Mish's Global Economic Trend Analysis |
- Stench from Chicago so Bad, Fitch Finally Smells It
- Final Second Quarter "GDPNow" Forecast 2.4% vs. Bloomberg Consensus 2.9%
- Witch Hunt is On; Foolish Ideas on Stopping the Shanghai Carnage; US Bubble Will Burst Too
- Chinese Stocks Plunge 8.5%, Biggest Decline Since February 2007
| Stench from Chicago so Bad, Fitch Finally Smells It Posted: 27 Jul 2015 03:32 PM PDT At long last, the stench from Chicago is so strong that Fitch can finally smell it. Fitch just now downgraded Chicago Board of Education General Obligation bonds to junk status. Fitch and the S&P were holdouts because there's money to be made by purposely pretending a manure factory is a rose garden. MarketWatch reports Fitch Downgrades Chicago Board of Ed (IL) ULTGOs to 'BB+'. Fitch Ratings has downgraded the Chicago Board of Education, IL's (the board) approximately $6.1 billion of unlimited tax general obligation (ULTGO) bonds to 'BB+' from 'BBB-'. The rating has been placed on Negative Watch. Rating Drivers
Fitch can finally smell enough stench from the above rating drivers to label the bonds as junk. The "J" Word The downgrade from BBB- to BB+ is a downgrade to a "non-investment" rating, commonly labeled "junk". Curiously, MarketWatch just could not bear the say the "J-Word". MarketWatch reports "Fitch would downgrade the rating further if there is not clear and meaningful progress over the next several months in reducing the large structural imbalance." I think we can count on that. Deep Into Junk On May 20, I spoke with Sean Egan at the rating agency Egan-Jones how he would rate these bonds. His reply was "Deep Into Junk". For details, please see CNBC's Santelli and Mish Discuss Municipal Bonds; Egan-Jones on Chicago; S&P Blames Moody's; Message to Bondholders. Rate Shop Whores S&P noses are still immune to the stench. On July 2, the S&P cut Chicago Board of Education's GO rating to 'BBB', still investment grade. And on July 8, the S&P Lowered Chicago GO Bonds one notch to "BBB-Plus", also investment grade. When the smell hits the collective noses at the S&P remains to be seen, but I suspect quickly. Rate shop whores simply can never be first with downgrades. For a discussion of how the SEC is to blame for the current environment of Fantsayland bond ratings please see Rate Shopping Whores and Chicago's Bond Rating. Solutions Instead of tackling the underlying problems, Chicago Mayor Rahm Emanuel nickels and dimes businesses to death, further makes Chicago an uncompetitive place to do business, and threatens massive property tax hikes. Emanuel also expects $500 million from the state even though the state budget (which Governor Bruce Rauner correctly refuses to sign) is $4 billion in the hole. For details and recommended solutions, please see Santelli Exchange with Mish: Public Debt, Taxation, Legacy Issues. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Final Second Quarter "GDPNow" Forecast 2.4% vs. Bloomberg Consensus 2.9% Posted: 27 Jul 2015 01:44 PM PDT The Atlanta Fed second quarter GDPNow final estimate came in at 2.4%.  The second quarter GDP official "advance" estimate from the BEA is due out Thursday, July 30 along with the annual revision of the National Income and Product Accounts (NIPA). The Bloomberg Consensus Estimate for second quarter GDP is 2.9%, a half percentage-point higher than the Atlanta Fed model. I will take the under. First quarter GDP releases by the BEA have been all over the map. The initial reading was +0.2%, revised to -0.7%, then revised again to -0.2%. Whatever number comes out Thursday, expect revisions, possibly in both directions. I expect the final first quarter and/or second quarter GDP to be revised lower. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Witch Hunt is On; Foolish Ideas on Stopping the Shanghai Carnage; US Bubble Will Burst Too Posted: 27 Jul 2015 12:08 PM PDT Nearly 1,800 stocks, over 60% of issues traded on the Shanghai and Shenzhen stock exchanges fell by the daily limit of 10% and were halted according to a Financial Times report. When contacted by the Financial Times, the China Securities Regulatory Commission refused to answer any questions. The amusing comment of the day comes from Zhu Ning, deputy dean at Shanghai Advanced Institute of Finance: "If [the government] does nothing then all its previous efforts will have been wasted but if they continue with the rescue efforts then the hole will get bigger and bigger. We hope the regulators will respect the market and the rules of the market." In reality, previous efforts were wasted the moment they were tried. Price discovery is now lacking, and that is a huge problem in and of itself. Absurd Cries for More Intervention and Liquidity On Monday, Zhu Baoliang, director of the economic forecast department of the State Information Centre, a government research agency, told Reuters the stock market crash was having a deep impact on the real economy and that it was "essential for the authorities to cut interest rates and loosen monetary policy further." Bear in mind that it was excessive liquidity that created China's property bubble followed by the stock market bubble. Thus, Zhu Baoliang is another charlatan promoting the inane notion that the cure is the same as the disease. In effect, Baoliang wants to give alcohol to alcoholics. Witch Hunt is On The witch Hunt is on. That means the ridiculous notion of blaming the shorts is in full swing. Chinese regulators even launched a website encouraging people to name the shorts, further stating those found guilty will be "dealt with severely". Loss of Control ZeroHedge discusses shorts in What Loss of Control Looks Like. Actually, regulators were never in control in the first place. It only appears that way when things are going well. Shorts Not the Problem Shorts are not the problem here. Nor were shorts the problem in 2000 and 2008 in the US. Indeed it was the shorts who understood the true nature of the stock market:
"Real Economy" Worries Chinese officials are worried the crash will hurt the "real economy". That's something they should have worried about before they blew the bubble. Moreover, the notion that the "real economy" was doing well in the first place is silly. Rather, speculative activities, and unrealized profits on those activities only made it appear the "real economy" was doing better that it really was. It's too late to do anything now. The only policy that makes any sense is to stand back and do nothing. Doing anything else just fosters more "moral hazard" speculative behaviors. Pointing the Finger in the Right Direction The Fed had a direct role in fostering US speculation in 2000 and 2008, just as the Chinese "regulators" fostered speculation in real estate and stocks in China over the past few years. US stocks are back in bubble territory and the only reason why that is not perfectly obvious is the crash has not yet started here. US Bubble Will Burst Too When the US bubble bursts, we will see more blame the shorts mentality here, just as we see in China now, and also as happened in 2000 and 2008 in the US. The Fed will never point the finger where it belongs: At themselves. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Chinese Stocks Plunge 8.5%, Biggest Decline Since February 2007 Posted: 27 Jul 2015 01:23 AM PDT The crash in Chinese stocks continued today following a respite last week. Shares on the Shanghai index plunged 8.48%, the Biggest One-Day Plunge Since February 2007. The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 8.6 percent, to 3,818.73, while the Shanghai Composite Index SSEC lost 8.5 percent, to 3,725.56 points.Immediately Clear It should be immediately clear stocks are in a bubble, so there is no need to search for a "reason" for the plunge. If anything, one might wonder why the stocks rose to such absurd valuations in the first place. $SSEC Shanghai Index  Stock rose from about 2300 in November to 5178 in June. That was an advance of 125% or so in about seven months. Today's decline is shown by the second blue arrow. Since the plunge in June, China stepped in to directly buy stocks, prohibit short selling, halted trading on half the companies, and prohibited large shareholders from selling any shares for six months. Expectation of such moral-hazard maneuvers coupled with cheap money is exactly what fuels bubble activity in the first place. Amusingly, margin buying is still at or near record levels. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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