Central Perk

joi, 14 mai 2015

Mish's Global Economic Trend Analysis

Draghi Warns ECB Economic Policies May Lead to Financial Instability and Worsen Income Inequality; Stupidity Index at New High
Steel Consumption in China Declines First Time in Three Decades; Painful Rebalancing
Producer Prices, Import/Export Prices Decline Again; Still Think the Fed Will Hike?
Second Quarter GDP Forecast: Blue Chip vs. GDPNow; Where Might the Fed be Wrong?

Draghi Warns ECB Economic Policies May Lead to Financial Instability and Worsen Income Inequality; Stupidity Index at New High

Posted: 14 May 2015 10:17 PM PDT

Here's a new one. ECB president Mario Draghi cautions that ECB policies may "lead to financial instability and worsen income inequality."

Place that warning in the "duh" category.

For duh details, please consider Draghi Warns Central Banks Against 'Blind' Risk-Taking.

Mario Draghi has warned central banks to beware of the risk that aggressive monetary easing, including mass bond buying, could lead to financial instability and worsen income inequality.

The European Central Bank president said the apparent success of policies such as the ECB's landmark €1.1trn quantitative easing package should not "blind" policy makers to the potential consequences of their actions on risk-taking in financial markets and in exacerbating wealth disparities.

"Because the use of these new instruments can have different consequences than conventional monetary policy, in particular with respect to the distribution of wealth and the allocation of resources, it has become more important that those consequences are identified, weighed and where necessary mitigated," Mr Draghi said at the International Monetary Fund.

Central banks around the world have faced criticism that their response to the financial crisis is stoking asset-price bubbles and increasing inequality.

In Spite of "Duh"

In spite of the blatantly obvious, and in an attempt to play down talk that the ECB could slow the pace of its €60bn per month asset purchase plan before the planned cut-off point of September 2016, Mr Draghi said: "To that effect, we will implement in full our purchase programme as announced and, in any case, until we see a sustained adjustment in the path of inflation."

Reader Mailbag

The above article is all the more amusing because Thursday morning I received this email from "PW" who said:

Hello Mish

One of my finance colleagues who is quite respected says "QE is working in Europe - as I've repeatedly said QE makes rates go up not down, despite what most in the market think"

This seems quite counter-intuitive and different to understood based on your blog.

Is QE Working?

If QE made rates go up why have rates in Japan been near zero for decades? Why did rates fall in the US?

And as for the ridiculousness of "QE is working" I responded ...

Working how?
And at whose expense?
And what about asset bubbles?
Negative bonds?
What about Spanish and French Unemployment?

To top it off, even Mario Draghi has concerns, so much so he warns banks not to take risks.

Apparently Draghi wants banks to lend without taking risks, in spite of the obvious asset bubbles and in spite of central bank sponsored income inequality.

New High in Stupidity Index

Pursuing policies that self-admittedly may "lead to financial instability and worsen income inequality" is a new high in stupidity.

Yet, I am confident this high will be broken many times.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Steel Consumption in China Declines First Time in Three Decades; Painful Rebalancing

Posted: 14 May 2015 09:04 PM PDT

Looking for signs of a global recovery that will lead export growth? If so don't look at China. Reuters reports China's Annual Steel Consumption Drops for First Time in Three Decades.

China's apparent crude steel consumption fell for the first time in three decades in 2014, data from an industry association showed, a further indication of how the country's economic slowdown is hurting industrial demand.

A decline in the use of steel in China, which is both the top consumer and producer of the alloy, will dent iron ore prices that have already been roiled by a global oversupply.

Spot rates of the steelmaking ingredient are currently mired near a 5-1/2 year low $65.60 per tonne.

China's apparent crude steel consumption fell 3.4 percent from a year ago to 738.3 million tonnes in 2014, according to calculations published by the China Iron and Steel Association (CISA) on Thursday.

Official data shows China's power output growth fell to a 16-year low last year, while coal output likely dropped for the first time in more than a decade.

China's 2014 steel output rose 0.9 percent to a record 822.7 million tonnes over the year, data showed.

"Affected by overcapacity, it is unlikely there will be any turnaround in oversupply in the steel product market or any big recovery in prices," CISA said.

Painful Rebalancing

This is all part of China's painful rebalancing process that is really just getting started. Commodity exporters like Australia and Canada are in the cross hairs.

