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Friday, January 29, 2016

Mish's Global Economic Trend Analysis

Poll Shows Nearly 40% of Germans Want Merkel to Resign

Posted: 29 Jan 2016 03:54 PM PST

As proof of how badly German chancellor Angela Merkel has handled the refugee crisis, a new Poll Shows 40 Percent of Germans want Merkel to Quit.

Nearly 40 percent of German voters think Chancellor Angela Merkel should quit over her liberal asylum policy after almost 1.1 million newcomers arrived last year, a poll showed Friday.

As the mood in Germany has shifted from a euphoric welcome for people fleeing war and persecution last September to growing doubts about the country's ability to accommodate and integrate the record influx, the popular Merkel has come under increasing pressure.

However, the poll for Focus news magazine conducted by the independent opinion research institute Insa among 2,047 German citizens showed that a larger share -- nearly 45 percent -- did not think Merkel should resign.

Among members of her conservative Christian Union bloc, nearly 27 percent said they wanted Merkel, who has been in power since 2005, to step down.

Peak Merkel

I called for this well in advance, on October 18, 2015 to be precise: Swamped By Stupidity; Peak Merkel.

But politicians don't resign. They just keep on insisting they are right until they are forced out or voted out of office.

As recently as January 20, Merkel insisted Austrian cap on refugees 'not helpful' for European solution.

Yesterday, Merkel supposedly "struck an accord late Thursday with her fractious left-right coalition to tighten asylum policies, notably by making it easier to send back arrivals from North Africa and by delaying family reunifications."

What a joke!

The family reunification proposal is a rehash of an announcement from months ago. And deporting refugees requires approval from the nation of origin.

Do Syria and the African nations want the refugees back?

Merkel doesn't get it, and she likely never will. Her time is past.

Mike "Mish" Shedlock

BEA 4th Quarter GDP 1st Estimate 0.7%; Q&A: Why Did GDPNow Rise After Durable Goods? When are Construction Revisions Coming?

Posted: 29 Jan 2016 11:57 AM PST

The BEA "Advance GDP" estimate for 4th quarter came in today at +0.7% vs. an Econoday Consensus Estimate of 0.9%.

Consumer spending is the central driver of the economy but is slowing, at least it was during the fourth quarter when GDP rose only at a 0.7 percent annualized rate. Final demand rose 1.2 percent, which is the weakest since first quarter last year but is still 5 tenths above GDP.

Price data are not accelerating, at plus 0.8 percent for the GDP price index which is the lowest reading since plus 0.1 in the first quarter last year. The core price reading is only slightly higher, at plus 1.1 percent which is also the weakest reading in a year.

There are definitely points of concern in this report, especially the weakness in exports and business investment, but it's the resilience in the consumer, despite a soft holiday season, that headlines this report and should help confirm faith in the domestic strength of the economy.

GDPNow Final Estimate 1.0%

The Atlanta Fed "Final" GDPNow Estimate for the 4th quarter was posted on January 28.

That was the final estimate the GDPNow model will make for the 4th quarter.

The Atlanta Fed's first estimate of 2016 1st quarter GDP growth will be released Monday, February 1.

Q&A #1: Why Did GDPNow Rise After Durable Goods Report?

The above question pertains to the Atlanta Fed model which rose from 0.7% to 1.0% following a disastrous durable goods report on the 28th (See Shocking Crash: Durable Goods Orders Plunge 5.1%, Shipments Drop 2.2%, Huge Negative Revisions; Recession Here?)

Answer: Patrick Higgins, Senior Economist for the Atlanta Fed, explains via email ...

"Hi Mish, As you probably noticed the model forecast for the contribution of equipment investment to fourth quarter GDP growth declined 0.07 percentage point after the durable goods manufacturing report. But this was more than offset by a 0.20 percentage point increase in the contribution of inventory investment to fourth quarter growth after that same report. The model didn't use the December data on shipments of nondefense aircraft & parts which had an unusually large decline last month (from $16.0 billion to $10.8 billion). That data isn't ever folded in until the exports and imports data for civilian aircraft and parts is released. The net shipments measure fed into the model is aircraft & parts shipments plus imports minus exports. Since the December international trade data won't be released until after the GDP release, the December aircraft data won't ultimately be used for the fourth quarter GDPNow forecast."

Q&A #2 - Are Econoday Economists Tracking GDPNow?

