Mish's Global Economic Trend Analysis

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• Retaliation and Claims 101: Beneficiaries and the Failure to Think Ahead
• GDPNow Forecast for 4th Quarter Dips to 1.4% Following Weak ISM and Strong Construction Reports
• Manufacturing ISM Contracts; Lowest Reading Since June 2009; Glimmers of Hope Extinguished

Retaliation and Claims 101: Beneficiaries and the Failure to Think Ahead Posted: 01 Dec 2015 07:09 PM PST Claims and counterclaims are the order of the day between Turkey and Russia. The US and Syria stand not side-by-side, but rather on each side, most of the time, but not all of the time. Background for this post is the deliberate shooting down by Turkey, a Russian aircraft attacking ISIS and alleged moderate rebels in Syria. At most, Russian aircraft were over Turkey for a matter of seconds. But Russia claims its aircraft were not over Turkey at all. Then came the unbelievable lie Turkey Says It Had Not Recognized the Aircraft as Russian When it Shot it Down. Putin angrily dismissed Turkey's claim as "impossible" and said Russia had provided the US with information on the time and location of its sorties. The Claim Russia claims Turkey shot down plane to protect oil trade with ISIS. The Response Turkish president Recep Tayyip Erdogan responded He Will Resign if Putin Can Prove the Claim. The Counter-Challenge Next, Erdogan Challenged Putin to Resign if he Can't Prove Turkey Buys Oil from ISIS. Alleged Proof Meanwhile, RT claims Russia has 'More Proof' ISIS Oil Routed Through Turkey. The article did not adequately detail the alleged proof. Question of Semantics Without a doubt, ISIS oil is flowing through Turkey. But there's a huge semantics question in play. Does proof require the Turkish administration bought ISIS oil? Or is it sufficient that some smugglers in Turkey do just that? The Need to Think Ahead Who is the winner here? In Turkey was protecting ISIL oil Smuggling; Russia urges Assad-Kurdish Alliance, Yuan Cole at Informed Comment offers an option that I largely agree with, but he did miss one significant aspect. Putin has a much more effective way of bringing the pain to Erdogan. The PYD and its paramilitary arm, the YPG (People's Protection Unites) are considered by Turkey to be branches of the separatist Kurdish terrorist organization the PKK (Kurdistan Workers Party), but the US and Russia do not agree, and have been willing to cooperate with the leftist Kurds in Syria against Daesh (ISIS, ISIL). Putin is attempting to shore up the government of Bashar al-Assad, while Turkey hopes to see it overthrown by Muslim fundamentalist rebels. Putin is angling for an alliance of the leftist Kurds with the Baath regime against Daesh Radikal notes (BBC Mon. trans.): Nothing would anger Turkey's government more than for Russia to give military support to the Syrian Kurds in their quest to establish a connected territory, "Rojava," linking the three major Kurdish cantons in northern Syria. Semih Idiz of the Cumhuriyet ("the Republic), a left of center Turkish paper, revealed (BBC Monitoring trans.) that in response to the shoot down of the Russian fighter jet: "The Russian General Staff Chief has also stated that they are going to provide aerial escorts to the jets carrying out the bombing campaign against the Turkmens, which they are going to step up substantially, "in order to protect them from behind." Idiz, in an article on how al-Assad is the main beneficiary of the shootdown, concluded: "When we look at the political sphere, Moscow is going to try to render Turkey as ineffective as possible in the Syrian negotiations. It is useful to recall that the United States and Russia are spearheading the negotiations in question. And it is also useful to keep in mind that Turkey, because of a series of strategic mistakes, is one of the weakest links of the Syrian table. Now if you were [Syrian President Bashar] Al-Asad, would you not be rejoicing on account of Turkey's having shot down the Russian plane?" The Beneficiaries The primary beneficiary of this mess is neither the US nor Turkey. Here they are. The Kurds Syrian President Bashar Al-Asad Russia - for a guaranteed place at the table Iran - who backs Al-Asad The biggest loser is Turkey, arguably followed by the US for its inane backing of alleged moderate Al Qaeda rebels. Of course, the US goal of overthrowing Al-Asad without having any reasonable replacement is so ridiculous, the US is in reality an inadvertent winner. Who Controls What? The above map ties everything together nicely. It's from the Financial Times article US Urges Turkey to Seal Border with Syria Sealing the border between Turkey and Syria and also between Turkey and Greece is exactly what I have been calling for. Turkey may be unlikely to cooperate because it would rather deal with ISIS than the despised Kurds who may seek their own territory in Turkey. Warmongers Win There is one more winner that needs to be addressed: US warmongers. In response to the shootdown of the Russian aircraft by Turkey, Russia Arms Fighter-Bombers in Syria with Air-to-Air Missiles. Russia announced Monday that a class of its fighter-bombers in Syria has been armed for the first time with air-to-air missiles for "defensive purposes" in a move that posed a potential risk to U.S. and coalition warplanes flying missions against the Islamic State. The