Prices may or may not stabilize here, but they are highly unlikely to shoot higher and stay higher. China's transition from infrastructure and housing to consumer consumption will take many years. And China's GDP will slowly sink (far more than most believe possible) until the process is complete. Two percent growth, down from seven is along the lines of what I have in mind. Of course, that presumes one believes China is really growing at seven percent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Producer Prices, Import/Export Prices Decline Again; Still Think the Fed Will Hike?

Posted: 14 May 2015 09:38 AM PDT

The Fed is struggling like mad to produce inflation, with little success on some fronts. Of course the Fed ignores asset bubbles in its measures.

Import/Export Prices

The Bloomberg Consensus range for export prices was 0.1%. The range for import prices was 0.4%.

Economists were wildly off the mark on both estimates. Both prices declined. Export prices declined more than any economist's guess.

Here are some Import/Export charts from the BLS.

Import Prices M/M and Y/Y

Thanks to a strong dollar, import prices declined for ten consecutive months. Year-over-year, import prices are down nine consecutive months.

Export Prices M/M and Y/Y

Export prices are down eight of the last nine months. Year-over-year, export prices are down eight consecutive months.

Effect on GDP

Imports subtract from GDP and exports add to GDP. Import prices down and export prices up is a good thing from that perspective.

Fuel Imports

The price index for import fuel increased 0.7 percent in April, after rising 1.2 percent the previous month. The March advance was the first monthly increase in fuel prices since the index rose 1.6 percent in June 2014. In April, a 1.0-percent advance in petroleum prices more than offset a 7.0-percent drop in natural gas prices. Despite the recent increases, fuel prices declined 46.1 percent for the year ended in April. Both a 47.0-percent decrease in petroleum prices and a 45.2-percent drop in natural gas prices contributed to the overall year-over-year decline in fuel prices.

Agricultural Exports

Agricultural export prices decreased 0.8 percent in April, after falling 1.7 percent in March. The April drop was driven by a 2.4-percent decline in meat prices, a 1.7-percent decrease in soybean prices, and a 2.7-percent fall in fruit prices. The price index for agricultural exports has not recorded a monthly advance since the index ticked up 0.1 percent in November 2014. The index decreased 15.6 percent for the year ended in April, the largest 12-month decline since the index fell 16.7 percent between September 2008 and September 2009.

The price index for nonagricultural exports declined 0.7 percent in April following advances of 0.2-percent and 0.1-percent the previous 2 months. The April decline was led by declining prices for nonagricultural industrial supplies and materials, capital goods, and consumer goods. In contrast, prices for automotive vehicles ticked up 0.1 percent in April. Nonagricultural export prices decreased 5.3 percent over the past 12 months.

Producer Prices

The Bloomberg Consensus Estimate for producer prices was 0.2%. Once again economists were wildly off the mark. The Producer Price Index came in at -0.4%, outside the range of any economist's prediction.

PPI for Finished Goods Percent Change

Does that look recessionary?

PPI for Finished Goods Less Food and Energy Percent Change

Strip out food and energy and prices still going up.

PPI Final Demand Index

This is a relatively new series that only dates back to November of 2009.

PPI Final Demand Percent Change

Fed Hike in 2015?

The timeline for Fed hikes went from June to September to December. I did not think they would hike this year, and expectations are finally leaning that way. If the Fed does hike bond yields will spike. But when does the Fed disappoint the markets?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Second Quarter GDP Forecast: Blue Chip vs. GDPNow; Where Might the Fed be Wrong?

Posted: 14 May 2015 08:11 AM PDT

Following yesterday's dismal retail sales report, inquiring minds may be interested in the Atlanta Fed GDPNow Forecast.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.7 percent on May 13, down slightly from 0.8 percent on May 5. The nowcast for second-quarter real consumer spending growth ticked down 0.1 percentage point to 2.6 percent following this morning's retail sales report from the U.S. Census Bureau.

GDPNow vs. Blue Chip

GDPNow Factors

GDPNow Contributions to Growth

Where Might the Fed be Wrong?

The Blue Chip estimators appear to be in some other alternate universe, especially that 4% forecast. Instead, let's focus on the Atlanta Fed model.

In light of retail sales, I suspect PCE of +1.76 is on the high side. If so, and if inventories and exports are worse than shown (which I also expect), we are in or close to negative territory, and in recession.

Note that the NBER does not require two consecutive quarters of negative GDP to call a recession. Rather, two consecutive quarters of declining GDP is a sufficient but not necessary condition.