Answer: It appears so at first glance. The Econoday consensus estimate of 0.9% is remarkably close to the 1.0% GDPNow estimate on the 28th and the prior estimate of 0.7% on the 20th. Then again, the Econoday range was a remarkable 0.0% to 2.3%. Why any economist would have predicted 2.3% is a mystery. That alleged economist ought to be following GDPNow more closely.

Q&A #3 - When Will Revisions Come?

Answer: Any time between February 26, 2016 and the next 10 years. The first revision to 4th quarter GDP will come on February 26. The BEA won't call it a revision though. Instead they will label the next revision the "preliminary" estimate for 4th quarter. At that time, first quarter 2016 will be nearly two-thirds over. The alleged "final" estimate for 4th quarter 2015 will come on March 25. Here's the BEA Schedule.

Q&A #4 - What About Construction Revisions?

The above question pertains to a massive GDP revision announced on January 4.

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

The BEA blames a "Processing Error" for one of its biggest errors in history. That processing error will affect GDP all the way back to 2005. My statement that revisions can come for 10 years was not a joke.

When will we know how construction affected GDP? I called the BEA on this in early January. The date I recall was July 26.

These guys are fast aren't they?

The main effect of the processing error is that construction spending for 2014 was way lower than reported. This will cause GDP in 2014 to rise.

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

Newport's assessment about 2015 is undoubtedly wrong.

On January 5, I posted this table of construction revisions that I calculated from the BEA's revision announcement.

Total Residential Construction Spending vs. Previous Reports

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

A quick glance at that table should convince you that GDP will go up in 2014 and down in 2015.

We will find out by how much in July. Lovely.

I guessed GDP would go up by about 25 basis points in first quarter of 2015, and down by about 50 basis points in second and third quarters.

If so, that would subtract about 75 basis points from 2015. My guess could be way off, but at least I have the sign correct.

Q&A #5: What About Recession?

At the start of recessions, GDP is frequently revised way lower for prior quarters, long after the fact, and without a doubt the US economy is flirting with, if not in recession right now.

Thus, construction spending is not the only subtraction I foresee.

For my take on recessions vs. the Fed model (not the Atlanta Fed GDFP model), please see Fed "Workhorse" Model Says Odds of Recession in Next Year Only 3.56%; What are the Real Odds?

Whether or not you accept my statement the US economy is very close to if not in recession right now, the Fed 12-month look ahead model of 3.56% is preposterous.

Q&A #6: What About the Consumer?

Bloomberg repeated the widely held belief "Consumer spending is the central driver of the economy."

I dispute that. So do others. See my article Debunking the Myth "Consumer Spending is 67% of GDP"

I cannot claim credit for the idea. To fully understand why the consumer is not the driver of the economy, please see ... Gross Domestic Output: Linking Austrian and Keynesian Economics: A Variation on a Theme by Mark Skousen.

Skousen destroys the fallacy that consumer spending drives the economy.

Mike "Mish" Shedlock

Thursday, January 28, 2016

Mish's Global Economic Trend Analysis

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

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

Posted: 28 Jan 2016 11:03 PM PST

Meaning of "Now"

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

Well, that was then, and this is now.

Negative Rates Announced

Today we learn Bank of Japan Adopts Negative Interest Rates.

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

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

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

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

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

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

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

Surprise, Surprise, We Lied Again

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

Mike "Mish" Shedlock

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

Posted: 28 Jan 2016 01:18 PM PST

Future of Farming

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

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

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

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

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

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

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

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

Go Vertical

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

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

Vertical Farms Half the Size of a Wal-Mart

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

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

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

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

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

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

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

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

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

Tipping Point

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

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

Japan will have similar technology in a similar timeframe.

The tipping point for worker-less agriculture has arrived.

Mike "Mish" Shedlock

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

Posted: 28 Jan 2016 10:35 AM PST

Crash!

Durable goods orders and shipments crashed in December.

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

Crash vs. Thud

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

Econoday reports ...

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

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

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

Inventories Up 5 Consecutive Months

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

Here are some additional inventory highlights:

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

Autos Down 4th Quarter

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

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

Recession Here?

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

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

Mike "Mish" Shedlock

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

Posted: 28 Jan 2016 12:39 AM PST

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

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

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

The Model

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

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

Practical Considerations

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

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

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

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

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

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

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

Yield Curve and Recessions

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

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

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

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

Holy Grail

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

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

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

Recession Odds

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

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

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

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

One Model is Wrong

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

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

Take your pick.

Some economists take the Fed's model.

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

Simply put, some economists refuse to think.

Reflections on Economic Modeling

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

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

Mike "Mish" Shedlock

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