luni, 18 mai 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Why Are Economists' Predictions So Damn Awful?

Posted: 18 May 2015 12:53 PM PDT

Economists have bought into the transitory soft patch thesis of the Fed, hook line and sinker. Please consider Economists' Forecast: Here We Grow Again.
Forecasters in the latest Wall Street Journal survey estimated the U.S. economy contracted at a 0.3% pace in the first quarter because of hits from winter weather and the West Coast port slowdown. But the panel, on average, sees annualized economic growth of 2.8% in the second quarter, supported by stronger job gains and wage growth.

The survey of 62 economists, not all of whom answered every question, showed a widespread expectation that consumers would start spending again after several months of avoiding the mall. The May survey was conducted before the Commerce Department reported retail sales were flat in April, but some economists played down the number.

"The April spending numbers will look better once we get information on services," said Stuart Hoffman of PNC Financial Services. "That's where consumers are spending their money, and the April increase in restaurant sales points to greater demand for services overall."

On average, nonfarm payrolls are expected to rise by 223,000 per month for the final three quarters of 2015, better than the 184,000 pace of the first quarter. The unemployment rate is forecast to fall to 5.1% by the end of this year from 5.4% in April.

Gregory Daco of Oxford Economics said the worst of the pain may have already occurred, especially since energy companies reacted quickly to cheap oil by cutting payrolls and capital-spending plans. "While trade and energy will still have an impact, the drag will be less in the second half," he said.

"Solid job growth and low energy prices could stir spending," said Michael Moran of Daiwa Capital Markets.
Pathetic Performance

Here is an amusing chart of the Fed's own pathetic performance (from Honey I Shrunk the Kids).

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The date of that post is November 14, 2014. Pay particular attention to that green 2015 line.

Here is the evolution of the Atlanta Fed "GDPNow" first quarter GDP Forecast as of April 2, 2015.

GDPNow Estimate for 1st Quarter - April 2, 2015




The Atlanta Fed at least has a model that makes adjustments. It is not the official Fed forecast.

Next consider a chart from my May 14 post Second Quarter GDP Forecast: Blue Chip vs. GDPNow; Where Might the Fed be Wrong?.

GDPNow vs. Blue Chip



Why the Awful Predictions?

Inquiring minds may be asking "Why Are Economists' Predictions So Damn Awful?"

I was discussing this just yesterday with a small group that shares thoughts every day.

My friend "BC" commented ... "The parasitic 'money-for-nothing' accumulation of money-inflation-induced financial 'wealth' is now a huge net cost to productive economic activity and the capacity of society to sustain its standard of living. Few eCONomists can frame the situation in this way because they are beholding to Wall Street and the top 0.001-1% owners of the rentier-socialist corporate-state at the expense of the middle class".

Pater Tenebrarum at the Acting Man blog replied ... "I totally hate how they have managed to buy off economists. There was time when economists were a thorn in the side of the ruling classes. Previously, the profession required one to tell impolitic truths. Today's economists are spokesmen for the most viciously statist ideology and have essentially become servants of the beast, paid far above their market value for the propaganda services they render."

Self-Preservation Bias

I have commented on this before as well. Investment firms typically get paid on investments, not counting cash. The way to get people invested in something is to be 100% bullish, 100% of the time.

Moreover, you never get fired for being too bullish. Heaven forbid you miss a big rally even if it is as speculative as the dot-com boom in 1999 or the housing boom in 2006.

Explaining the Bias

  1. The Fed as no vested interest in spooking anyone
  2. Home builders and realtors always say "now is a good time to buy a home"
  3. The sell side investment houses always come up with reasons to buy stocks.
  4. No one ever gets fired for being too bullish

As a self-preservation mechanism, economists are trained to be bullish. A good example of a trade bias is the National Association of Home Builders' Housing Market Index.

In spite of consistently poor traffic for years, home builders have maintained very strong expectations of future home sales.

Recent Economist Misses


Economists have been very wrong for at least five months. And in general, they have been far too optimistic for years.

It all adds up to perpetual economic overoptimistic bias with subsequent downgrades.

Recession Odds



In spite of the fact first quarter GDP is highly likely to be negative, economists believe there is only a 1.2% chance the US is in recession.

Whether or not you think a recession is likely, 1.2% is totally absurd.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Home Builders Optimistic Despite Decline in Traffic; Housing Market Index Declines

Posted: 18 May 2015 10:44 AM PDT

The National Association of Home Builders' Housing Market Index once again reveals positive builder sentiment even though new home sales are weak. The HMI is Derived from a monthly survey that NAHB has been conducting for 30 years.

The index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

Index Lower Than Expected, But Positive

A new release came out today and although the index was positive, the Bloomberg Consensus Number was lower than any economist's forecast.


The housing market index has long been signaling strength in the new home market that has yet to appear, but the signal is less strong in May. The index fell 2 points from April to 54 which is below the low-end Econoday forecast.

Weakness in traffic has been a major feature of this report, underscoring the lack of first-time buyers in the housing sector. A plus in today's report is a 1 point gain in future sales, a component that is well out in front at a very strong 64.
Traffic vs. Expectations

Traffic is weak, but future expectations are very strong. The disconnect suggests more than a little bit of builder overoptimism. Let's dive into the actual report for a closer look.

The NAHB reports Builder Confidence Falls Two Points in May.
"Despite this month's slight dip, builder confidence in the new home market remains above the 50-point benchmark," said NAHB Chairman Tom Woods, a home builder from Blue Springs, Mo. "Overall, the second quarter of 2015 is shaping up to be very solid." 

