The profound question that clueless marketers almost never consider.
The words we imagine we'll tell the boss, the neighbors, our spouse after we make a change or take an action... this drives the choices that constitute our culture, it's the secret thread that runs through just about everything we do.
The Bank of Japan has slashed interest rates to minus 0.1 per cent in a shock move that adds a new dimension to its record monetary stimulus.
Showing its willingness to expand the policy further, the BoJ said it "will cut the interest rate further into negative territory if judged necessary".
"The bank will lower the short end of the yield curve by slashing its deposit rate on current accounts into negative territory and will exert further downward pressure on interest rates across the entire yield curve."
However, the BoJ will use a complicated three-tier system, which makes the negative rate much weaker than comparable moves by the ECB and other European central banks.
Crucially, it will only pay negative rates on any new bank reserves resulting from its programme of asset purchases. All existing bank reserves — which amount to about $2.5tn or 50 per cent of gross domestic product — will continue to be paid interest at 0.1 per cent.
That means there is unlikely to be any impact on bank profits or bank depositors in the short term. The negative interest rate will only have an impact over time as the BoJ keeps buying assets and creating new bank reserves.
The move will add to Mr Kuroda's reputation for surprises, suddenly adopting policies he has vehemently denied were even possible. Eight days ago he told parliament the BoJ was "not seriously considering" a negative rate.
Surprise, Surprise, We Lied Again
If any of these surprises ever accomplished anything, we wouldn't keep having them.
The Japanese lettuce production company Spread believes the farmers of the future will be robots.
So much so that Spread is creating the world's first farm manned entirely by robots. Instead of relying on human farmers, the indoor Vegetable Factory will employ robots that can harvest 30,000 heads of lettuce every day.
Don't expect a bunch of humanoid robots to roam the halls, however; the robots look more like conveyor belts with arms. They'll plant seeds, water plants, and trim lettuce heads after harvest in the Kyoto, Japan farm.
The Vegetable Factory follows the growing agricultural trend of vertical farming, where farmers grow crops indoors without natural sunlight. Instead, they rely on LED light and grow crops on racks that stack on top of each other.
In addition to increasing production and reducing waste, indoor vertical farming also eliminates runoff from pesticides and herbicides — chemicals used in traditional outdoor farming that can be harmful to the environment.
The new farm, set to open in 2017, will be an upgrade to Spread's existing indoor farm, the Kameoka Plant. That farm currently produces about 21,000 heads of lettuce per day with help from a small staff of humans. Spread's new automation technology will not only produce more lettuce, it will also reduce labor costs by 50%, cut energy use by 30%, and recycle 98% of water needed to grow the crops.
Go Vertical
What starts with lettuce, won't stay with lettuce. Strawberries, cabbage, tomatoes, beans, eggplant, and many other vegetables can be grown this way.
Potatoes, peanuts, and things that grow in the ground may be off limits. Corn is too tall with acreage requirements too big.
Matt Matros reads about the 34,000 bags of spinach Dole just recalled and shudders. A Salmonella contamination never would have happened on his farm.
Matros is CEO of FarmedHere, the largest indoor vertical farm in North America. At 90,000 square feet, the Bedford, Illinois farm is a leader in a growing agriculture movement that grows crops without soil and sunlight. Instead, these crops are grown indoors, where they're always monitored and kept away from harmful bacteria.
FarmedHere also prioritizes locally sourcing its produce, Matros says. It wants to deliver its herbs and leafy greens to consumers living at most 200 miles away, as part of a larger mission to reduce its carbon footprint.
In Matros' eyes, the move follows in the footsteps of the fast-casual chain Chipotle, which recently updated its mission to source from farms at most 350 miles away.
With 18 FarmedHere facilities, 75% of the US population would fall within that 200-mile radius, ensuring the produce can reach consumers quickly.
So far, the main crops are basil, mint, lettuce, and kale. Those are the low-hanging fruit that are easy to grow, Matros says.
Without the hassle of Mother Nature's changing climate, farmers can enjoy year-round growing seasons indoors, using less water, fewer pesticides, and avoid biological invaders that cause diseases like Salmonella, Escherichia coli (E. coli), and Listeria.
The company is anticipating an industry-wide tipping point a couple years down the line in which the winners are the local farmers who can provide nutritious food to nearby residents who need it, taking a big chunk of all long-haul trucks filled with produce off the road for good.
Tipping Point
Instead of digging deeper and deeper wells in the California desert to grow things, water in these farms is 95-98% recycled.
And commenting on labor issues, Matros points to Amazon's use of factory robots: "We're going to have that in our next farm, which will be open in about a year."