For further discussion please see Dismal Retail Sales Numbers Suggest Recession Likely Underway: Overall +0.0%, YoY +0.9%, Department Stores -2.2%

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Seth's Blog : Choosing what's possible: Your turn to grow

Choosing what's possible: Your turn to grow

On Tuesday, we opened applications for the altMBA, an intensive course designed to help people shift gears and make a bigger ruckus.

It's not an MBA. There's no accounting, finance or big business sleight of hand. It's also not a typical online course, with impersonal systems and no standards.

Instead, it's a personal small-group experience for people who want to make a difference...

So far, we've received applications from engineers, artists, non-profit executives, designers, marketers, and founders.

Mostly, we're hearing from people who may be a lot like you. At seminars I've run in the past I see it again and again: everyone is sure that they're the least powerful, least qualified person in the room. And then we all lift each other up.

One applicant, a successful editor, told me, "The course description is the single most terrifying thing I have read in my whole life. And for that reason, I'm saying: yes, if you'll have me."

What people take away from business school isn't the coursework. It's the ability to ship, to connect, to be surrounded by people who expect more from us.

It's easy to overlook how frightening it is for many people to even consider an opportunity like this. Change represents a threat, and for many of us, change is something to be avoided. If you know someone ready to step up, I hope you'll share this with them.

Groucho Marx famously didn't want to belong to any club that would have him as a member. And one reason for his hesitation was the very real fear of not getting in. I think he would have gotten a lot out of the altMBA, and while it's too late for Groucho, I hope you'll check it out...

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PozzitifonShow: "КАК ПОСМОТРЕТЬ В БУДУЩЕЕ?" and more videos

Mihai, check out the latest videos from your channel subscriptions for May 14, 2015.

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Seth's Blog : Non-profits and stories that matter

Non-profits and stories that matter

Here's Cat Hoke talking about Defy Ventures.

And here's a brand-new interview about fundraising.

An alternative for a different audience: Goodwell tells a story of radical, rational efficiency.

And a link to my rant about gala economics from 2011.

I also enjoyed Jessica Hagy's free new ChangeThis manifesto.

It takes guts to care and it takes hubris to stand up and do something.

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miercuri, 13 mai 2015

Mish's Global Economic Trend Analysis

Calpers Wins Pension Lawsuit, Not Good News for Chicago (or Bondholders in General)
Blog Comments Down
Dismal Retail Sales Numbers Suggest Recession Likely Underway: Overall +0.0%, YoY +0.9%, Department Stores -2.2%

Calpers Wins Pension Lawsuit, Not Good News for Chicago (or Bondholders in General)

Posted: 13 May 2015 01:34 PM PDT

Judge Rejects Bondholders' Lawsuit Over Pension Debt

In bankruptcy, the federal courts have ruled that cities can reduce pension obligations. They can, but they don't have to. In Detroit, bondholders were sacrificed to maintain police and fire pensions with minimal haircuts.

On Monday, U.S. Bankruptcy Judge Meredith Jury ruled against bondholders in favor of Calpers in the San Bernardino bankruptcy. She acknowledged that her decision is likely to be seen as unfair to the municipal bond market and might even discourage investors from buying pension obligation bonds in the future.

Please consider Calpers' Pension Hammer Forces 'Unfair' Bond Ruling by Judge.

California's public retirement fund holds so much power over local officials that pension-bond investors can't expect equal treatment when a city goes bankrupt, a judge said in a ruling that she acknowledged seems "unfair."

"What I see as unfair, and might seem unfair to the outside world, does not matter under law," Jury said, referring in part to the powerful remedies Calpers can seek if the city doesn't honor its contract.

Monday's ruling sticks with a pattern seen in the bankruptcies of Stockton, California, and Detroit, said Marilyn Cohen, president of Envision Capital Management in El Segundo, California.

Up to Cities

Federal bankruptcy courts have many times ruled that cities can cut pension obligation, but nothing forces them to.

For example, in the Stockton California bankruptcy, a federal judge ruled that Stockton could have tried to reduce its obligation to Calpers. However, Stockton chose not to do so, arguing that fighting Calpers would take too long and could endanger employee pensions.

Conflict of Interest

I believe Stockton's rationale is nonsense. Instead, I propose Stockton city officials had a conflict of interest.

City officials wanted to preserve their own pensions.

Chicago Connection

So what does this have to do with Chicago and the state of Illinois in general?

Lots, so let's tie it all together.

