marți, 28 iulie 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Sentiment Measures vs. Retail Spending: Clueless Clues and Random Noise

Posted: 28 Jul 2015 08:04 PM PDT

Economists Shocked

Economists were shocked by the plunge in the Conference Board Consumer Confidence Index this morning, well below the any economist's guess in Bloomberg's Econoday Forecast.
The consensus estimate was 99.6. The consensus range was 97.0 to 102.0. And the actual result ... 90.9.

Consumer confidence has weakened substantially this month, to 90.9 which is more than 6 points below Econoday's low estimate. Weakness is centered in the expectations component which is down nearly 13 points to 79.9 and reflects sudden pessimism in the jobs outlook where an unusually large percentage, at 20 percent even, see fewer jobs opening up six months from now.

A striking negative in the report is a drop in buying plans for autos which confirms weakness elsewhere in the report. Inflation expectations are steady at 5.1 percent which is soft for this reading.
Survey Methodology

How many people does the conference board survey each month? The answer is 3,000. Supposedly that's all it takes to determine car sales, job prospects, economic slowing, home purchases, etc.

Bloomberg reports "While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month."

I will return to that idea in a bit. But first let's take a look at what others say.

Risk for the Economy

Please consider Plunge in Consumer Confidence Exposes Risk for U.S. Economy.

"A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers' confidence," Lynn Franco, director of economic indicators at the Conference Board, said in a statement.

Really? US consumers care about the Chinese stock market and Greece? Since when?

"A drop in U.S. sentiment this month that results in weaker retail spending would represent a challenge to the Fed," said the article.

Other Measures of Sentiment

The Conference Board "Consumer Confidence" report is not to be confused with the University of Michigan "Consumer Sentiment" report or the Gallup "Confidence Index" survey.

With that confusion out of the way, and in reference to the University of Michigan sentiment numbers, please consider the July 17 MarketWatch report Consumer Sentiment Drops from Five-Month High.
Consumers' attitudes soured in July, with a gauge of their sentiment pulling back from June's five-month high, according to reports on the University of Michigan gauge released Friday.

The University of Michigan's gauge of consumer sentiment fell to a preliminary July reading of 93.3 from a final June level of 96.1. Economists polled by MarketWatch had expected a July figure of 95.

Economists follow readings on confidence to look for clues about consumer spending, the backbone of the economy. Earlier this week the government reported retail sales fell in June, the first drop in four months. Americans spent less at car dealers, and furniture and clothing stores, among other areas.

However, the retail-spending drop may be short-lived, economists say. A growing economy that's adding a healthy number of jobs should boost confidence and support spending.

"Despite the decline, consumer sentiment remains relatively high, reflective of continued improvement in job market conditions, limited inflation, and an economy that appears to have re-gathered some momentum after stumbling out of the gate early this year," said Jim Baird, chief investment officer for Plante Moran Financial Advisors. "Recent stock market volatility, increasing gas prices, and the most recent tensions around the ongoing debt crisis in Greece were likely the key drivers of the drop."
Proposed Survey Question

MarketWatch repeats nonsense about Greece once again.

I suggest a survey question: "Do you give a rat's ass about Greece?"

Whether or not Greece or Italy eventually matters is irrelevant. Until they do matter, US consumers will not care one iota.

Gallup Confidence Index Continues Slide

In contrast to the Conference Board and University of Michigan volatility, the Gallup Confidence Index has been trending lower most of the year.


Gallup's Economic Confidence Index is the average of two components: how Americans rate the current economy and whether they feel the economy is getting better or getting worse. The index has a theoretical maximum of +100, if all Americans rate the economy as excellent or good and improving; and a theoretical minimum of -100, if all Americans rate the economy as poor and getting worse.

The current conditions score fell four points from the week prior to its current score of -9, accounting for the entire decline in the overall index. This was the result of 23% of Americans saying the economy is "excellent" or "good" and 32% saying it is "poor." Meanwhile, 39% of Americans said the economy is "getting better," while 57% said it is "getting worse." This resulted in an economic outlook score of -18, unchanged from the previous week.



