Controls May be China's Only Real Option.

Chinese officials readily admit that communication has not been their strong point when it comes to dealing with international investors. Policymakers have now made it explicit that they have no wish to engineer a big devaluation. However, they are much less forthcoming about how they plan to reconcile a desire for currency stability with the realities of capital flight and a slowing economy.

Central bank guidance is most effective when the policy is clear and it is relatively straightforward to work out how it will evolve in response to changes in economic data. At present, the reality in China is that the PBoC has no clear course of action and wants to leave itself flexibility.

No amount of clarification would help to varnish the underlying problem: capital flight. The corruption clampdown and a lack of investment opportunities at home are driving Chinese people to take their money out of the country, just as the prospect of higher US interest rates is prompting companies to pay off dollar debt. Fear of a devaluation has fuelled the outflows. Far from seeking a weaker renminbi, the central bank has been forced to spend a big chunk of its reserves to prop it up

This goes against the grain of recent liberalising measures, which last year helped China win the renminbi's inclusion in the International Monetary Fund's special drawing rights basket, alongside traditional reserve currencies. However, the IMF has become far more willing to accept the case for temporary capital controls since quantitative easing sparked huge flows of hot money into emerging markets.

Capital controls are not a long-term solution but, at present, they are the correct step for Beijing to take in a very difficult situation. However, they will only work if China uses the breathing space to articulate a clear policy to rebalance its economy and liberalise its currency in the longer term — a process that will take many years.

Yuan's Fall Is Just 'Noise' Amid Deeper China Woes

The Wall Street Journal hits the nail on the head with this headline: Yuan's Fall Is Just 'Noise' Amid Deeper China Woes.

When the financier George Soros attacked the British pound in 1992 and famously "broke the Bank of England" he was trading on a conviction that the currency was misaligned.

Britain devalued after squandering its reserves in a vain defense. Mr. Soros walked off with $1 billion or more. To the surprise of many, though, the U.K. economy soon picked up once the pound found its proper level.

China's raging battles with currency speculators are unlikely to end as happily for the country. That's because turmoil in the currency markets reflects a much more perilous imbalance than an overvalued yuan: China is now lopsidedly dependent on ever larger inputs of local bank credit to keep sputtering growth from declining further.

The country is already littered with "zombie" factories, empty apartment blocks that form ghostly suburbs, mothballed power stations and other infrastructure that nobody needs. But yet more wasteful projects are in the pipeline, even as the government talks about cutting industrial overcapacity.

"That's the misalignment—everything else is noise," says Rodney Jones, the Beijing-based principal of Wigram Capital Advisors, who was a partner at Soros Fund Management during the 1990s.

If debt keeps piling up at the current rate, China faces an eventual financial crisis, perhaps leading to years of subpar growth, mirroring the fate of Japan after its bubble burst in the early 1990s.

Mr. Jones argues that global equity markets haven't property adjusted to this risk, even after a 16% decline in U.S. dollar terms from their May peak. "The world will have to learn to live without demand from China," he says. "It'll come as a shock."

Managing a Crisis of China's Own Doing

As we sit here discussing "temporary" measures that often seem to last decades, we need to step back and ask: What caused this mess?

The answer is a ridiculous growth targets. To hit 7% growth targets for years on end, China had to waste a lot of money on projects, many of which are now worthless.

While the boom lasted, China, like Japan before it, was considered an "economic miracle".

To top it off, China did not float the yuan, but now wants to defend an untenable target.

Unlike the above writers, I suggest China do what it should have done a decade ago: float the yuan and stop micro-managing the economy.

Sure there will be a lot of short term pain. But short term pain is a lot better than three lost decades as Japan is experiencing

Mike "Mish" Shedlock

Dallas Fed Region Activity Plunges to Lowest Reading Since 2009; Production Collapsed

Posted: 25 Jan 2016 11:28 AM PST

Those expecting a bounce in manufacturing following an alleged improvement in the Philadelphia Region were mistaken.

