Central Perk: 01/01/2016

duminică, 31 ianuarie 2016

Mish's Global Economic Trend Analysis

China Manufacturing Prices Decline 18th Month; China Hoping to Avoid Hard Landing
Nate Silver's Continual Underestimation of Donald Trump's Chances
Economists in Fantasyland: Economists See 20% Chance of Recession That's at Least 20% Likely Already Here

China Manufacturing Prices Decline 18th Month; China Hoping to Avoid Hard Landing

Posted: 31 Jan 2016 09:22 PM PST

China's manufacturing extended its long slump according to the Caixin China General Manufacturing PMI.

Chinese manufacturers signaled a modest deterioration in operating conditions at the start of 2016, with both output and employment declining at slightly faster rates than in December. Total new business meanwhile fell at the weakest rate in seven months, and despite a faster decline in new export work. Nonetheless, lower production requirements led companies to cut back on their purchasing activity and inventories of inputs. On the prices front, both input costs and output charges fell again in January, though at the weakest rates in seven months.

Weaker client demand led manufacturers to discount their prices charged again in January, thereby extending the current sequence of deflation to 18 months (although the rate of reduction was the slowest seen since June 2015). Lower selling prices were supported by a further fall in average input costs at the start of the year. In line with the trend for charges, the rate of decline eased to the weakest in seven months. Lower cost burdens were generally linked to reduced raw material prices.

China PMI

China Hoping to Avoid Hard Landing

Commenting on the China General Manufacturing PMI™ data, Dr. He Fan, Chief Economist at Caixin Insight Group said:

"The Caixin China General Manufacturing PMI for January is 48.4, up 0.2 points from December. Sub-indexes show a softer fall in new orders, which contributed the most to the improvement in the overall figure. Recent macroeconomic indicators show the economy is still in the process of bottoming out and efforts to trim excess capacity are just starting to show results. The pressure on economic growth remains intense in light of continued global volatility. The government needs to watch economic trends closely and proactively make fine adjustments to prevent a hard landing. It also needs to push ahead with existing reform measures to strengthen market confidence and to signal its intentions clearly."

Hard Landing Definition

If China is beginning to "show results", those results aren't pretty.

Depending on how one defines "hard landing", China is doomed. A couple years ago a "hard landing" was believed to be 6% growth. By that definition, a hard landing is baked in the cake.

3% or 2% growth, or even lower is highly likely.

Perhaps a couple years from now, 3% won't seem any harder than 6% did two years ago.

Mike "Mish" Shedlock

Nate Silver's Continual Underestimation of Donald Trump's Chances

Posted: 31 Jan 2016 03:49 PM PST

On January 18, I sent the article below (starting with the title Nate Silver Off the Mark on Donald Trump Nomination Odds) to the New York Times as an Op-Ed.

They did not publish it.

It's hard enough getting something timely to major new organizations, and when you do, you have to sit and wait days for no response. The New York times has the best turnaround of the bunch, three days so I could have used this earlier.

This would have been more timely on the 18th and even more timely when I first started writing, but here it is now. What I have to say the is still relevant.

Nate Silver Off the Mark on Donald Trump Nomination Odds

I am a big fan of Nate Silver. His calling of the last two elections was nothing short of brilliant. However, I just cannot accept Silver's current assessment of Trump's chances of winning the Republican nomination.

In footnotes to his January 8 article Three Theories Of Donald Trump's Rise Silver expressed belief that "Trump's chances are about half of what betting markets say they are. I think they're about half that - 12 or 13 percent."

Trump Odds According to Nate Silver

Historical Precedents

Given Trump's commanding lead in the polls, one might instinctively think Silver is crazy. But Silver cites historical precedents:

Polls before the first primary are not that useful
Political outsiders do not win elections
Establishment candidates do win elections

To that Silver adds "Trump could lose New Hampshire either to a surging Cruz or if one of the several establishment candidates — Marco Rubio, Chris Christie, Jeb Bush, John Kasich — can consolidate the support of more moderate/establishment Republican voters."

In defense of Silver, I would personally add there are 12 Republican candidates and anything could happen, in theory. One chance in 12 would be just over an 8 percent chance.