Japan will have similar technology in a similar timeframe.
The tipping point for worker-less agriculture has arrived.
Econoday called the results a "giant thud". The words "giant crash" seem more appropriate. In retrospect, both terms may be inappropriate. Have we landed yet, or are we still falling?
Econoday reports ...
The factory sector ended 2015 with a giant thud. Durable goods orders fell 5.1 percent in December vs expectations for a 0.2 percent gain and a low-end estimate of minus 3.0 percent. Aircraft orders didn't help but they weren't the whole cause of the problem as ex-transportation orders fell 1.2 percent vs expectations for no change and a low-end estimate of minus 0.4 percent. Core capital goods, which exclude defense equipment and also aircraft, are especially weak, down 4.3 percent following a 1.1 percent decline in November. Shipments for core capital goods, which are an input into GDP, slipped 0.2 percent following a downward revised 1.1 percent decline in November (initially minus 0.4 percent).
Orders for civilian aircraft lead the dismal list, down 29 percent in December. The other main subcomponent for transportation, motor vehicles, also fell, down 0.4 percent in a reminder that vehicle sales were slowing at year end. Capital goods industries show deep declines: machinery down 5.6 percent, computers down 8.7 percent, communications equipment down 21 percent, and fabricated metals down 0.5 percent.
Other readings include a surprising 2.2 percent monthly drop in total shipments and a 0.5 percent drop in total unfilled orders. All this weakness isn't a plus for inventories which rose 0.5 percent to lift the inventory-to-shipments ratio sharply, to 1.69 from 1.64. The rise in inventories poses a headwind to the sector and will dampen future shipments as well as employment and is a reminder of the inventory warning in yesterday's FOMC statement.
Inventories of manufactured durable goods in December, up following five consecutive monthly decreases, increased $2.1 billion, or 0.5 percent, to $397.9 billion. This followed a 0.2 percent November decrease.
Transportation, up following three consecutive monthly decreases, led the increase, $1.8 billion or 1.4percent to $131.8 billion.
Autos Down 4th Quarter
Of other note, the auto sector that had been on fire in 2015 went negative in the fourth quarter.
October, November, December shipments for motor vehicles and parts were -2.9%, +1.1%, -0.4%.
October, November, December orders for motor vehicles and parts are -3.0%, +1.0%, -0.4%.
Recession Here?
In contrast to the preposterous Fed model that says the odds of a recession in all of 2016 is a mere 3.56%, this report strengthens the odds the US economy is already in recession.
Of all the ridiculous opinions as to why the US is not about to enter a recession, the Fed's "Workhorse" Model is at the top of the list.
Torsten Sløk, chief international economist at Deutsche Bank, is taking the optimistic route by drawing attention to a certain economic model that currently puts the chance of an imminent contraction in the single digits. The Federal Reserve's so-called probit model looks at the difference between 10-year and three-month U.S. Treasury rates to gauge the probability of a U.S. recession over the next 12 months.
"The Fed has a workhorse recession model where [the] yield curve today is a predictor of future recessions, and running the Fed's probit model with today's values for 10-year and 3-month rates shows that there is currently a 4 percent probability of a recession over the next 12 months," Sløk said in an e-mail.
The Model
Prepare to have your eyes gloss over because here is the model.
Highlights in yellow are mine. Note that two constants are estimated using data from January 1959 to December 2005. Not only that, the constants were fitted to match what happened. Lovely.
The report failed to mention the most practical of practical issues: It's damn hard for the 3-month to invert with 10-year treasuries when the Fed has artificially held short-term yields closet to zero.
Of course there is a practical reason for the Fed not pointing out that practicality. The article was written in 2006 before short-term yields went to zero.
You might have thought chief international economists would have stopped to consider such practical issues, but you would be wrong.
One might also have thought such issues would have crossed the minds of the New York Fed, but please banish that thought as well.
Despite the obvious uselessness of the indicator under current conditions, others are on the same bandwagon.
Pater Tenebrarum at the acting man took them to task back in 2014 with his post Yield Curve and Recessions.
One popular theme gets reprinted in variations over and over again. Here is a recent example from Business Insider, which breathlessly informs us of the infallibility of the yield curve as a forecasting tool: "This Market Measure Has A Perfect Track Record For Predicting US Recessions" the headline informs us – and we dimly remember having seen variants of this article on the same site at least three times by now:
At a breakfast earlier today, LPL Financial's Jeffrey Kleintop noted that the yield curve inverted just prior to every U.S. recession in the past 50 years. "That is seven out of seven times — a perfect forecasting track record," he reiterated. The yield curve is inverted when short-term interest rates (e.g. the 3-year Treasury) are higher than long-term interest rates (e.g. the 10-year Treasury yield). "The yield curve inversion usually takes place about 12 months before the start of the recession, but the lead time ranges from about 5 to 16 months," wrote Kleintop in a recent note. "The peak in the stock market comes around the time of the yield curve inversion, ahead of the recession and accompanying downturn in corporate profits."