provocative action followed warnings from Russian President Vladimir Putin that Turkey would pay a price for shooting down last week a Russian Su-24 Fencer frontline bomber in which a Russian pilot was killed and a Russian marine died in a rescue attempt near the Turkish-Syrian border. The U.S. has six air superiority F-16C fighters at the Incirlik airbase in Turkey that could counter the Russians, but those aircraft have seen limited duty, Pentagon officials said. The F-16Cs were originally sent to Incirlik in October with the intention of helping the Turks guard their airspace, but the F-16s "have not to date flown any CAPs (Combat Air Patrols)," said Navy Capt. Jeff Davis, a Pentagon spokesman. Tension The Mideast tension between a multitude of players increases the likelihood of an "accident" or an "accidentally on purpose" type of incident between Russian and Turkey or Russia and the US. Warmongers would cheer such events. Finally, I offer an opinion that Turkey did not shoot down the Russian jet over oil per se, but rather because Turkey would rather deal with ISIS than the Kurds. Chancellor Merkel is downright idiotic to be supporting Turkey in this set of circumstances, but here we are. In this aspect, Turkey is a big winner and the EU a big loser if Turkey gets the German/EU concessions it seeks.  Mike "Mish" Shedlock 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.

GDPNow Forecast for 4th Quarter Dips to 1.4% Following Weak ISM and Strong Construction Reports Posted: 01 Dec 2015 11:27 AM PST Construction Spending Hits 8-Year High US News reports US Construction Spending Jumps to 8-Year High, Lifted by Home Building, Federal Government. The construction of single-family homes and apartments climbed 1 percent in October, also reaching their highest level since December 2007. Manufacturers boosted their construction spending by 3 percent. And federal government building soared 19.2 percent, the biggest increase since October 2006. Americans are staying in rental apartments for longer, rather than buying a home. That spurred a nearly 28 percent jump in apartment and condo construction in October from a year earlier. Nearly a third of buildings completed so far this year were apartments and condos, compared to just 27 percent before the recession began in late 2007. Public construction of schools, highways and other infrastructure rose 1.4 percent in October to its highest level in five years. It has risen 6.6 percent in the last 12 months Construction Spending Beats Estimates The consensus estimate for construction spending was +0.6% but the actual month-over-month reading was +1.0%. Construction is one of the highlights of the 2015 economy with spending up a solid 1.0 percent in October for the best rate since May. Despite mixed signals from the housing sector, spending on residential construction is very solid, up 1.0 percent in October for a seventh straight gain and all of them convincing. Year-on-year, residential construction is up 16.6 percent vs 13.0 percent for total spending. The monthly gain in the residential component is led by the key subcomponent of single-family homes, up a very strong 1.6 percent for a seventh straight gain. New multi-family homes, which have been leading the residential component all year, rose 1.4 percent. And these gains are not tied to remodeling which dipped slightly in the month. Private non-residential spending rose 0.6 percent in October with the year-on-year rate at plus 15.3 percent. Strength here is led by outsized gains for manufacturing that are offset in part by weakness in the power and especially the commercial subcomponents. Public spending is holding down totals with educational construction unchanged in the month though Federal spending did jump, up 19.2 percent for the largest gain in nine years that takes the year-on-year rate to plus 10.7 percent. This is the best rate among the public subcomponents. The highway & street subcomponent was also very strong in the month, up 1.1 percent for what is still a comparatively soft year-on-year gain of 6.0 percent. The housing data in this report are not only favorable but the pop higher in related permits, in data previously released with the housing starts & permits report, hints at further gains ahead. This report points to a solid fourth-quarter contribution from construction. Construction Contribution to GDP As noted earlier today, this morning's ISM report was a disaster. (See Manufacturing ISM Contracts; Lowest Reading Since June 2009; Glimmers of Hope Extinguished). But the construction report looked good. Like Bloomberg, I would have expected construction to add to GDP, in isolation. Combined with ISM spending, I would have expected the net result of today's reports to be an overall small minus. Actual GDPNow Forecast Results were dramatically different. GDPNow Forecast Sinks 0.4 Percentage Points to 1.4 Percent Construction Subtracts From GDP vs. Prior Estimate Compared to the November 27 report that included new home sales, construction appears to have subtracted approximately 0.09 percentage points and ISM roughly another 0.31 percentage points. Other reports in between may have contributed but those should be the main factors. I have a question into the Atlanta Fed regarding construction contribution to GDP. Mike "Mish" Shedlock 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.

