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Mish's Global Economic Trend Analysis

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• Super Taper Tantrum? How About an UnTaper Tantrum?
• Idiot's Solution to Negative Interest Rates: Abolish Cash, Tax Currency
• Empire State Manufacturing Index Back in Contraction, New Sales and Unfilled Orders Sharply Decline
• String of Good News Snaps at One: Industrial Production Down 0.6 Percent, First Quarterly Decline Since 2009

Super Taper Tantrum? How About an UnTaper Tantrum? Posted: 15 Apr 2015 07:39 PM PDT Generally, the IMF is wrong every which way about nearly everything. Thus, one has to wonder if the correct response to 'Super taper tantrum' ahead, warns IMF is along the lines of "No Worries Mate". José Viñals, the director of the IMF's monetary and capital markets department, warned of a "super taper tantrum" and spiking yields as the US central bank gets nearer to lifting rates from near-zero levels. "This is going to take place in uncharted territory," he said in an interview. In its Global Financial Stability Report, released on Wednesday, the IMF argued that risks have not only risen worldwide, but that they have rotated to parts of the financial world that are harder to monitor — including to the non-bank sector. Among the key worries are "severe challenges" brewing in the EU life insurance sector amid plunging interest rates in the region. Many policies are offering generous return guarantees that are "unsustainable" in a prolonged low-interest rate environment, the IMF warned, highlighting German and Swedish firms. In the report, the IMF said a sudden rise of 100 basis points in 10-year Treasury yields was "quite conceivable" once the market wakes up to the possibility of the first rise in official rates in nearly a decade. "Shifts of this magnitude can generate negative shocks globally, especially in emerging market economies," the IMF said. Higher US interest rates could expose particular vulnerabilities in emerging markets where companies have issued large amounts of debt in dollars, the IMF said, adding that between 2007 and 2014 debt had grown faster than GDP in all major emerging markets. Mr Viñals also laid out a scenario which he called a "Yellen conundrum" in which the central bank is forced to tighten policy more sharply than planned because longer-term interest rates do not respond to hikes in the Fed's target range. "This exit is a lot more complex to figure out, and this is behind the uncertainty that there is in the markets," he said. "You don't want to just be happy with the fact that borrowing costs are falling and that equity prices are rising and that the euro is depreciating, all of which is good for price stability and growth in the euro area. You also need to unblock the bank credit channel, and for that you need to decisively deal with non-performing loans," he said. IMF Chief Economist to the Rescue  In many ways, that was one of the more sensible things the IMF has ever published. So what's up? Not to worry, Olivier Blanchard, the IMF chief economist, came to the rescue with his rebuttal. Releasing growth forecasts on Tuesday, Olivier Blanchard, the IMF chief economist, said: "I sense the macro risks are smaller than in October — there is no reason for doom and gloom." Taper Tantrum? Well, what if the Fed doesn't hike? How About an UnTaper Tantrum? I am increasingly convinced the US is headed for recession. In fact, I think it is quite possible recession has already started. So, can you have a taper tantrum based on hikes that do not occur (or do not occur at the rate that is priced in?) While pondering that question, here's another: Is it possible the US economy is so weak we have an untaper tantrum in the stock market when the Fed doesn't hike (or doesn't hike as much as everyone assumes they will)? The "UnTaper Tantrum" thesis seems more reasonable to me. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Thus, one has to wonder if the correct response to 'Super taper tantrum' ahead, warns IMF is along the lines of "No Worries Mate". José Viñals, the director of the IMF's monetary and capital markets department, warned of a "super taper tantrum" and spiking yields as the US central bank gets nearer to lifting rates from near-zero levels. "This is going to take place in uncharted territory," he said in an interview. In its Global Financial Stability Report, released on Wednesday, the IMF argued that risks have not only risen worldwide, but that they have rotated to parts of the financial world that are harder to monitor — including to the non-bank sector. Among the key worries are "severe challenges" brewing in the EU life insurance sector amid plunging interest rates in the region. Many policies are offering generous return guarantees that