This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve!
Holy Grail
No need to sell now. The holy grail has been perfected. When the yield curve inverts, wait another six months for stocks to peak then sell.
Tenebrarum points out the amazing success of that method for Japan.
The model last worked in1991. Since then, the yield-curve method has had a perfect track record of failure. In at least 6 recessions since, counting one in 2014 the above chart does not show, the model has failed.
Recession Odds
I think there is a 25% chance or better the US already went into recession as of December 2015 or January 2016. A couple of bad jobs reports will seal the deal, and it may not even take that. But that's just a guess. I have no economic formula for economists to go gaga over.
On the economic front, I continue to believe that a U.S. recession is not only a risk, but is now the most probable outcome. As I noted last week, among confirming indicators that generally emerge fairly early once a recession has taken hold, we would be particularly attentive to the following: a sudden drop in consumer confidence about 20 points below its 12-month average (which would currently equate to a drop to the 75 level on the Conference Board measure), a decline in aggregate hours worked below its level 3-months prior, a year-over-year increase of about 20% in new claims for unemployment (which would currently equate to a level of about 340,000 weekly new claims), and slowing growth in real personal income.
Last week, new claims for unemployment jumped to 293,000, a level we've observed only once since last April. Even at this early point (given that employment measures are among the most lagging economic indicators), we already observe a pickup in claims from last year's lows. To put this increase into perspective, the chart below shows points where the ISM Purchasing Managers Index was below 50, the S&P 500 was below its level of 6 months prior, and the 4-week average of initial unemployment claims was at least 5% above its 12-month low. While a year-over-year increase in unemployment claims closer to 20% would be a more reliable confirmation of recession, it's clear that even here, the current combination of evidence is more associated with recession than not.
One Model is Wrong
Seven out of seven times we have been in these conditions, the economy was close to or in recession.
That's one possible model. It contrasts with the Fed's model which says the 12-month look ahead odds are only 3.56%.
Take your pick.
Some economists take the Fed's model.
Why? Because the Fed put a formula to it. That makes it official even though the model has no scientific basis under current conditions.
Simply put, some economists refuse to think.
Reflections on Economic Modeling
Constants α and β are on the verge of massive revisions. After the next recession (which we may already be in), the Fed will see fit to dream up a revised formula that will take into account conditions at zero bound.
That revision will work for the last two recessions but it may not work for the next three.
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Some marketers generate ten times (or a hundred times) as much value as a typical marketing person. How come?
The 10x marketer understands that the job isn't to do marketing the way the person before you did it, or the way your boss asked you to do it. Strategic marketing comes from questioning the tactics, understanding who you are seeking to change and being willing to re-imagine the story your organization tells. Don't play the game, change the game.
The 10x marketer doesn't fold in the face of internal opposition.
These two points are essential and easily overlooked. If you are merely doing your job and also working hard to soothe all constituencies, it's almost certain that your efforts (no matter how well-intentioned or skilled) will not create ten times as much value as a typical marketer would.
This means that an organization that isn't getting 10x marketing needs to begin by blaming itself (for not asking the right question and for not supporting someone who answers the other question). 10x marketers are made, not born, and half the battle is creating a platform where one can work.
Beyond that, the 10x marketer embraces two apparently contradictory paths:
Persistence in the face of apathy. Important marketing ideas are nearly always met with skepticism or hostility, from co-workers, from critics and from the market. Showing up, again and again, with confidence and generosity, is the best response.
The willingness to quit what isn't working. Sometimes the marketer faces a dip that must be survived, but the 10x marketer is also engaged enough to know the difference between that dip and a dead end that has no hope.
Not every project needs a 10x marketer. If you sell a commodity (or something you treat like a commodity) it'll almost never happen. But if 10x is what you're hoping for, learn to dance.
On Wednesday, the Chicago Board of education pulled the plug on a proposed $875 Million Bond Sale.
Facing hefty yields, the financially ailing Chicago Public Schools (CPS) postponed Wednesday's planned $875 million bond sale and will evaluate the timing on a day-to-day basis, a school official said.