Bottom Line

Though Americans' confidence in the national economy has skewed negative for six months now, the recent drop of the current conditions component comes on the heels of a new path for solving the Greek debt crisis and amid a tumultuous period for Chinese stocks. The instability abroad could be fueling Americans' doubts about the health of the U.S. economy, not to mention that the Dow closed lower several days in a row last week.
Another Blame on Greece

There you have it: Another blame on Greece and China with the addition of the DOW dropping last week.

Might I point out to Gallup ....

  • The Gallup Index has been sinking since mid-January
  • The Plunge in China started in mid-June
  • The plunge in the DOW (that no one really follows anyway) is essentially nonexistent

Rather than asking, analysts leap to what I believe are absurd conclusions about Greece. Why don't they just ask: "Do you give a rat's ass about Greece?"

Poll Discrepancy

Note the discrepancy in the three polls. Supposedly all these surveys are statistically valid measures of sentiment.

It seems the polls forgot to measure the same 3,000 people.

Retail Spending

Let's return to the notion that confidence equates to retail spending. Bloomberg Econoday states "Typically retail sales will move in tandem with consumer optimism - although not necessarily each and every month."

This notion is widely believed, even by the Fed. I have questioned this belief before, but let's put the idea under the microscope for further examination.

Consumer Confidence vs. Retail Sales



Unfortunately, that data only goes back to 2012 (without paying for it). But the chart, as shown, ought to raise some eyebrows on widely believed theory.

The next set of charts is even more interesting.

University of Michigan Sentiment vs. Retail Sales



That chart is certainly amusing. It suggests retail sales go up except in recessions, and perhaps even in recession. But let's look at this still one more way.

Year-Over-Year Percentage Changes: Sentiment vs. Retail Sales



Same Chart with Discrepancies Noted



Random Noise on Leading Indicators

The above chart shows year-over-year percentage changes in sentiment vs. retail sales.

The result: random noise.

Note that retail sales are not adjusted for CPI or for population growth (putting an upward pressure on sales). Nor do economists factor in demographics of aging boomers or changing attitudes of millennials (putting downward pressures on sales).

Some attitudes are fleeting, others not. And debt remains a huge overhand.

Expecting retail sales to match sentiment is a hopeless proposition, yet one economists cling to.

Supposedly, sentiment is a "leading indicator".

A leading indicator of what?

Mish Economic Prognosis

  1. Retail spending does not follow sentiment in any predictable pattern.
  2. Sentiment measures often conflict.
  3. Sentiment is not a valid leading economic indicator.
  4. Consumers are not concerned about Greece.
  5. Consumers are concerned about rising rent.
  6. Consumers are also concerned about rising health care costs.
  7. The decline in gas prices that economists erroneously expect consumers to spend on junk, pales in comparison to points 5-6.
  8. A decline in auto sales, long overdue, will shock economists and the Fed.
  9. Rising minimum wages will take a huge bite out of job growth.
  10. This economy is much weaker than most assume.

I believe points 1-3 are proven. Points 4-10 are my suggestions.

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.

Simmereing Stew; Italy's Finance Minister Joins "United States of Europe" Parade; Germany's "5 Wise Men" Argue for Grexit

Posted: 28 Jul 2015 01:51 PM PDT

Italy Seeks Political Union

As expected, Italy has joined the "United States of Europe" parade. And also as expected, some from Germany want no part of it. Let's start with Italy.

Italy's finance minister, Pier Carlo Padoan calls for 'Political Union' to Save Euro.
Italy's finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move "straight towards political union" is the only way to ensure the survival of the common currency.

Pier Carlo Padoan's comments reflect how the tortured and dramatic negotiations that led to this month's deal on a third bailout of Greece have triggered a round of soul-searching about the future of monetary union across European capitals.

"The exit and therefore the end of irreversibility is now an option on the table. Let's not fool ourselves," he said in an interview in his central Rome office.

Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered.

"To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy," Mr Padoan said. "And this fiscal policy must respond to a parliament, and this parliament must be elected. Otherwise there is no accountability."
Germany's "5 Wise Men" Argue for Grexit

In contrast to tighter integration, Germany's "5 Wise Men" say Let Debtor Nations Leave Euro.
Countries should be able to exit the euro as a "last resort" if they are unable to manage their debts, the German government's independent economic advisers say, in a sign of Berlin's hardening attitude towards propping up fellow members of the single currency.

The mere suggestion of a country leaving what was supposed to be an irreversible currency union had long been taboo. But Germany's finance minister, Wolfgang Schäuble, broke it two weeks ago by suggesting a possible five-year eurozone "timeout" for Greece.

"A permanently uncooperative member state should not be able to threaten the existence of the euro," the economists said in a special report, published on Tuesday, calling for countries to exit the eurozone if it is necessary as an "utterly last resort".

The five-member independent panel, known as the "wise men", also argued that creditors should be forced to shoulder losses if states go bankrupt, encouraging them to scrutinize more closely the risks before they invest.
Special Report of the Council

Here's a link to the Executive Summary, in English. The Full Text is in German only. Here are a couple of key snips from the summary.
The crisis in the euro area has revealed fundamental problems in the design of the single currency area. Firstly, there was a lack of economic and fiscal policy discipline. And secondly, there was no credible mechanism to respond to crises.

It has become evident in the past years that the euro area member countries are overwhelmingly unwilling to give up national budget autonomy. To provide a stable framework for the Monetary Union based on the principle of unity of liability and control, the German Council of Economic Experts has developed a long-term framework ("Maastricht 2.0", see Annual Economic Report 2012
paragraphs 173ff; Annual Economic Report 2013 paragraphs 269ff.).

For the no-bailout clause to become credible, an insolvency mechanism needs to be created that requires a maturity extension of government bonds as part of future adjustment programmes if public debt is not deemed sustainable. In the event of over-indebtedness or a material breach of fiscal rules, an ESM adjustment programme should only be approved after a debt haircut is imposed on private creditors. If a member country continually fails to cooperate, the stability and very existence of Monetary Union may be at risk. A country's exit from Monetary Union must therefore be possible as a last resort.

In contrast to these reforms, short-term measures to address acute problems harbour a serious long-term threat to the stability of the euro area. This also applies to reform proposals currently under discussion, such as establishing a fiscal capacity or a European unemployment insurance. The institutional framework of the single currency area can only ensure stability if it follows the principle of unity of liability and control. Reforms that stray from this guiding principle plant the seeds of further crises and may damage the process of European integration.
Creditors vs. Club-Med Countries

The club-med countries with high unemployment seek unemployment insurance. Germany says that would "harbour a serious long-term threat to the stability of the euro area".

Germany wants tighter fiscal restraints and a "Maastricht 2.0". The club-med countries want fewer restraints and less austerity.

Germany wants to allow for eurozone exit. Italy and many other countries don't.

Inane Parliament Proposal

Like French president Francois Hollande, Padoan calls for an "elected eurozone parliament alongside the existing European Parliament ".

I mocked that idea in Hollande Pleads for Creation of Eurozone Government; United States of Europe?

Specifically, Hollande wants to eliminate "insufficiencies" (not inefficiencies) of the existing levels of government. Let's have a recap.
Counting "Insufficiencies"