are "unsustainable" in a prolonged low-interest rate environment, the IMF warned, highlighting German and Swedish firms. In the report, the IMF said a sudden rise of 100 basis points in 10-year Treasury yields was "quite conceivable" once the market wakes up to the possibility of the first rise in official rates in nearly a decade. "Shifts of this magnitude can generate negative shocks globally, especially in emerging market economies," the IMF said. Higher US interest rates could expose particular vulnerabilities in emerging markets where companies have issued large amounts of debt in dollars, the IMF said, adding that between 2007 and 2014 debt had grown faster than GDP in all major emerging markets. Mr Viñals also laid out a scenario which he called a "Yellen conundrum" in which the central bank is forced to tighten policy more sharply than planned because longer-term interest rates do not respond to hikes in the Fed's target range. "This exit is a lot more complex to figure out, and this is behind the uncertainty that there is in the markets," he said. "You don't want to just be happy with the fact that borrowing costs are falling and that equity prices are rising and that the euro is depreciating, all of which is good for price stability and growth in the euro area. You also need to unblock the bank credit channel, and for that you need to decisively deal with non-performing loans," he said. IMF Chief Economist to the Rescue  In many ways, that was one of the more sensible things the IMF has ever published. So what's up? Not to worry, Olivier Blanchard, the IMF chief economist, came to the rescue with his rebuttal. Releasing growth forecasts on Tuesday, Olivier Blanchard, the IMF chief economist, said: "I sense the macro risks are smaller than in October — there is no reason for doom and gloom." Taper Tantrum? Well, what if the Fed doesn't hike? How About an UnTaper Tantrum? I am increasingly convinced the US is headed for recession. In fact, I think it is quite possible recession has already started. So, can you have a taper tantrum based on hikes that do not occur (or do not occur at the rate that is priced in?) While pondering that question, here's another: Is it possible the US economy is so weak we have an "UnTaper Tantrum" in the stock market when the Fed doesn't hike (or doesn't hike as much as everyone assumes they will)? The "UnTaper Tantrum" thesis seems more reasonable to me. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Idiot's Solution to Negative Interest Rates: Abolish Cash, Tax Currency Posted: 15 Apr 2015 01:40 PM PDT Citibank's Global Chief Economist Willem Buiter is another in a line of economic idiots (sorry, but no other word is more accurate) who call for abolishing cash and taxing deposits. Bloomberg author Lorcan Roche Kelly fell for Buiter's nonsense hook line and sinker in Citi Economist Says It Might Be Time to Abolish Cash. Buiter proposes that interest rates should have been -6% during the crisis. Kelly is enough of an fool to say "It seems Buiter is correct". On May 28, 2014, economist Kenneth Rogoff proclaimed to the Financial Times, Paper money is unfit for a world of high crime and low inflation. While I would agree with the notion that fiat paper is unfit, thus requiring a return to the gold standard, that is not exactly what Rogoff had in mind. Buiter Calls for Helicopter Drop Buiter carried the idea even further, and actually did so in advance of Rogoff. On May 9, 2012, Buiter Central Banks Need To Drop Money From Helicopters, And Perhaps ABOLISH CURRENCY COMPLETELY. Negative Interest Rates I have discussed the stupidity of negative interest rates several times recently. The natural rate of interest can never be negative. For discussion, please see Stupidity of Negative Interest Rates Expands to Spain; Deflation Shock Thesis. Also see Thrown Under the Bus: Another Look at the Self-Serving Launch of Ben Bernanke's Blog and the Brookings Institute's Pandering Role. Pater Tenebrarum's article Ben Bernanke's Apologia for the Fed is a third discussion on the absurdity of negative rates. Idiotic Ideas Breed Idiotic Solutions To explain Buiter's solution, one only need look at his economically illiterate notions that consumer price deflation is a bad thing and something needs to be done about it. I repeat my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit". Consumer Price Deflation NOT Damaging Even the BIS has concluded that routine consumer price deflation is no threat. For details, please see Historical Perspective on CPI Deflations: How Damaging are They? In the link at the top, Buiter lists reasons we need to do away with cash, then allegedly knocks them down. As is often the case with economic insanity, a Bloomberg lap dog sucks up total nonsense as if it was candy. Why We Are In This