The nation's third-largest public school system is struggling with a structural budget deficit of at least $1 billion. Its fiscal woes led Illinois Governor Bruce Rauner and Republican lawmakers last week to push for a state takeover and potential bankruptcy for CPS - moves that were quickly shot down by Chicago Mayor Rahm Emanuel, who controls the school system, and leaders of the Democratic-controlled legislature.
A pre-pricing marketing scale circulated by underwriters on Tuesday for the "junk"-rated general obligation bonds showed yields topping out at 7.75 percent with coupons of 7.25 percent for bonds due in 2041 and 7 percent for bonds due in 2044. That yield indicated a so-called credit spread over Municipal Market Data's benchmark triple-A yield scale of as much as 506 basis points.
That spread was wider than the 464 basis-point spread the school system's 19-year bonds were fetching in secondary market trading last week.
Five Questions for Chicago
Will the yields be any lower tomorrow? Next week? Why?
How the heck is the school district going to close a hole of at least $1 billion?
Will Emanuel push for yet another massive tax hike just to pay teacher pensions?
How can another tax hike do anything but postpone the problem?
Since the most likely outcome is bankruptcy, why was the yield offering so good?
Reflections on Bankruptcy
In regards to question number five, 7.75% seems very attractive given the high likelihood those bonds will soon be worthless.
Heck, even 10% would be a bargain for the city and a horrid deal for the bondholders.
But that's not the way markets work. No one thinks bankruptcy is coming until it's a few weeks away. And of course, for bankruptcy to be possible, the Illinois legislature has to approve it.
Governor Bruce Rauner needs to hold firm until Emanuel begs the union-controlled Illinois legislature to pass a municipal bankruptcy bill.
Stepping back, recall that Emanuel defeated Cook County Commissioner Jesus "Chuy" Garcia in a runoff on April 7, 2015.
In debates ahead of the runoff, Emanuel said Garcia's promises would require tax hikes to fund them. Emanuel called tax hikes failed "politics of the past."
Emanuel forgot to say he would undertake the same failed measures as Garcia, only much bigger.
Six months later, Emanuel passed the largest property tax hike in Chicago history. And in the understatement of the year, Emanuel commented "It's Not a Piece of Art".
With that I have one final question for the mayor.
Bonus Question
Hello Rahm, when will you put city taxpayers and the good of the city itself ahead of the unions and your perpetual reelection campaign that's currently nothing but lies and deceit followed by monstrous tax hikes?
The supply glut in oil storage continues as crude. Inventories hit new all-time highs this past week.
The above charts from EIA Weekly Supply Data shows the crude inventory of 494,920,000 (not counting strategic reserves) passed the previous high of 490,912,000 set on April 24, 2015.
Reserves, including the Strategic Petroleum Reserve (SPR), reached 1,190,038 barrels, also a record high.
"At 494.9 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 3.5 million barrels last week, and are well above the upper limit of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories decreased by 4.1 million barrels last week but are near the upper limit of the average range for this time of year. Propane/propylene inventories fell 6.2 million barrels last week but are well above the upper limit of the average range. Total commercial petroleum inventories decreased by 1.0 million barrels last week."
Crude Jumps on News Russia May Cooperate with OPEC
Oil futures surged on Wednesday, after Russia said it was discussing the possibility of co-operation with OPEC, fanning hopes that a deal was in the works to reduce oversupply that sent prices the lowest levels in a dozen years last week.
Russia's energy ministry said possible coordination with the Organization of the Petroleum Exporting Countries (OPEC) was discussed at a meeting with Russian oil companies on Wednesday.
"I remain skeptical, at the end of the day, about that happening as the oil producers are looking at the other guy to cut production while maintaining their own levels," Andrew Lipow of Lipow Oil Associates said.
Crude was looking firm before the Russia news on the back of a U.S. Energy Department report showing a surprise spike in demand for refined products like heating oil last week, when a massive blizzard hit the U.S. Northeast.
The U.S. Energy Information Administration said inventories of distillates, fell more than 4 million barrels, trumping expectations for a rise of about 2 million.
Economists Surprised Again
Despite the small drawdown in fuel oil please recall the report stated "Distillate fuel inventories are near the upper limit of the average range for this time of year."
Economists can be surprised by anything including the possibility blizzards and cold weather may increase the demand for fuel oil in the Northeast!
December new home sales surged well over the high end Econoday estimate.
The outlook for the housing sector just got a boost from a sharp jump in new home sales, up 10.8 percent to a 544,000 annualized rate that is 44,000 over the Econoday consensus and 24,000 over the high estimate. The gain, however, may have been boosted by discounting as the median price slipped 2.7 percent to $288,900 for a year-on-year rate of minus 4.3 percent.