In Philadelphia, all that really happened was that things got worse at a decreasing rate.

Dallas Region Collapse

The Dallas Fed General Activity Index plunged to -34.6 from a revised reading last month of -20.1. The Econoday Consensus Estimate was -14.0 in a range of -17.0 to -10.0. The production index, also plunged. Last month the index was in positive territory at 12/7. It's now -10.2.

Manufacturing data from the Dallas Fed, along with that of the Kansas City Fed, have been offering the most striking evidence of oil-related contraction. Dallas' general activity index came in at an extremely negative score of minus 34.6 for the January report which is the lowest reading since the beginning of the recovery in 2009.

New orders are falling deeper into contraction as are unfilled orders. Hours worked are now in the negative column as is employment. And finally falling into contraction -- and in a big way -- is the production index which had through last year, despite long weakness in orders, held in positive ground, but not anymore with the reading at minus 10.2 for a nearly 23 point monthly plunge. Price data in this report remain well into the minus column, at nearly double-digit monthly declines.

Manufacturing reports this month have been mixed, with this and Empire State pointing to another buckling but not the most closely followed report, the Philly Fed which is pointing to stability for the sector. Watch for the Richmond Fed report tomorrow and the Kansas City report on Thursday.

Production vs. Activity

Price of oil and gas is so low, production is a money-losing effort. This month we finally see the production spigots have been turned to low throttle. It's a needed step for oil prices to bottom.

Mike "Mish" Shedlock

Sunday, January 24, 2016

Mish's Global Economic Trend Analysis

Debunking the Myth "Consumer Spending is 67% of GDP"
Crowdfunding Review: Exploding Kittens; Bankrupt Zano; Will Crowdsourcing Ever Work?
East Coast Blizzard - Some Love It: Legal Sledding on Capitol Hill First Time in 140 Years; Panda "Tian Tian" Loves Snow
Rajoy Says Leftist Parties Causing "Terror in Europe" as Spanish Government About to Fall

Debunking the Myth "Consumer Spending is 67% of GDP"

Posted: 24 Jan 2016 10:55 PM PST

Consumer Spending Myth

It is widely believed that consumer spending accounts for approximately two-thirds of the economy. A few of us dispute that claim.

Reader Gary writes "You had made the comment more than once that manufacturing is really a much larger part of GDP than is frequently quoted. I could not find how you got there, but ZeroHedge has a nice Pie Chart that shows what you have stated."

It's Only a Manufacturing Recession

The chart Gary referenced is from "But It's Only A Manufacturing Recession, What's The Big Deal" - Here's The Answer.

I am not sure of the origin of that chart, or its precise accuracy, but the essential idea rings true.

GDP Illusion

In Is the US Economy Close to a Bust, Pater Tenebrarum at the Acting Man Blog points out ...

One thing that we cannot stress often enough is that the manufacturing sector is far more important to the economy than its contribution to GDP would suggest. Since GDP fails to count all business spending on intermediate goods, it simply ignores the bulk of the economy's production structure. However, this is precisely the part of the economy where the most activity actually takes place. The reality becomes clear when looking at gross output per industry: consumer spending at most amounts to 35-40% of economic activity. Manufacturing is in fact the largest sector of the economy in terms of output.

In The GDP Illusion Tenebrarum writes ...

Sure enough, in GDP accounting, consumption is the largest component. However, this is (luckily) far from the economic reality. Naturally, it is not possible to consume oneself to prosperity. The ability to consume more is the result of growing prosperity, not its cause. But this is the kind of deranged economic reasoning that is par for the course for today: let's put the cart before the horse!

In addition to what Tenebrarum states, please note that government transfer payments including Medicaid, Medicare, disability payments, and SNAP (previously called food stamps), all contribute to GDP.

Nothing is "produced" by those transfer payments. They are not even funded. As a result, national debt rises every year. And that debt adds to GDP.

Real GDP is constantly overstated because it's obscured by a cloud that hides monetary inflation and ignores both debt and bubbles.