Mess We are in this mess precisely because the Fed had done nearly everything these idiots have dreamed up. The results were a dotcom bust, housing bubble, and now an asset bubble everyone but economic idiots can see. Bad Ideas Never Go away It's time for a recap of my Law of Bad Ideas. Law of Bad Ideas: Bad ideas don't go away until they have been tried and failed multiple times, and generally not even then. Corollary Number One: Left alone, bad ideas get worse over time. Corollary Number Two: The overwhelming desire to implement bad ideas leads to compromises guaranteed to make things worse. Corollary Three: Those in positions of political power not only have the worst ideas, they also have the means to see those ideas are implemented. Corollary Four: The worse the idea, the more likely it is to be embraced by academia and political opportunists. Corollary Five: No politically acceptable idea is so bad it cannot be made worse. Corollary Six: Bad ideas lead to more bad ideas to fix problems caused by previous bad ideas. Corollaries 3-6 are from Democrat Sponsored "Income Inequality"; Law of Bad Ideas, Yet Again. And speaking of income inequality, those who live day-to-day on cash (the poor), are those who would be most hurt by Buiter's asinine idea. I was surprised to learn no one had formulated a "Law of Bad Ideas" so I claimed it on February 14, 2014. Don't expect Buiter's idea to go away. Instead, expect it to be embraced by academia even though such  ideas are precisely what is behind the very income inequality the Fed and academia are enraged over. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Empire State Manufacturing Index Back in Contraction, New Sales and Unfilled Orders Sharply Decline Posted: 15 Apr 2015 12:01 PM PDT Bad news in economic reports continues amidst occasional and one-time positive reports. The Bloomberg Empire State Manufacturing consensus was not only overoptimistic. The Empire State index points to month-to-month contraction for April, at minus 1.19 for only the second negative reading in the last 23 months. The other negative reading was in December which was just about the beginning of this indicator's slowdown. New orders are contracting noticeably, at minus 6.00 for the second straight contraction. Weakness in exports, tied to the strong dollar and soft global demand, is a major factor behind the dip in orders. Unfilled orders, at minus 11.70, are in sharp contraction for a second straight month. But the drop in orders has yet to pull down shipments which, at least for now, are still in the plus column and well into the plus column, at 15.23. Employment is also well into the plus column at 9.57 on top of March's standout strength of 18.56. Still, shipments and employment are certain to turn lower if orders don't pick up. But, in an optimistic note, that's exactly what the sample sees as a sizable 52 percent expect general conditions to improve in the next six months. Empire State vs. Philly Fed The index has dipped twice without the US economy falling into recession. Unless orders pick up, which I doubt given strength in the US dollar, the third time may be it. The Philly Fed survey is out tomorrow. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

String of Good News Snaps at One: Industrial Production Down 0.6 Percent, First Quarterly Decline Since 2009 Posted: 15 Apr 2015 11:05 AM PDT The string of good news in industrial production snapped at one month. The Fed's Industrial Production and Capacity Utilization report shows Industrial production decreased 0.6 percent in March after increasing 0.1 percent in February. For the first quarter of 2015 as a whole, industrial production declined at an annual rate of 1.0 percent, the first quarterly decrease since the second quarter of 2009. The decline last quarter resulted from a drop in oil and gas well drilling. In March, manufacturing output moved up 0.1 percent for its first monthly gain since November; however, factory output in January is now estimated to have fallen 0.6 percent, about twice the size of the previously reported decline. The index for mining decreased 0.7 percent in March. The output of utilities fell 5.9 percent to largely reverse a similarly sized increase in February, which was related to unseasonably cold temperatures. Capacity Utilization Underperforms Expectations Economists at least got the direction correct. Nonetheless, the Bloomberg Industrial Production Consensus was -0.3 percent, once again too optimistic. In January, December and November were revised sharply lower.  This month,  January was revised lower. If March is revised lower next month, there was no string of good news on industrial production at all. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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