Central Perk

duminică, 13 septembrie 2015

Seth's Blog : Another chance to start over

Another chance to start over

Every day that you begin with a colleague, a partner, a customer... it might was well be a fresh start.

There's little upside in two strikes, a grudge, probation. When we give people the benefit of the doubt, we have a chance to engage with their best selves.

If someone can't earn that fresh start, by all means, make the choice not to work with them again. Ask your customer to move on, recommend someone who might serve them better.

But for everyone else, today is another chance to be great.

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sâmbătă, 12 septembrie 2015

Mish's Global Economic Trend Analysis

Raging California Wildfires Force Evacuations; Governor Brown Declares State of Emergency

Posted: 12 Sep 2015 08:28 PM PDT

California remains a tinderbox due to drought conditions.

Fires rage in multiple places and Governor Brown has declared a state of emergency with a new fire about to consume San Andreas, a town 60 miles East of Sacramento.

The Guardian reports Explosive Wildfire Threatens California Mountain Towns as Blaze Intensifies.

A mountain town is standing by to evacuate on Saturday and residents across a huge swath of northern California have been warned of "explosive fire conditions" as a fierce wildfire across more than 100 square miles suddenly intensified.

California governor Jerry Brown has declared a state of emergency for the counties experiencing the inferno, as it approaches the town of San Andreas, about 60 miles south-east of Sacramento in the Sierra Nevada region.

Some homes have been engulfed and thousands are threatened with imminent destruction in the path of flames that are spreading over steep landscape.

The gradients help the fires grow by sending heat up slopes and increasing ground temperatures ahead of the flames while making it extremely difficult for the emergency services to tackle the blaze.

A blaze that covered one square mile on Thursday quickly burned more than 100 square miles and was only 5% contained by Friday evening. By Saturday afternoon, firefighters had gained some ground and containment had increased to about 10%, fire officials said.

Meanwhile, in central California between the city of Fresno and the Kings Canyon National Park, firefighters are digging trenches to try to stop wildfires reaching a growth of ancient giant sequoia trees in the Sierra Nevada, where the towering specimens are often found to be 3,000 years old.

The Grant Grove of sequoias is named for the majestic General Grant tree in its midst, which is 268 feet tall. Lightning caused a fire more than a week ago that has now spread to an area of 40 square miles.

The Guardian has many images. This is the lead image.

A house burns as the Butte fire rages through Mountain Ranch, California, on Saturday. Photograph: Noah Berger/Reuters

Mike "Mish" Shedlock

What the Hell is the US Mission in Syria? Perverse Wisdom

Posted: 12 Sep 2015 11:04 AM PDT

Now that the US has destabilized Iraq and Syria, and a four-way battle over both countries is underway, I have a simple question: What the hell is the mission?

In Iraq, Isis, the Kurds, the Shia, and the Sunni all fight for portions of the country. In Syria, there are pro-Assad forces, Al-Qaeda rebels, and Isis fighting over a badly splintered country.

The US backs Syrian Al Qaeda rebels (many of whom eventually defect to Isis).

Did I say four-way battle? Maybe I should have said five- or six-way battle. Russia is now in the picture. And there's always room for more.

Lebanon is tired of hosting millions of refugees. Perhaps it gets into the act. And of course Iran wants to fight Isis, but the US does not want that kind of help because Iran supports Assad.

Russia Seeks US Cooperation in Syria

Please consider Russia Calls on US to Cooperate with its Military in Syria.

Russia has called on the US to co-operate with its military in Syria to avert "unintended incidents" as Moscow boosts its forces in the war-torn country in what Russian foreign policy officials say is a bid to lead the battle against the Islamic State of Iraq and the Levant (Isis).

John Kirby, state department spokesman, said that he did not know what Mr Lavrov was referring to when he talked about possible "unintended incidents".

[Duh! How about US-backed rebels fighting Assad, accidentally shooting at Russian or Iranian backed forces attacking Isis? Was that really so hard to figure out John?]

"We would welcome constructive efforts by Russia against Isis, but that cannot be a function of continued support to the Assad regime," Kirby said. "The most productive thing that they can do is to stop aiding the Assad regime."

Top Priority

With that statement, Kirby, just emphatically explained the US number one priority: Getting rid of Assad is far more important than stopping Isis. The US even backs Al Qaeda in that mission under the perverse description "moderate rebels".

Please recall that the US took out Saddam Hussein on a blatant lie about weapons of mass destruction, but also on a secondary lie that Hussein backed Al Qaeda.