Mike "Mish" Shedlock

Crowdfunding Review: Exploding Kittens; Bankrupt Zano; Will Crowdsourcing Ever Work?

Posted: 24 Jan 2016 07:24 PM PST

Crowdsourcing Hype

Robots and artificial Intelligence will destroy 5.1 million jobs by 2020 says a study on the "Future of Jobs".

Crowdsourcing was one of the big factors noted in the study.

My comment last Friday was "I suspect crowdsourcing is one of those things with huge potential that never really flies because there is no money in it for anyone."

More accurately, I should have said "no net money for anyone but the promoters".

This weekend, readers emailed a series of article on a cwowdsourcing that I had not seen.

Crowdsourced Zano Implodes

Please consider the January 18 Media.Com article How Zano Raised Millions on Kickstarter and Left Most Backers with Nothing.

The gist of the story is one of Zano, a drone-maker that sought to raise $190,000 to put a prototype into production. The company raised millions but the drones could not fly.

Said one person involved: "I unpacked my Zano and tried to fly it indoors, as I guess most people did. It really didn't go very well at all, banging into the wall. So I took it down to a local park and tried to fly it there. After 10 or 15 seconds, it would just go off and do its own thing, zipping off sideways until it got out of range. Basically, it was just awful. The video was pretty poor quality too."

The promotional videos displayed smooth, professional shots.

"As [with] any commercial video, people are going to edit out the takes that aren't as good."

The article notes "UK market analyst firm Juniper Research predicts that that investments made in technology via crowdfunding platforms will increase sevenfold from an estimated $1.1 billion last year to $8.2 billion by 2020. If we want a democratic, open, freely accessible alternative to banks and venture capitalists, then we will have to accept occasional failures like Zano along with runaway successes like Pebble, Oculus Rift, and Veronica Mars."

Media.Com concludes with some sobering bullet points ...

Financial pressures led the creators to ship Zano units that they knew were not ready, and additionally to favour pre-order customers in the hope of receiving additional revenues.
The liquidation is proceeding in a professional manner, but is unlikely to result in any refund, however small, to any Kickstarter backer.
I do not believe that the creators possessed the technical or commercial competencies necessary to deliver the Zano as specified in the original campaign.
Kickstarter, and other crowdfunding platforms, should reconsider the way that they deal with projects involving complex hardware, massive overfunding, or large sums of money. There should be better mechanisms to identify weak projects before they fund, as well as new processes to provide mentorship, support and expert advice to newly-funded projects.

Related Articles

October 30: Crowdfunding for Internet Stock Sales Approved by SEC
November 2015: When Crowdfunding Projects Go Wrong
January 21: Kickstarter Digs Deep Into Case of Doomed Drone

Biggest Crowdsourcing Efforts

Bloomberg reports on the Biggest Crowdfunding Campaigns of 2015, cleverly commenting "no the Greek Bailout did not make the list".

Exploding Kittens and Russian Roulette

I confess. I never heard of "Exploding Kittens" or anything else the crowds are funding.

"Exploding Kittens is a highly strategic kitty-powered version of Russian Roulette. Players take turns drawing cards until someone draws an exploding kitten and loses the game. The deck is made up of cards that let you avoid exploding by peeking at cards before you draw, forcing your opponent to draw multiple cards, or shuffling the deck," wrote the creators in the official webpage. "So if you're into card games or laser beams or weaponized enchiladas, please help us make this game a reality. We think you'll love it as much as we do," they added.

Expect More Beanie Babies

Maybe the crowds can identify popular games in advance, maybe not. But when it comes to serious applications, any expectation that crowdsourcing will be a disruptive force seems silly.

The crowds also brought us Beanie Babies and Pet Rocks. Expect more of the same.

I commented on truly disruptive processes in Fourth Industrial Revolution: Robots, Artificial Intelligence Will Destroy 5.1 Million Jobs by 2020.