With builders slow to bring new homes to market, low supply remains a central factor holding back sales. Supply did rise 6,000 in the month to 237,000 but supply relative to sales fell back to 5.2 months from 5.6 months. A reading of 6.0 months is considered to be the balance point between supply and demand.
Regional data show a 32 percent sales surge in the Midwest where the year-on-year rate of 39 percent is the strongest. Sales in the West and Northeast both rose 21 percent in the month with the year-on-year rate in the West, which is a key region for new housing, up 22 percent while the Northeast, which is a very small region in this report, down 6.5 percent on the year. The South, which is the largest region, shows a fractional gain in the month and no change on the year.
For full year 2015, new home sales rose 14.7 percent to 501,000 from 437,000 in 2014. Sales of new homes have been noticeably higher than prices, suggesting that prices have room to accelerate. This report follows special strength in existing home sales with both perhaps benefiting from December's warm weather but with both pointing nevertheless to new momentum for 2016.
Negative Momentum
Why did sales surge 39% in the Midwest? Because this was one of the warmest December on record even discounting global warming silliness.
Bloomberg calls this "new momentum" for 2016. Indeed it is, but that momentum is negative.
This statement by Bloomberg caught my eye: "Sales of new homes have been noticeably higher than prices, suggesting that prices have room to accelerate."
Prices Have Room to Fall
I suggest home prices have room to fall. Curiously so does Bloomberg, albeit in different ways, and in a different article.
The world's economic woes -- from China to Russia to South America -- are damping sales in the high-end real estate market. Haywire overseas stock markets and dropping currency values caused in part by plummeting oil prices are dulling demand for mansions, penthouses and winter escapes.
Luxury Pfft
Prices for the top 5 percent of U.S. real estate transactions remained flat in 2015 while all other houses gained 4.9 percent, according to data from Redfin Corp., a real estate brokerage and data provider.
Stronger Dollar
The stronger dollar is driving South American buyers away from the 23,000 condos in the pipeline for Miami's downtown area, said Peter Zalewski, owner of South Florida development tracker CraneSpotters.com. Buyers signed about one-fourth fewer pre-construction contracts last year than in 2014, according to Anthony M. Graziano, senior managing director at Integra Realty Resources Inc., which tracks condo data for the Miami Downtown Development Authority.
In nearby Sunny Isles, Florida, faraway currency fluctuations are endangering the sale of a $3.7 million condominium.
In Houston, the plunge in oil prices to a 12-year low is killing the luxury boom. Sales for homes priced at $500,000 or more dropped 17 percent in December from a year earlier, according to the Houston Association of Realtors.
Manhattan resale prices for the top 20 percent of the market peaked in February and have fallen every month since, according to an analysis through October by listings website StreetEasy.
Even in San Francisco, where the market for luxury properties remains strong, the inventory of listings for $2 million or more jumped in October to a record level, said Patrick Carlisle, chief market analyst for Paragon Real Estate.
"More sellers are jumping in and more buyers are holding off because they're worried about where the volatility is going," Carlisle said.
Buyers are now on the hunt for deals, said Nela Richardson, chief economist at Redfin.
"There's a limit even to what a wealthy person will spend," she said.
Is Everybody In?
Bloomberg did not make the necessary connection, but they did provide the chart. Let's tie up some loose ends.
In bonds, rot starts with junk and spreads to the core. With homes, price rot starts at the high end.
With Chinese West-coast buyers now not feeling so wealthy after a 47% plunge in the stock market, and with "Temporary" Capital Controls likely on the way, that segment of the high-end market is toast.
The strong dollar is having the same effect in Florida. And in New York, well ... "There's a limit even to what a wealthy person will spend."
And every decrease in the price at the high end, affects every level below it. A mansion that was $1,000,000 but is now $900,000 will affect the price of homes listed for $850,000 to $900,000, etc., all the way down the ladder.
Is Everybody In?
Let's return to the Econoday "room to accelerate" misanalysis.
If homebuilders could sell more expensive homes, they surely would. And at the very high end, it appears we have hit the peak. That group is "all in".
It was one hell of a bubble-reblowing effort by the Fed, but another slide lower awaits. New homes prices will likely get cheaper and cheaper with more and more features added.
In turn that will lower the price of similar existing homes. This stuff does cascade. We have seen it before.
Lack of Supply
There's plenty of talk about lack of supply. Actually, there's an ample supply of homes. There's just no supply at prices people are willing and able to pay.
Expect lower, not higher prices. And if you need to get out, beat the rush, if you still can.
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