As a result Tuesday's Illinois Supreme Court Ruling that the 2013 Pension Reform Law Is Unconstitutional Moody's cut Chicago's bond rating two notches to junk. Moody's specifically cited Chicago's pension crisis.

I discussed this yesterday in Chicago Bond Rating Cut to Junk; City Faces $2.2 Billion in Various Termination Fees; Irresponsible to Tell the Truth.

In light of the San Bernardino ruling today, cities that have huge pension issues will see bond yields soar.

The Chicago Board of education is already paying 285 basis points more than other cities because of pensions. If bondholders keep getting hammered, those yields will rise further.

Pass a Bankruptcy Law, Give Taxpayers a Chance

A Chicago Tribune editorial by Henry J. Feinberg, says Pass a Bankruptcy Law, Give Taxpayers a Chance.

Under federal law, state governments can't file for bankruptcy. Local governments can do so if their states give them permission. A bill now before the Illinois legislature would extend that permission to Illinois municipalities, most of which now can't seek protection under bankruptcy law.

The right way is to amend House Bill 298 so people who hold Illinois bonds have a "secured first lien," the fancy words needed in the law to make sure bondholders are first in line to get their money back. Passing this amended bill would do three things that the state's local governments have not been able to accomplish for decades.

Three Reasons to Amend Bill 298

Feinberg cites three reasons to amend the pending bankruptcy bill.

First, it would bring opposing sides to the table to have meaningful discussions about how to save the borrower, in this case the local government, from financial ruin.
Second, the government could ask the bankruptcy court to modify labor contracts and order the parties to renegotiate the terms of collective bargaining agreements.
Finally, a law that puts bondholders first in line to get repaid would be a stroke of fairness that would help Illinois cities, school districts and other local governments avert a short-term solution like Detroit's. There, some people who had lent money to the city by buying its bonds lost two-thirds of their investment. Meanwhile, members of the politically powerful police and firefighter unions took no cuts to their pensions (their cost-of-living adjustment was reduced). Other workers took a 4.5 percent base cut in pensions and the elimination of an annual cost-of-living increase, The Detroit News reported.

I agree with Feinberg on all three points. Bankruptcy is the only real solution for many of these plans and many cities as well.

Beware the Tax Man

Tax hikes cannot possibly address the shortfall. As discussed on May 4, in Beware, the Tax Man Has Eyes on You, the potential hike for Illinoisans is staggering.

Nuveen estimated 50% property tax hikes would be necessary. Those hikes were just for Chicago. They did not include money to bail out other Illinois pension plans. Nor did it address the $9 billion budget deficit for the state.

Finally, Nuveen's estimate assumed pension plans would make their plan assumption of 7% returns or higher.

Stock Market Bubble Will Hit Pensions

I believe another serious decline in the stock market is likely. So do some of the biggest fund managers in the world.

Please check out Seven Year Negative Returns in Stocks and Bonds; Fraudulent Promises.

Pension promises were not made in good faith.

Rather, pension promises were the direct result of coercion by public unions on legislators, mayors, and other officials willing to accept bribes because they shared in the ill-gotten gains of backroom deals at taxpayer expense.

Illinois taxpayers cannot be held accountable for coercion of public officials by public unions.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Blog Comments Down

Posted: 13 May 2015 10:52 AM PDT

I have posted on this before, but many people missed it.

JS-Kit/Echo went under. Along with that development, the comment system on this blog no longer works.

I am looking for a replacement but have not been able to get Disqus to work. I also need to strip out all of the Echo code, but have not done so because some of it I may need to handle peculiarities of this blog.

If someone is familiar with Disqus and blogger and is free to help, I would appreciate it.
Thanks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Dismal Retail Sales Numbers Suggest Recession Likely Underway: Overall +0.0%, YoY +0.9%, Department Stores -2.2%

Posted: 13 May 2015 09:10 AM PDT

Economists were surprised by the dismal retail sales report this morning. That's not surprising because economists are nearly always surprised.

The Bloomberg Consensus retail sales estimate was a rise of 0.2%, but sales came in at 0.0% and the details were ugly, emphasis mine.

Consumer confidence may be strong but it still is not translating to strength for consumer spending. Retail sales were unchanged in April vs Econoday expectations for a 0.2 percent gain. Excluding autos, sales did rise but only barely at plus 0.1 and below expectations for 0.5 percent, while excluding both autos and gasoline, sales rose 0.2 percent vs expectations for a 0.4 percent gain.