Al Qaeda is now our friend (until of course they get in control, then we will want Al Qaeda out as well).

Meanwhile, a squadron of five Russian naval ships equipped with guided missiles has also set off to conduct maneuvers in Syrian territorial waters, a source close to the Russian navy told Reuters news agency on Friday.

Accidents can happen.

Let's Be Realistic

Financial Times writer David Gardner says We Must be Realistic about Intervention in Syria.

I certainly agree with that headline idea, and also with Gardner's statement "Alongside revived talk from London to Ankara of intervention in Syria, there is no clarity of aim."

Unfortunately, Gardner quickly provides clarity in support of the "perverse top priority".

"It is important to get away from the perverse received wisdom that the only way to fight Isis is to lay off the Assads. That is a mirror image of the hopeless choice facing millions of Syrians, caught between the barrel bombs of the regime and the barbarian savagery of Isis. Mr Assad has used total and sectarian war to create the self-fulfilling conditions whereby he would be seen as the only alternative to jihadism," says Gardner

Perverse Wisdom

The perverse wisdom is there is such a thing as "moderate Al Qaeda rebels".
The perverse wisdom is that Iraq can stay in one piece.
The perverse wisdom is that Assad gets all the blame for the mess in Syria.
The perverse wisdom is that the Kurds should not have their own country.
The perverse wisdom is the US should refuse help from Iran and Russia to contain Isis.
The perverse wisdom is the "House of Saud" is our friend.
The perverse wisdom is Iran must remain an enemy.
The perverse wisdom is the US should be nation building at all in this region.

Gardner concludes "Does Tehran want full control of a pariah enclave — or more realistic influence in a Syria with which its neighbours can live? As the Assad realm shrinks, it may have to decide."

It seems to me the US ought to be asking the question "As the Assad realm shrinks, do we really want Al Qaeda or Isis in complete control of the country?"

Nation Building

Let's reiterate the key "perverse wisdom" point: The perverse wisdom is the US should be nation building at all in this region.

We are in this four to six-way mess precisely because of the perverse wisdom the US needed to get rid of Hussein in a nation-building mission in Iraq.

By all means, David Gardner, "We Must be Realistic about Intervention in Syria".

And it's perverse wisdom to expect better results nation building in Syria than we achieved nation building in Iraq.

Mike "Mish" Shedlock

Seth's Blog : Will this be on the test?

Will this be on the test?

The test, of course, offers nothing but downside. No extra credit, just points marked off. The test is the moment where you must conform to standards, to say what is expected of you.

Perhaps a better question is, "Will this be in the Playbill?"

The Playbill is the little program they hand out before the Broadway musical. The Playbill is all about extra credit, about putting on a show, surprising, elevating, doing something more than people hoped for.

A different part of our brain is activated when we think about what's possible as opposed to what's required.

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vineri, 11 septembrie 2015

Mish's Global Economic Trend Analysis

Apocalypse Illinois: IOUs Projected to Hit $10.5 Billion, $163 Billion Total Accumulated Liabilities
China's Art of Propaganda: Future So Bright You Need Sunglasses Inside
CME Fedwatch and Bloomberg Rate Hike Odds Still Wrong; Deflationary Bust Coming

Apocalypse Illinois: IOUs Projected to Hit $10.5 Billion, $163 Billion Total Accumulated Liabilities

Posted: 11 Sep 2015 12:33 PM PDT

Flat Out Broke

Illinois is in serious fiscal trouble. Unpaid bills will hit about $10.5 billion later this year, counting unpaid lotto winners and state university bills.

Lotto is a small problem overall, yet symbolic of the mess the state is in.

Because Illinois has no current budget, the state does not pay lotto winners. Instead it sends the winners IOUs. Yesterday, two Illinois lottery winners filed a class action lawsuit over unpaid prizes.

Promises, Promises

Unpaid bills do not count additional promises that politicians seek. For example, Chicago Mayor Rahm Emanuel wants a half billion dollars from the state to shore up the Chicago school budget.

Where is that supposed to come from?

The list of "wants" is endless; the reality is "Illinois is flat out broke".

When will multiple downgrades from Moody's, Fitch, and the S&P hit the overall state, not just the city of Chicago?

Drowning in Red Ink

In a big understatement of Illinois' problem, a Crain's Chicago headline reads Illinois IOUs Growing Fast, Could Pass $8.5 Billion by Yearend.

Slowly but surely, Illinois government is beginning to drown in red ink, State Comptroller Leslie Munger said today, as the cost of the continuing Springfield budget war steadily worsens the already bad condition of state finances.