Bit of Realism

Chances are not all equal. So let's place some odds on some additional candidates.

What are the realistic odds that Ben Carson, Chris Christie, Carly Fiorina, Jim Gilmore, Mike Huckabee, John Kasich, Rand Paul, or Rick Santorum will win the nomination?

As long as we are taking history into consideration, Ben Carson has flamed out. Has a flame-out ever recovered? Does Rand Paul (my preference) have more than a 0.1% chance?

Does anyone in the above group of eight have more than a 0.5% chance? If so, who and why?

Even if you gave them all a 1% chance, which seems generous, the total combined odds would be 8%. Nonetheless, let's make that assumption and place it in a new chart.

Interpretation of Nate Silver Odds

Does the combination of Bush, Rubio, and Cruz really have a 79% of winning the nomination?

I think not.

Double the combined odds of Ben Carson, Chris Christie, Carly Fiorina, Jim Gilmore, Mike Huckabee, John Kasich, Rand Paul, and Rick Santorum to an amazing 16% and the Bush, Cruz, Rubio odds would still be 71%.

Triple the odds of the "group of eight" winning the nomination to a preposterous 24% and the "group of three" would still have a 63% chance of winning.

Mathematical Bias

By focusing solely on the odds of Trump winning, while placing no odds on the others, Silver introduces a mathematical bias far beyond what history can reasonably suggest.

Let's put a spotlight on Bush. Jeb Bush is polling 4.8% nationally.

Silver discounts national polls. I sympathize. But how far does one want to take that idea given that primaries start less than two weeks away?

Do candidates polling less than 5% at this stage often win nominations?

If one generously gives a Bush 5-15% chance of winning the momination, the combined Cruz Rubio odds would be something in the 65-75% range, assuming the group of eight has an 8% chance and Trump a 13% chance.

It all has to add up to 100%.

Arguably, the best chance for Bush and the ABT (Anybody But Trump) crowd has is if the Republican convention is deadlocked.

Until we see the results from Super-Tuesday and the polls of the states that follow, a deadlocked convention is a distinct possibility, but not one I have seen Silver depend on.

Other Flaws in Silver's Odds Estimates

We are dealing with humans, in real time, not history.

History suggests fringe candidates don't usually win elections, but they can. Jimmy Carter was unknown, but he won. Obama was not supposed to beat Hillary, but he did.

Yet, flame-outs are more likely. Carson did just that. So have many others.

Trump hasn't yet.

Rather than insisting a historical flame-out is still likely, Silver just might wish to consider reasons Trump will not flame out.

For example, a Gallup Poll headline from January 18 plays straight into Donald Trump's hands: Majority in U.S. Now Dissatisfied With Security From Terrorism.

Does Unpopularity Matter? When?

Silver notes Donald Trump Is Really Unpopular With General Election Voters.

Does unpopularity mean "People won't vote for the guy?"

I don't particularly like Trump. But I would vote for him over Clinton or Sanders.

What did Carson have before he flamed out other than he was "likable"? Amusingly, he's still the most likable Republican.

Carson comes across as sincere, and he is likable. But I would not vote for Carson under any circumstances. I would instead "waste my vote" and write in Rand Paul or vote for the Libertarian candidate.

Trump draws amazing crowds. Silver dismisses that. Yet, the last time someone generated this much crowd energy was Ronald Regan.

This is not a basketball game. Nor is this a one-on-one play with polls all breaking one way at the last minute. Those are areas in which Silver excels.

This is a one-on-many play, where voter attitudes have consistently sided with Trump, no matter who he offends. It's a mistake to discount such sentiment.

Like him or not, Trump is clever. For Republicans, he is on the right side of security, guns, abortion, and China. That's quite a bit.

And he's also a genuine outsider at a time nearly every other Republican is pretending to be one.

Is there any reason to suspect voter attitudes on terrorism, on Trump, or on Washington insiders will change in the next few weeks?

Odds of Winning it All

I suggest Trump's odds of winning the nomination are far more than what odds makers presume. And if Trump wins the nomination, I suspect his odds of him winning it all would be about 50%.