Manufacturing ISM Contracts; Lowest Reading Since June 2009; Glimmers of Hope Extinguished Posted: 01 Dec 2015 09:24 AM PST After flirting with contraction for three months, the Manufacturing ISM fell into negative territory with a 48.6 reading, below the lowest Econoday estimate of 49.7. The Econoday Consensus guess was 50.5, an improvement over the October reading of 50.1 After skirting right at the breakeven 50 line since September, ISM's manufacturing index broke below in November to 48.6 which is more than 1 point below Econoday's low-end estimate for the lowest reading since June 2009. The decline includes a significant dip for new orders which are down 4.0 points to 48.9 and the lowest reading since August 2012. At 43.0, backlog orders are in a six-month streak of contraction. With orders down, ISM's sample cut back on production, down nearly 4 points to 49.2, and cut back on inventories, down 3.5 points to 43.0. Employment firmed but remains soft at 51.3. A convincing detail in the report is the breadth of weakness with only five of 18 industries reporting composite growth in the month. Transportation equipment, getting a boost no doubt from aircraft and motor vehicles, is among those in the plus column while the negative column includes petroleum as well as a number of capital goods industries including machinery, primary metals, and fabricated metals. Weakness in these industries points to weakness in business expectations. Exports have been the Achilles heal [heel] of the factory sector all year. New export orders in this report held steady at 47.5 for the sixth straight sub-50 reading. Another weak detail is a second month of contraction for import orders (49.0) which are suffering their worst run in four years. Prices paid remains in deep contraction at 35.5. Glimmers of Hope Extinguished The ISM index came in at 50.2 last month, vs. a consensus estimate of 50.0, providing economists with glimmers of hope. Economists then did what they normally do, which is take the prior reading and expect the next month to be better, explaining this month's consensus guess of 50.5. ISM 2007-2015 That was the lowest reading since June 2009. But don't worry, there's no recession warning here, just glimmers of hope. And with that hope, let's further dive into the numbers straight from the ISM Report. Index Nov Oct PP Change Direction Rate of Change Trend in Months PMI® 48.6 50.1 -1.5 Contracting From Growing 1 New Orders 48.9 52.9 -4.0 Contracting From Growing 1 Production 49.2 52.9 -3.7 Contracting From Growing 1 Employment 51.3 47.6 +3.7 Growing From Contracting 1 Supplier Deliveries 50.6 50.4 +0.2 Slowing Faster 4 Inventories 43.0 46.5 -3.5 Contracting Faster 5 Customers' Inventories 50.5 51.0 -0.5 Too High Slower 4 Prices 35.5 39.0 -3.5 Decreasing Faster 13 Backlog of Orders 43.0 42.5 +0.5 Contracting Slower 6 Exports 47.5 47.5 +0.0 Contracting Same 6 Imports 49.0 47.0 +2.0 Contracting Slower 2 Key Points New orders, production, PMI Index in contraction Backlog of orders in contraction 6 months Exports in contraction 6 months Prices in contraction 13 months There's nothing in the ISM report to make the Fed want to hike, but the Fed will do what they want. Mike "Mish" Shedlock 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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