  • European Commission: The European Commission (EC) is the executive body of the European Union responsible for proposing legislation, implementing decisions, upholding the EU treaties and managing the day-to-day business of the EU. The Commission operates as a cabinet government, with 28 members of the Commission (informally known as "commissioners"). One of the 28 is the Commission President (currently Jean-Claude Juncker) proposed by the European Council and elected by the European Parliament. The Council then appoints the other 27 members of the Commission in agreement with the nominated President, and the 28 members as a single body are then subject to a vote of approval by the European Parliament.[Jean-Claude Juncker is president of the European Commission and a member of the European People's Party (EPP).
  • Eurogroup: The Eurogroup is the recognised collective term for informal meetings of the finance ministers of the eurozone, i.e. those member states of the European Union (EU) which have adopted the euro as their official currency. The group has 19 members. It exercises political control over the currency and related aspects of the EU's monetary union such as the Stability and Growth Pact. Its current president is Dutch finance minister Jeroen Dijsselbloem. The ministers meet in camera a day before a meeting of the Economic and Financial Affairs Council (Ecofin) of the Council of the European Union. They communicate their decisions via press and document releases. This group is related to the Council of the European Union. The Eurogroup is also responsible for preparing the Euro Summit meetings and for their follow-up.
  • European Union: The European Union has 28 member states. It operates through a system of supranational institutions and intergovernmental-negotiated decisions by the member states. The institutions are: the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, the European Central Bank, the European Court of Auditors, and the European Parliament.
  • European Parliament: The European Parliament is the directly elected parliamentary institution of the European Union.
  • Euro Summit: The Euro Summit (not to be confused with the EU summit) is the meeting of the heads of state or government of the member states of the eurozone (those EU states which have adopted the euro). It is distinct from the EU summit held regularly by the European Council, the meeting of all EU leaders.
  • European Council: The European Council (not to be confused with the parliamentary council of Europe or the Council of the European Union) is the Institution of the European Union that comprises the heads of state or government of the member states, along with the council's own president and the president of the Commission. 
  • Council of the European Union:  The Council of the European Union (not to be confused with the European Council or the Parliamentary Assembly of the Council of Europe), is sometimes just called "the Council". It is part of the essentially bicameral EU legislature (the other legislative body being the European Parliament) and represents the executive governments of the EU's member states.
  • Parliamentary Assembly of the Council of Europe: PACE is not to be confused with the  European Parliament or the Assembly of the Western European Union or the Council of the European Union or the European Council or the Council. The Parliamentary Assembly of the Council of Europe (PACE) is one of the two statutory organs of the Council of Europe, an international organisation dedicated to upholding human rights, democracy and the rule of law, and which oversees the European Court of Human Rights. It is made up of 318 parliamentarians from the national parliaments of the Council of Europe's 47 member states, and generally meets four times a year for week-long plenary sessions in Strasbourg.

Growth of European Council Meetings

  • Meetings of the European Council, an institution of the European Union (EU) comprising heads of state or government of EU member states, started in 1975 as tri-annual meetings.
  • The number of meetings grew to minimum four per year between 1996 and 2007, and minimum six per year since 2008.
  • From 2008 to 2015, an average of seven council meetings per year took place.
  • Since 2008, an annual average of two special Euro summits were also organized in addition - and often in parallel - to the EU summits.
Theory vs. Practice

In theory, France and Italy want another parliament. In practice, is France prepared for what that could mean?

It could mean the end of inane work rules such as no work on Sunday. It could also mean higher retirement ages and the end of collective bargaining. Topping things off, it could mean the end of agricultural tariffs, the only way many French farms survive.

The risk for Germany is that parliament passes some inane fiscal rules or decides Sundays off is a good idea for everyone.

If countries truly understand the potential implications, neither France nor Germany would risk ceding total sovereignty to yet another parliament.

My Way

Topping off the "no deal" cake, the German constitution prohibits bailouts and transfers. France and Italy are open to transfer mechanisms, but not Finland and others.

And so here we are.

Everyone wants "deeper integration" their way. It cannot be done, and it's impossible to fix key flaws inherent in the creation of the eurozone.

Simmering Stew

Creditor-debtor issues will simmer and simmer until another boiling over point is reached.

Italy may very well be next. For details, please see Record Eurozone Borrowing: Public Debt Rises With Recovery; Greece a Small Sideshow Compared to Italy.

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.

Another Bridge Loan Likely as Greek Talks Break Down; Shocked Over Parallel Currency Plans? Why?