My rationale is that Hillary may not win the nomination. There is some chance of a criminal indictment related to emails. Sanders could pull out an upset. Odds of one of those have to be higher than the alleged 13% chance Silver assigns to Trump.

AWM (Angry White Men) will be a factor, perhaps totally negating any personal dislike of Trump.

Most importantly, I think the US approaching, if not already in a recession. Eight years ago, Obama blew dissatisfied Republican out of the water on the heels of a big recession that had just started.

Why can't that happen again? If anything, history suggests it will.

Mike "Mish" Shedlock

Economists in Fantasyland: Economists See 20% Chance of Recession That's at Least 20% Likely Already Here

Posted: 31 Jan 2016 10:32 AM PST

Economists have a perfect track record of 100% failure in ability to predict a recession. In a recession that's at least 20% likely to have already started, Economists See 20% Chance of US Recession this Year.

A Financial Times survey of 51 economists, conducted in the days after the Fed's January meeting, underscores the impact of the past month's severe market turbulence and a string of lacklustre economic reports out of the US and China.

The fear that the world's largest economy — considered the lone engine of global growth — is on the verge of recession has intensified. In the FT's December survey economists had put the odds of a US recession at 15 per cent during the next two years. Now, they see a one-in-five chance of recession in the next 12 months.

Economists surveyed by the FT emphasised that while the odds of a recession had climbed, a large majority still expected the US to escape one. Several who have fielded increased investor calls on the subject said that the conversation had been skewed because of the near obsession with the price of oil — a point that they argued had more to do with supply than global demand.

Mr Gapen, who put the odds of a recession between 10 and 15 per cent, said that he still thought strong consumption trends would keep the US economy from contraction.

Rate Hikes Odds

Less than 5% of economists see a greater than 50% chance of recession.

Hikes Foreseen in December Survey

In December not a single economist thought the Fed would hike zero times in 2016.

Hikes Foreseen in January Survey

CME Fedwatch Odds

The Fed Fund futures show a nearly 50% chance of no hikes this year.

Fantasyland Material

In contrast to Fed Fund futures, the latest Financial Times survey shows economists still expect two or three hikes this year. Over 10% of the economists foresee four hikes.

This is truly Fantasyland material.

Mike "Mish" Shedlock

Seth's Blog : Fit and finish

Fit and finish

It's pretty clear that the design of the egg carton isn't going to change the flavor of the omelette.

Except, of course, it does.

It does because people can't judge the eggs until they eat them, but they can judge the packaging in the store. And if they choose someone else's product, you never get a chance.

Not only that, but the placebo effect creates a self-fulfilling prophecy. We like what we liked. The customer would rather be proven right than proven wrong.

That's why it's so important to understand the worldview and biases of the person you seek to influence, to connect with, to delight. And why the semiotics and stories we produce matter so much more than we imagine.

It's not always fair or right or efficient that we need to worry about how we and our work will be judged. Until we come up with a better way to communicate what we've done, though, prepare to be judged in advance.

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sâmbătă, 30 ianuarie 2016

Mish's Global Economic Trend Analysis

Lacy Hunt – "Inflation and 10-Year Treasury Yield Headed Lower"

Posted: 30 Jan 2016 06:35 PM PST

No one has called long-duration treasury yields better than Lacy Hunt at Hoisington Management. He says they are going lower. If the US is in or headed for recession then I believe he is correct.

Gordon Long, founder of the Financial Repression website interviewed Lacy Hunt last week and Hunt stated "Inflation and 10-Year Treasury Yield Headed Lower".

Fed Tactics

"Debt only works if it generates an income to repay principle and interest."

Research indicates that when public and private debt rises above 250% of GDP it has very serious effects on economic growth. There is no bit of evidence that indicates an indebtedness problem can be solved by taking on further debt.

One of the objectives of QE was to boost the stock market, on theory that an improved stock market will increase wealth and ultimately consumer spending. The other mechanism was that somehow by buying Government securities the Fed was in a position to cause the stock market to rise. But when the Fed buys government securities the process ends there. They can buy government securities and cause the banks to surrender one type of government asset for another government asset. There was no mechanism to explain why QE should boost the stock market, yet we saw that it did. The Fed gave a signal to decision makers that they were going to protect financial assets, in other words they incentivized decision makers to view financial assets as more valuable than real assets. So effectively these decision makers transferred funds that would have gone into the real economy into the financial economy, as a result the rate of growth was considerably smaller than expected.