"Consumers are exhibiting caution, and want to be on more stable financial footing before purchasing a home," said NAHB Chief Economist David Crowe. "On the bright side, the HMI component measuring future sales expectations has been tracking upward all year, mortgage rates remain low, and house prices are affordable. These factors should spur the release of pent-up demand moving forward."

The index's components were mixed in May. The component charting sales expectations in the next six months rose one point to 64, the index measuring buyer traffic dropped a single point to 39, and the component gauging current sales conditions decreased two points to 59.
NAHB Housing Market Index



If you ask the builders, sales conditions are very good with a score of 59. Sales expectations rose to an excellent score of 64. Meanwhile, actual lookers score a very poor 39.

Average it all together and you get the totally useless chart above.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Rate Shopping Whores and Chicago's Bond Rating

Posted: 18 May 2015 01:29 AM PDT

Moody's vs. S&P Rating of Chicago

On May 12, Moody's downgraded Chicago's GO bonds to Junk.

I commented on that downgrade in Moody's Cuts Chicago Bond Rating to Junk; City Faces $2.2 Billion in Various Termination Fees; Irresponsible to Tell the Truth.

On May 14, S&P Downgraded Chicago General Obligation Bonds from A+ to A-. That rating is three levels above junk.

Two Questions

  1. Why was the S&P slow in the downgrade?
  2. Why does Moody's rate Chicago as junk while the S&P rate Chicago three levels higher than junk.

Rate Shopping Whores

The answer to both questions is rate shopping.

Mark Glennon at WirePoints explains S&P, slated to rate upcoming Chicago bond sale, goes comparatively easy on downgrade. Hmmm.

"Chicago plans to price offerings of $201 million and $182 million on May 19, as reported yesterday by Bloomberg. And guess who is one of the two agencies slated to rate the new offering, hired by the city? You take it from here. What a system."

Origin of Rate Shopping

It did not use to work like this. And I have been harping about the underlying problem for years. A good starting point is my September 28, 2007 post Time To Break Up The Credit Rating Cartel.

Here is a recap.

The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.

Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO). It originally named seven such rating companies but the number fluctuated between 5 and 7 over the years.

Establishment of the NRSRO did three things (all bad):

  1. It made it extremely difficult to become "nationally recognized" as a rating agency when all debt had to be rated by someone who was already nationally recognized.
  2. In effect it created a nice monopoly for those in the designated group.
  3. It turned upside down the model of who had to pay. Previously debt buyers would go to the ratings companies to know what they were buying. The new model was issuers of debt had to pay to get it rated or they couldn't sell it. Of course this led to shopping around to see who would give the debt the highest rating.

Instead of rating agencies getting paid on the basis of how well they rated debt, the rating agencies got paid on how much debt they rated!

Explaining CDO Garbage Rated AAA

If you were looking for a reason all that CDO tranch garbage was ever rated as AAA, you now know. Rating agencies made money by rating it AAA.

Back to Mark Glennon: "Guess who is one of the two agencies slated to rate the new offering, hired by the city?"

Looking for another questionable Chicago debt rating? If so, I just happen to have one.

On May 11, BusinessWire reported Kroll Bond Rating Agency Assigns A- Rating with a Stable Outlook to Six Series of Reoffered City of Chicago, Illinois General Obligation Bonds.

Please note KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO).

Kroll Background

How did Kroll break into the bond rating business? A February 2011 New York Times article explains: A Corporate Sleuth Tries the Credit Rating Field.
FEW people ever penetrate the dark side of money, but Jules Kroll is one of them. Fortunes plundered, ransoms paid, deals cut — the uncovering of such secrets, and the million smaller confidences that are his history, have made Mr. Kroll a rich man.

Which is why his latest venture seems at once so unusual and yet so very Kroll. At 69, an age when other multimillionaires are working on their backswings, he is getting into — of all things — the credit ratings business.

You might wonder why anyone pays attention to them anymore. After all, the financial crisis of 2008 and 2009 laid bare the conflicts at the heart of the ratings game. The world learned that the three dominant services — Moody's, Standard & Poor's and Fitch — had stamped sterling ratings on mortgage investments that turned out to be nearly worthless. It was a lesson that nearly brought down the financial system.

Some small ratings services have challenged the establishment by having investors — that is, the people who actually buy securities — pay for ratings. But for all his talk about shaking up this industry, Mr. Kroll is hewing to the status quo. Like Moody's, S.& P. and Fitch, Kroll Bond Ratings will be paid by the issuers, just as the big three are.

"What does he know about giving me a rating on a security?" asks Richard X. Bove, an analyst at Rochdale Securities.

 Mr. Kroll, for his part, is thinking big — as he always has. He wants to grab 10 percent of this $4 billion-a-year industry within five years.

But even that seemingly modest goal may be a reach. Moody's and S.& P. each have about 40 percent of the ratings market. The remainder is spread among Fitch and several lesser-known agencies.

"I think it's a tough industry to break into, but if anyone can do it, it's Jules Kroll," says Michael Charkasky, the chief executive of Altegrity, which acquired Kroll Inc. last year.
How To Gain Market Share

Gaining market share is easy. All you have to do is give junk an AAA rating when the other guy won't.

The debt rating scam is such that you lose business if you do the job better than others. I repeat what I said in 2007: Time To Break Up The Credit Rating Cartel.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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