Mike "Mish" Shedlock

East Coast Blizzard - Some Love It: Legal Sledding on Capitol Hill First Time in 140 Years; Panda "Tian Tian" Loves Snow

Posted: 24 Jan 2016 12:56 PM PST

Not everyone hates the unusual blizzard that dumped 2 feet or more of snow in Washington D.C. and other locations on the East coast.

Giant Panda Stars at National Zoo

Please consider Giant Panda Stars at National Zoo in Reaction to Blizzard.

"A frolicsome giant panda called Tian Tian appeared to be capturing the bulk of the online attention as videos and other images emerged of animals at the National Zoo in Washington, D.C., as they encountered Saturday's accumulating snowfall."

Legal Sledding on Capital Hill

DC Residents Flock to Capitol Hill for First Legal Sledding in 140 Years.

Just in time for the blizzard that dumped more than 2 feet of snow across the mid-Atlantic, kids and adults took their sleds to Capitol Hill, legally, for the first time in more than 140 years.

In a provision from December's spending bill, Capitol Police will halt their enforcement of the sledding ban as long as conditions are safe.

Hundreds of people took advantage of the newly changed policy during the record-breaking blizzard on Saturday. The Hill was quickly populated with sleds, inflatable mattresses, inner tubes and other creative forms of transport.

"It took an act of Congress, but children are finally welcome to sled down on #CapitolHill," Speaker of the House Paul Ryan tweeted on Saturday.

Best Thing From Congress in Years

Is sledding on Capitol hill the best thing Congress has done in years? I struggle to come up with anything better.

Mike "Mish" Shedlock

Rajoy Says Leftist Parties Causing "Terror in Europe" as Spanish Government About to Fall

Posted: 24 Jan 2016 12:10 PM PST

Following a December election that has left Spanish politics deeply fragmented, People's Party (PP) leader, Prime Minister Mariano Rajoy's has been unable to secure the majority coalition he needs to rule.

Unless someone has a majority, it is the role of the king, otherwise a largely ceremonial role, to see if anyone can build a coalition. First chance goes to the party receiving the most votes.

Here's a sequence of events with brief translations and a couple of comments from reader Bran who lives in Spain. The clips are from last Friday through today. Links are in Spanish.