"In essence the way in which it worked was by signaling that real assets were inferior to financial assets. The Fed, by going into an untested program of QE effectively ended up making things worse off."

Flattening of the Yield Curve

"Monetary policies currently are asymmetric. If the Fed tried to do another round of QE and/or negative interest rates, the evidence is overwhelming that will not make things better. However if the Fed wishes to constrain economic activity, to tighten monetary conditions as they did in December; those mechanisms are still in place."

They are more effective because the domestic and global economy is more heavily indebted than normal. The fact we are carrying abnormally high debt levels is the reason why small increases in interest rate channels through the economy more quickly.

If the Fed wishes to tighten which they did in December then sticking to the old traditional and tested methods is best. They contracted the monetary base which ultimately puts downward pressure on money and credit growth. As the Fed was telegraphing that they were going to raise the federal funds rate it had the effect of raising the intermediate yield but not the long term yields which caused the yield curve to flatten. It is a signal from the market place that the market believes the outlook is lower growth and lower inflation. When the Fed tightens it has a quick impact and when the Fed eases it has a negative impact.

The critical factor for the long bond is the inflationary environment. Last year was a disappointing year for the economy, moreover the economy ended on a very low note. There are outward manifestations of the weakening in economy activity. One impartial measure is what happened to commodity prices, which are of course influenced by supply and demand factors. But when there are broad declines in all the major indices it is an indication of a lack of demand. The Fed tightened monetary conditions into a weakening domestic global economy, in other words they hit it when it was already receding, which tends to further weaken the almost non-existent inflationary forces and for an investor increases the value.

Failure of Quantitative Easing

"If you do not have pricing power, it is an indication of rough times which is exactly what we have."

The fact that the Fed made an ill-conceived move in December should not be surprising to economists. A detailed study was done of the Fed's 4 yearly forecasts which they have been making since 2007. They have missed every single year.

That was another in a series of excellent interviews by Gordon Long. There's much more in the interview. Give it a play.

Finally, lest anyone scream to high heavens, Lacy is obviously referring to price inflation, not monetary inflation which has been rampent.

From my standpoint, consumer price deflation may be again at hand. Asset deflation in equities, and junk bonds is a near given.

The Fed did not save the world as Ben Bernanke proclaimed. Instead, the Fed fostered a series of asset bubble boom-bust cycles with increasing amplitude over time.

The bottom is a long, long ways down in terms of time, or price, or both.

Mike "Mish" Shedlock

Seth's Blog : 3-D printers, the blockchain and drones

3-D printers, the blockchain and drones

New technology demands something important to move from early-adopter novelty to widely embraced tool:

Examples.

Examples and stories and use cases that describe benefits we can't live without.

The beauty of examples is that they can travel further and faster than the item itself. The story of an example is enough to open the door of imagination, to get 1,000 or 1 million copycat stories to enter the world soon after.

Email had plenty of examples, early and often. Stories about email helped us see that it would save time and save money, help us reach through the bureaucracy, save time and cycle faster. It took just a few weeks for stories of email to spread through business school when I was there, more than thirty years ago.

On the other hand, it took a long time for the story of the mobile phone to be deeply understood. For years, it was seen as a phone without wires, not a supercomputer that would change the way a billion people interact.

Most of the stories of Bitcoin haven't been about the blockchain. They've been about speculators, winning and losing fortunes. And most of the stories of 3-D printers have been about printing small, useless toys, including little pink cacti. And most of the stories about home drones have been about peeping toms and cool videos you can watch after other people make them.

Choose your stories carefully.

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vineri, 29 ianuarie 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

Damn Cool Pics

Pablo Picasso's Self Portrait At Age 16 Compared To Age 72

Posted: 29 Jan 2016 06:50 PM PST

Pablo Picasso is known for his unique and abstract art style. When you compare a self portrait he painted at the age of 16 to one he painted at the age of 72 you can see just how much his style changed over the years.