Without legislative action to adopt a balanced budget, the state's backlog of unpaid bills will hit $8.5 billion in December—not counting an additional $4 billion in spending for state universities, lottery winners and other purposes that has been indefinitely deferred, Munger said.

If the bill backlog indeed hits $8.5 billion in December—and you include half of that $4 billion in other spending, since December is the midpoint of the state's fiscal year—that would put the cumulative backlog at what appears to be an all-time high of $10.5 billion.

As best as I can tell from consulting with state finance insiders, the highest the backlog ever reached in non-inflation-adjusted dollars was in 2010, early in the days of the Pat Quinn administration, when it hit $9.9 billion.

Humorous Solution

My favorite comment to Crain's article comes from "Earl" who sarcastically asks "Why not try not spending money the state does not have?"

Indeed. Let's try that. Well, actually Illinois has been doing that for years. And bad as $10.5 billion sounds, it's but a small drop in the cumulative bucket.

Apocalypse Illinois

Drum roll please: In January, Illinois' total cumulative liability was $159 billion.

Counting $4 billion in spending for state universities, lottery winners, etc., the total cumulative liability is on the order of $163 billion today, and growing more rapidly than ever.

A study released this past January called "Apocalypse Now" discusses the "Consequences of Pay-Later Budgeting in Illinois".

Deficit Spending

IOUs

The stack of IOUs. The term "legacy costs" is sometimes used to describe obligations to pay for services purchased by the state in previous years.

Figure 1 shows that the state of Illinois has run deficits in every fiscal year since 2001. A portion of these shortfalls were covered by asset sales and other one-time revenue sources, but most were covered by some form of borrowing. We look first at the total value of these legacy costs in Illinois, separated by type:

Pension obligation bonds. Illinois issued bonds in FY 2003, 2010 and 2011 to cover scheduled contributions to its pension funds. At the end of FY 2015, the remaining principal on these bonds will be $12.7 billion.
Unfunded liabilities for pensions. As of the end of FY 2014, the state of Illinois' five retirement systems had assets to cover only 42.9 percent of liabilities, leaving an unfunded liability of $104.6 billion.
Unfunded liabilities for retiree health costs. As of the end of FY 2013, the state had unfunded liabilities for retiree health costs of $34.5 billion.
Short-term inter-fund borrowing in FY 2015. Authorizing legislation for FY 2015 permits the General Funds to borrow $650 million from other funds to be paid back within 18 months.
Unpaid bills. As of December 2014, unpaid bills for services already provided to the state totaled $6.5 billion.

The total value of these obligations to pay for past deficits is $159 billion.

Budget Gap

Figure 2 shows a projected deficit of $9 billion for FY 2016 to 2022.

Illinois is projected to have total sustainable revenue in FY 2016 of $65 billion, but a much smaller amount represents state-controlled revenue. If we eliminate federal grants, health provider fees (linked to Medicaid spending), and the portion of sales, income, and other taxes transferred back to local governments, the state's own share of total revenue in FY 2016 is only $36.3 billion.

The $9 billion deficit represents 25 percent of that revenue. Raising all of Illinois' taxes and fees by 25 percent would be extremely difficult politically.

Crowding Out

Pay-later budgeting has been perpetuated by a political willingness to ignore the fact that every dollar borrowed to pay the bills in one year must be paid back with interest, thus crowding out what the state can spend on other priorities in future years.

Illinois' fiscal problems are huge, structural, and escalating quickly. The state's deficits cannot be eliminated by quick, temporary fixes, or by waiting for the economy to grow.

Digging out of our accumulated fiscal problems also requires changes in awareness and expectations.

Being saddled with paying off IOUs for past years' bills means that Illinois' citizens must reduce their expectations for the services that they can expect from government and be prepared to pay more for government now and in the future. Decision makers need to understand — and act on — the fact that pay-later financing hurts the state's residents and businesses in future years.

Estimating Crowding Out Effects Not Included in the Fiscal Futures Model

Some of the legacy costs detailed above have pay-off schedules and are included in the deficit projections, but others do not. The lack of a pay-off schedule can conceal but does not change the fact that legacy liabilities will crowd out other spending. In order to illustrate the magnitude of those "hidden" effects of past deficits, we use the Fiscal Futures Model to simulate of effects of specified pay-off schedules for the "hidden" liabilities.

Figure A1 shows the result of adding these three payment schedules to the Fiscal Futures Model.