Posted: 28 Jul 2015 11:48 AM PDT

Greece insists it has met all of the conditions for another bailout, but only one vote matters, that of the creditors who say Greece hasn't.

One of the stickiest issues is hiking taxes on farmers.

But if tax hikes is what the creditors want, that's what they will get. Greece should realize that by now.

Nonetheless, the bickering lingers and it will continue until Greece finally is forced out of the eurozone.

Greek Talks Break Down

Meanwhile, Denials Fly in War of Nerves Over Greek Debt Talks.
Any hope of a fresh start in fraught relations between Greece's leftist government, purged of its most radical members, and the institutions representing its creditors, appeared to be dashed by the flurry of assertions and rebuttals.

The two sides couldn't even agree on when the talks began.

Differences included the pace and conduct of bailout talks, whether or not Greece needs to enact further laws before a deal, the reopening of the Athens stock exchange, and the activities of former finance minister Yanis Varoufakis, who continues to heap abuse on the creditors in his blog.

Greek official said suggestions that Greece needed to pass further reform legislation before a bailout deal were not justified by the euro summit statement or subsequent exchanges.

However, euro zone officials made clear that Athens must enact measures to curb early retirement and close tax loopholes for farmers before any new aid is disbursed. Greece needs more finance by Aug. 20, when it owes a 3.5 billion euro payment to the European Central Bank.

Hanging over the new talks is the legacy of Varoufakis, whom Tsipras sidelined in the final phase of the talks before accepting even more stringent bailout terms this month. He continues to create problems for the premier by denouncing the bailout agreement and accusing the creditors of having treated Greece like a colony.
Uproar Over Varoufakis' Parallel Currency Plan

Yahoo!Finance reports Varoufakis 'Parallel' Currency Ploy Sparks Uproar in Greece
Revelations by Greece's flamboyant former finance minister Yanis Varoufakis of secret plans for a parallel currency have sparked uproar in the country as the embattled leftist government on Monday began to rebuild tattered trust with its international creditors.

On Monday, a recording of Varoufakis' remarks was released by the Official Monetary and Financial Institutions Forum.

In it, the maverick economist said Prime Minister Alexis Tsipras had "given the green light" for a Plan B before coming to power in January.

The goal was to create a "functioning parallel system" of liquidity in case the European Central Bank cut off support to Greece's banks, as indeed it did after talks with the hard-left government on new austerity reforms broke down in June.

Varoufakis said that a five-man team under his orders had hacked into the finance ministry and obtained access to the tax file numbers of Greek taxpayers in order to create duplicate accounts.

The subterfuge, he explained, was necessary to avoid alerting Greece's EU-IMF creditors who "fully" control the revenue mechanism.

The operation was designed to enable the ministry and also taxpayers to make digital transfers without having to use the banks, which as it turned out, had to be shut down for three weeks this month to avert a run on deposits.

"Of course this would be euro denominated but at the drop of a hat it could be converted to a new drachma," Varoufakis said.

"The work was more or less complete," he added.

The news caused a political storm in Athens, with opposition parties demanding an official explanation from the government and threatening to put Varoufakis on trial.
Shocked Over Parallel Currency? Why?

No one should be shocked by any of this. In fact, a bank takeover was absolutely necessary were Greece to be forced from the eurozone. And Greece was right at that point before Tsipras caved in to every creditor demand.

Not having a "Plan B" would have been extremely incompetent. The takeover of accounts is precisely what I warned about for months on end.

Primary Account Surplus, Yet Again

Greece would have tried to remain on the euro, but would not have been able to do so unless it quickly got to a primary account surplus position (tax receipts, in euros, large enough to pay current expenses except for debt repayments and interest on debt).

Looking for a reason Germany demanded 50 billion euros in collateral for another bailout? The key is a primary account surplus.

Creditors demand a primary account surplus from Greece so that Greece can pay back the creditors from the surplus. But as soon as Greece has a surplus, the temptation would be to stop the debt payments, thus the need for collateral.

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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