The surprising part of the report isn't the weakness in motor vehicles, which was signaled by weak unit sales and which fell 0.4 percent in the month, but weakness in some of the core readings including department stores which fell a very steep 2.2 percent and electronics & appliances which fell 0.4 percent for a 7th straight decline. Both furniture and food & beverages also show declines.

Year-on-year rates show just how weak growth in the retail sector has been. Total retail sales are up only 0.9 percent year-on-year, down from 1.7 percent in March. This is the lowest rate since late 2009. Excluding motor vehicles, year-on-year sales are unchanged, again the lowest reading since late 2009. Ex-auto ex-gas, sales are up a respectable 3.4 percent but, compared to 3.9 percent in March, are going in the wrong direction.

Estimated Retail Sales

The Census Department offers this Table of Retail Sales.

click on chart for sharper image

Note the huge patch of negative numbers this month. At least people are still eating out and drinking more.

Also note the negative numbers in the November 2014 through January 2015 column.

Economists expected the decline in gasoline sales (down 7.2%) to translate into increased sales elsewhere. It didn't.

I am scratching my head over Bloomberg's statement "consumer confidence may be strong ...". What the heck is Bloomberg talking about?

Does Bloomberg even read its own numbers? Here is a snip from the Bloomberg Consumer Confidence Level Report for April 2015, released on 4/28/2015.

Consumer confidence has fallen back noticeably this month, down more than 6 points to a much lower-than-expected 95.2. This compares very poorly with the Econoday consensus for 103.0 and is even far below the Econoday low estimate of 100.5. The weakness, ominously, is the result of falling assessments of the jobs market, both the current jobs market and expectations for the future jobs market. The second quarter, which is expected to be much stronger than the weather-depressed first quarter, isn't likely to get off to a fast start, at least as far as this report goes.

The most striking weakness in April is the assessment of future conditions with the expectations component down 8.5 points to 87.5 for the weakest reading going all the way back to September. And the most striking weakness among the sub-components is employment, where fewer see more jobs opening up 6 months from now and more see fewer jobs available. This spills over into income where fewer see an increase ahead and more see a decrease.

But also weak is the present situation component which is down more than 2-1/2 points to 106.8 for its weakest reading since December.

The Fed is not looking at those numbers either. In the latest FOMC report the Fed specifically stated "consumer sentiment remains high".

I mocked the Fed on April 29 in Fed Cites Weather, "Transitory" Factors in FOMC Statement; What About Consumer Sentiment?

Autos Only Reason YoY Sales Are Positive

Autos are now the only thing keeping retail sales positive year-over-year. And auto sales are driven by subprime loans. How long is this party going to last?

Who wants a car, needs a car, can afford a car, and can get a car loan?

Retail Sales Flashbacks

January 14 - Economists Still Upbeat: Retail Sales Drop Seen as "Blip"
February 13 - Economists Blame Weather: Retail Sales "Unexpectedly" Decline; December Revised Lower, GDP Estimates Follow.
April 14 - Experts Confounded: Retail Sales Rise First Time in Four Months, But Weaker Than Expected.

Household Spending Growth Expectations Plunge; Recession Already Started?

Every month the Fed does a Survey of Consumer Expectations for inflation, earnings growth, income growth, and consumer spending growth.

Yesterday, I stuck my neck out regarding consumer spending projections: Household Spending Growth Expectations Plunge; Recession Already Started?

Downloading data from the Fed, I produced this chart.

click on chart for sharper image

This is what I said yesterday...

Spending Analysis

In spite of rising earnings and income estimates, "median household spending growth expectations retreated significantly from the last month" in the Fed's words.

Should these spending projections prove to be correct, a US recession that few if any economists see coming, has already started.

The Fed's own survey shows spending sentiment is weak. The data shows how weak. Amusingly, the Fed says "consumer sentiment remains high".

And Bloomberg does not believe its own sentiment numbers either.

Following today's report, I move my position from a recession may have started to a recession is now likely underway.

I suspect economists and the Fed will still believe it's "transitory". If so, look for the term "technical recession" because no one seems to believe it. Heck, they do not even believe their own data.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

joi, 14 mai 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Seth's Blog : Choosing what's possible: Your turn to grow

Choosing what's possible: Your turn to grow

More Recent Articles

PozzitifonShow: "КАК ПОСМОТРЕТЬ В БУДУЩЕЕ?" and more videos

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miercuri, 13 mai 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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