Accumulated Debts Per Capita

The US Census Bureau reports the Illinois population is on the order of 13 million and growing slowly if at all.

The accumulated bill amounts to $12,538 per every man, woman, and child. But children don't pay bills or taxes.

So let's do the calculation based on the census estimate of 4,772,723 households. That accumulated bill amounts to $34,152 per household.

Problem Understated

I propose the Apocalypse Now study hugely understates Illinois problems.

What About?

What about aging infrastructure?
Boomer demographics?
Chicago schools?
Business flight?
Taxpayer flight?
Bond downgrades and higher borrowing costs?
Untenable pension plan assumptions?
Possibility of a significant stock market decline?

Sobering View

I discussed point eight in detail on July 21 in SuperBull Club: RBC Ups Morgan Stanley, Says Bull Market to Continue 6 Years; Sobering Alternative View from GMO.

Sobering Alternative View from GMO

In contrast, to the SuperBulls, I present the 7-Year Real Return Forecast of GMO.

*The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward‐looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward-looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Rain on the SuperBull Party

Note that GMO expects negative real returns in US stocks, on average, for a full seven years.

I hate to ruin a SuperBull party with forecasts that have been historically among the best in the world, but so be it.

Reforms, Not Tax Hikes

Tax hikes are not the answer. Tax hikes will just cause more Illinois taxpayers and businesses to flee. Business exodus is already a serious problem. For details, please see Get Me the Hell Out of Here.

Massive reforms are the only thing that can possibly save this state.

Meanwhile, Debt downgrades from Moody's, Fitch, and the S&P are just around the bend, and deservedly so.

Mike "Mish" Shedlock

China's Art of Propaganda: Future So Bright You Need Sunglasses Inside

Posted: 11 Sep 2015 12:10 PM PDT

The future of China is so bright you need to wear sunglasses inside to see.

That's the essence of recent propaganda from China, where the state promotes good lies with discussion of the bad truth strictly forbidden.

Please consider Don't Fret About the Data, China's GDP Forecast to be Good News.

"The focus for the month of September will be strengthening economic propaganda and . . . promoting the discourse on China's bright economic future and the superiority of China's system," the party's propaganda department said in a directive to national media outlets.

A photograph of the latest directive was posted online by California-based China Digital Times, which monitors Chinese media and internet censorship. "They want to control how the media frames and interprets [economic data], making sure that they all focus on positive things," said Xiao Qiang, CDT founder.

CDT also posted a notice from the chief editor's office at the Xinhua news agency, dated September 7, that reiterated the need to "stabilise expectations and inspire confidence". The Xinhua notice instructed staff to "please plan related reporting" and send their story ideas to the agency's Creative Planning Center.

This week, Chinese leaders went on a public relations offensive, having stayed largely silent during both a controversial stock market intervention launched in July and last month's "one-off" devaluation of the renminbi.

China's central bank remained silent for two days after devaluing the renminbi 1.9 per cent against the dollar on August 11 and adjusting its mechanism for setting the currency's daily dollar "reference rate".

David Bandurski, at the University of Hong Kong's China Media Project, said it was rare for the propaganda department to issue written rather than oral directives for fear they might leak. "Economic troubles have been a focus of concern in the party's news and propaganda work lately," he added. "The content of these purported propaganda instructions fits with what official state media have been pushing for the last few months."

An official whose name and phone number appeared on the Xinhua notice declined to comment. The party propaganda department could not be reached for comment.

Say the right things and you move up the party line. Say the wrong things and you are put in prison or shot.

China has no human rights, appalling property rights, illiquid bond markets of insufficient size, and a pegged currency it can no longer control smoothly. Capital controls round out the mess.

Yet, people think the Yuan will "soon" become the world's reserve currency, replacing the US dollar.

I have heard these yuan reserve currency "soon" stories for at least a decade. What a joke.

Mike "Mish" Shedlock

CME Fedwatch and Bloomberg Rate Hike Odds Still Wrong; Deflationary Bust Coming

Posted: 11 Sep 2015 01:56 AM PDT

As of September 10, the CME has the odds of a September hike by the Fed at 24%. Bloomberg says the probability of a move is 28%.

Bloomberg Rate Hike Odds

CME Fedwatch Odds

Both Models Wrong

What's wrong with both models is they still presume a quarter point hike.

Neither Bloomberg nor the CME allows for the possibility of a Fed hike to precisely 0.25% or to a smaller tighter range.

Given the effective Fed Funds Rate is 0.14% (see upper right of Bloomberg chart), resetting the rate to a flat 0.25% from the current range of 0.00-0.25% (now at 0.14%), would be both a "move" and a "hike".