Rajoy declines the offer by the king to try to form a government. However the news is later tempered with his words "I haven't renounced the right to be chosen, it is that right now I don't have the votes". Friday - http://politica.elpais.com/politica/2016/01/22/actualidad/1453478212_032444.html
During the round of meetings with the king, Iglesias (leader of Podemos) announced without any warning that he would seek to form a coalition with PSOE based on proportional representation of power in the government with Sanchez as president and himself as vice president and ministers also proportionally assigned. Iglesias includes IU (left) as part of the tripartite and asks for a Catalan referendum. Apparently Sanchez was only informed of the offer when he went to meet the king. Friday - http://politica.elpais.com/politica/2016/01/22/actualidad/1453461680_098827.html
Sanchez's first reaction was a cautious welcome, saying "Voters would not understand if I and Podemos did not understand each other". He says he will hold talks with Podemos over the weekend. However Iglesias carried on his overt approach by tweeting his position with statements like "the historic possibility that he (Sanchez) will become president is a smile from destiny that he should be thankful." Friday - http://politica.elpais.com/politica/2016/01/22/actualidad/1453464023_797332.html
Reactions of the regional heads and ex-heads of the PSOE, including previous party leader Rubalcaba was not favorable. Rubalcaba stated "It is the first time I have heard an offer of accord to form a Government while gravely insulting the party with which you hope to govern with." There is even a new hash tag #Respetoal PSOE "Respect PSOE" Friday - http://politica.elpais.com/politica/2016/01/22/actualidad/1453496560_129777.html?rel=cx_articulo#cxrecs_s
Message from Bran on Saturday: "Hello Mish, I'll keep posting through the politics but if you are thinking of writing on it, be careful not to be caught off guard. There are more twists and turns than we might imagine.
Rajoy, having resigned his candidature, but still offering it, launches straight into the offensive from his self-declared position of opposition, labeling Sanchez "mortgaged and undignified" for hypothetical agreements with Podemos politica. Saturday - http://politica.elpais.com/politica/2016/01/23/actualidad/1453545112_869649.html
Sanchez refuses to pick up the gauntlet, broadcasting that he will not present himself as candidate for now because that right still belongs to Rajoy because PP has the most seats. Sanchez also smacked down Podemos in the process, saying his own candidacy won't be launched by blackmail. The actual word Sanchez used is "chantaje", which means "story telling leverage", a bit lighter than blackmail. Saturday - http://politica.elpais.com/politica/2016/01/23/actualidad/1453553795_291625.html
PP says Podemos offer to align with PSOE "causes terror in Europe". Saturday - http://ecodiario.eleconomista.es/politica/noticias/7299394/01/16/El-PP-asegura-que-la-oferta-de-Gobierno-de-Pablo-Iglesias-ha-causado-terror-en-Europa.html
Sanchez now says he will attempt to form a government if the king asks him to. Saturday - http://politica.elpais.com/politica/2016/01/23/actualidad/1453553795_291625.html
Rajoy says that PSOE/Podemos coalition will not be able to govern because he will use the PP majority in the senate to block it. Saturday - http://ecodiario.eleconomista.es/politica/noticias/7299046/01/16/Rajoy-amenaza-a-la-union-PSOEPodemos-No-podran-gobernar-tenemos-la-mayoria-en-el-Senado.html
Yanis Varoufakis, former finance minister of Greece says the troika will tie the hands of a PSOE/Podemos government. Saturday - http://www.eleconomista.es/economia/noticias/7299442/01/16/Varoufakis-advierte-que-la-Troika-ataria-las-manos-de-un-Gobierno-PSOEPodemos.html
Bran comment on Sunday: "All sorts of covert and overt activity is taking place. For now, all the political leaders reject coalitions that can reach a majority. We will have to see how the PSOE/Podemos relationship pans out, because they will still need to pick up additional seats from fringe parties to reach a majority."

Breaking the Logjam

The Financial Times reports Podemos Proposes Leftwing Coalition to Break Spain Logjam.

The anti-austerity Podemos party on Friday made an audacious move towards breaking Spain's post-election political logjam, proposing a three-way coalition government with the Socialists and the United Left party.

"If the PSOE [the Spanish Socialist party] wants it, there can be a government of change," Pablo Iglesias, the Podemos leader, told a news conference in Madrid.

He was speaking after meeting Felipe VI, the Spanish monarch, whose constitutional role includes proposing the next head of government to parliament.

Another complication is that the Socialists, Podemos and the United Left would still not hold a majority in parliament. The three parties together control 161 seats in the 350-seat parliament, meaning they would be 15 votes short of an absolute majority.

To win the premiership and pass future legislation, they would need either the support or the abstention of smaller regional parties, including the two parties that support Catalan independence from Spain. For the Socialists, a party that prides itself on its staunch defence of Spanish unity, it would be a deeply uncomfortable situation.

The proposal made by Mr Iglesias marks the first concrete offer to create a left-of-centre government coalition since Spain went to the polls in December. The election produced a deeply fragmented parliament that leaves neither the right nor the left an obvious path towards a stable majority.

Mr Rajoy, the leader of the conservative Popular party, has proposed a centrist alliance between his own party, the Socialists and the centrist Ciudadanos party. The Socialists have so far rejected the prime minister's offer.

Problems Facing Leftist Coalition

PSOE insists Catalonia stay united with Spain
Podemos is open to Catalan elections
The third group of fringe parties needed to form a coalition demand Catalonia independence

Spanish Government About to Fall

The most likely possibilities are a new election (if no one can achieve a majority), or an unstable coalition of leftist parties.

Barring an unlikely last minute miracle, the government of Mariano Rajoy is over. New elections are in the cards immediately, or a bit down the road after an unstable coalition of some sort falls apart.

Either way, Rajoy is burnt toast.

Mike "Mish" Shedlock

Saturday, January 23, 2016

Mish's Global Economic Trend Analysis

Arrogant Trump: "I could stand in the middle of 5th Avenue and shoot somebody and I wouldn't lose voters"

Posted: 23 Jan 2016 03:30 PM PST

At an Iowa rally earlier today, Donald Trump made the arrogant claim "I could stand in the middle of 5th Avenue and shoot somebody and I wouldn't lose voters".

CNN reported Trump refused to clarify what he meant.

Donald Trump boasted Saturday that support for his presidential campaign would not decline even if he shot someone in the middle of a crowded street.

"I could stand in the middle of 5th Avenue and shoot somebody and I wouldn't lose voters," Trump said at a campaign rally here.

After the event, Trump declined to answer when asked by CNN to clarify his comments.

Teflon Trump

At what point does making arrogant, seemingly idiotic statements matter?

No doubt his campaign is working on damage control now.

Here's the likely explanation: "Trump was obviously referring to being attacked and responding in kind."

Reaction So Far - Positive

Then again, perhaps Trump can just brush it off. NPR has this Report on Trump.

NPR's Don Gonyea reports that so far, the reaction to Trump's remarks has followed a familiar pattern.

"His audiences love it. His opponents try to use it against him — but so far, to no avail," Gonyea reports. "I talked to some of his supporters and they say, 'Yeah, sometimes he makes me cringe, but I still like him and I still think he's the right thing for America.' "

One supporter, who spoke to ABC News, said he found Trump's point clear — but mentioned Trump could have articulated it differently.

"He probably could've worded it a little bit better," campaign volunteer Brandon Fokkema said.

Fed Up

One thing's for sure: Former New York City mayor, Michael Bloomberg is so fed up with both Democratic and Republican candidates, that despite the longshot odds, Bloomberg Contemplates Running for President as Independent.

Mike "Mish" Shedlock

Bloomberg Contemplates Running for President as Independent; Longest of Longshots

Posted: 23 Jan 2016 03:10 PM PST

Former New York Mayor, billionaire Michael Bloomberg, is fed up with Donald Trump, the republicans in general, Bernie Sanders, and Hillary Clinton's shift to the left to fight Sanders.

As a direct result of being fed up with everyone but himself, Michael Bloomberg Mulling Run for President as Independent.

Mr. Bloomberg, 73 years old, has long contemplated a run at the White House. But the unlikely rise and continued strength of Donald Trump, along with polls suggesting Hillary Clinton's campaign may be flagging, have driven the billionaire businessman closer than ever before to entering the race, a close adviser said Saturday.

Eyeing a potential opening for the first time, Mr. Bloomberg has retained a consultant to help him run on the independent ballot in state primaries. He has commissioned polls to test his path to victory. And he has directed the close circle of advisers who worked for him as mayor and have remained by his side over the past two years since he left office to begin mapping out a blueprint for a run, one adviser said.

That adviser said the former mayor has been upset by what he sees as extremist rhetoric from Republicans in the race, as well as a leftward turn from Mrs. Clinton, who is fending off an unexpectedly strong challenge in the Democratic primary from the more liberal Vermont Sen. Bernie Sanders.

If he runs, Mr. Bloomberg is likely to face hurdles with voters, especially those outside the Northeast, where he is better known. A recent poll by Morning Consult showed Mr. Bloomberg receiving 13% support from voters, Democrat Hillary Clinton getting 36% and Republican Donald Trump 37%. The same poll found that 43% of voters either hadn't heard of Mr. Bloomberg or had no opinion. Morning Consult said the poll was conducted from Jan. 14 to Jan. 17 among a sample of 4,060 registered voters around the country.

Longest of Longshots

Should he choose to run, Bloomberg would be the longest of longshots. But, he has a lot of money to waste.

Should he choose to do so, would it help or hurt Trump?

Mike "Mish" Shedlock