Tighter Range

The Fed could also use ranges as Bloomberg and CME imply, but target ranges in 1/8 of a point increments rather than 1/4 point increments.

For example the Fed could target a range of 0.25% to 0.375%.

I suspect the odds of a move to a flat 0.25 or a range (0.25% to 0.375%), are far greater than Bloomberg's "probability of a move" set at a mere 28%.

I went over this before, on August 19, in Plotting the Fed's Baby Step 1/8 Point Hikes; Yellen vs. Greenspan "Measured Pace".

I updated my charts today.

Flattening of Rate Hike Expectations

Using Fed fund futures from CME, I calculated implied interest rates through December 2017. The line in Blue shows what futures implied on August 19. The line in red is from September 10.

Note the flattening of the curve. This has been happening pretty much all year.

The market initially penned in hikes for January. The hikes then shifted to March, then June, then September, and now December by both the Bloomberg and CME models.

Range Watch

Curve Watchers Anonymous is closely watching the implied baby steps in the Fed fund futures. Incrementally, the hikes appear as follows.

Month	Fed Funds Future	Rise in Implied Rate
Aug-15	99.863
Sep-15	99.835	0.028
Oct-15	99.805	0.030
Nov-15	99.765	0.040
Dec-15	99.720	0.045
Jan-16	99.685	0.035
Feb-16	99.645	0.040
Mar-16	99.610	0.035
Apr-16	99.560	0.050
May-16	99.520	0.040
Jun-16	99.480	0.040
Jul-16	99.435	0.045
Aug-16	99.385	0.050
Sep-16	99.350	0.035
Oct-16	99.295	0.055
Nov-16	99.230	0.065
Dec-16	99.170	0.060
Jan-17	99.135	0.035
Feb-17	99.055	0.080
Mar-17	99.020	0.035
Apr-17	98.970	0.050
May-17	98.915	0.055
Jun-17	98.875	0.040
Jul-17	98.830	0.045
Aug-17	98.780	0.050
Sep-17	98.740	0.040
Oct-17	98.700	0.040
Nov-17	98.650	0.050
Dec-17	98.615	0.035

Baby Steps Plotted

Fed fund futures imply a very slow tightening of 3-6 basis points a month. The only exception is January to February of 2017 where the incremental rise is 8 basis points (0.080 percentage points).

The Fed does not set policy every month. Instead it does so about eight times a year. FOMC dates are not yet set for 2017, but futures imply something like the following.

Fed Rate Hike Expectations Through 2017

Yellen vs. Greenspan

The above market expectations are clearly similar to Greenspan's famous statement: Hikes will be at a "pace that's likely to be measured".
The Yellen expected "pace" is half as often.
The Yellen expected "measure" is half as much.

Just Get On With It!

Via email, Albert Edwards at Society General writes:

The clamour for the Fed not to enact the long-awaited ¼% rate hike next week is growing by the day. Misgivings come not just from reputable mainstream commentators, but now also the World Bank has repeated the IMF's recent words of caution in advising delay. What a load of nonsense! My esteemed colleague Kit Juckes characterises the current consensus thinking as "If the Fed hikes, pestilence, plague and never-ending deflation will follow." Well even those like me who see a deflationary bust awaiting think the Fed should hike next week – because the longer you leave it, the bigger the financial market excesses become, and the bigger the risk of financial dislocation and global recession ensuing. Have we learned nothing from the 2008 Great Recession? Just get on with it!

Exactly!

A deflationary bust is coming and there is nothing the Fed or any central bankers can do about it.

And when the bubble busts, Paul Krugman, Larry Summers, the World Bank, and Christine Lagarde at the IMF will all be singing the "I told you so" tune.

The irony is Krugman, Summers, the World Bank and the IMF are all wrong. The seeds of the upcoming deflationary bust were planted, watered, and over-fertilized by central bankers everywhere, all in the asinine name of "price stability" and deflation fighting.

For further discussion on the sheer ridiculousness of price stability policy, see Cross-Border Deflation: US Export Prices Collapse Most Since July 2009; How Damaging is Price Deflation?

Mike "Mish" Shedlock

Damn Cool Pics

The World's 17 Most Dangerous Foods [Infographic]

Posted: 11 Sep 2015 05:40 PM PDT

Mr Gamez compiled an infographic of the world's 17 deadliest foods, along with some interesting notes about each deathtrap and why consumers should beware.

Click on Image to Enlarge.