Mish's Global Economic Trend Analysis |
- Steve Keen on Economic Forecasts, Ponzi Schemes, GDP, China; One Way Streets and Poison
- Yet Another Dispute Over GDP; What's Really on the Fed's Mind?
- GDP by Other Measures; Will the "Real" GDP Please Stand Up?
- Kansas City Region Activity Remains in Deep Contraction
- Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing
- Hall of Mirrors: Jim Grant on the "Paper Moon", No Price Discovery Economy; Psychology of Bubbles
| Steve Keen on Economic Forecasts, Ponzi Schemes, GDP, China; One Way Streets and Poison Posted: 27 Aug 2015 10:47 PM PDT Economic Forecasts Economist Steve Keen pinged me in response to my post Regional Manufacturing Expectations From Mars. In that post, I compared Richmond Fed manufacturing survey expectations (six month look ahead projections made in February for August), to what actually happened in August. In response, Steve Keen Tweeted @MishGEA gets it wrong! Says "Regional Manufacturing Expectations From Mars" when they're really from Uranus. I duly stand corrected. I am now planetarily aligned with Keen on the distinction between Mars and Uranus. China Implosion On a more serious note, please consider the Financial Times article Why China's stock market implosion might not be very meaningful, by Izabella Kaminska. Kaminska quotes Steve Keen as follows ... One key peculiarity about China's economy—and there are many—is that much of its growth has come from the expansion of industries established by local governments ("State Owned Enterprises" or SOEs). Those factories have been funded partly by local governments selling property to developers (who then on-sold it to property speculators for a profit while house prices were rising), and partly by SOE borrowing. The income from those factories in turn underwrote the capacity of those speculators to finance their "investments", and it contributed to China's recent illusory 7% real growth rate.Heart of the Matter Keen indeed gets to the heart of the matter about SOEs, borrowing, and illusory growth rates. I have commented time and time again, no one in their right mind believe Chinese growth rates. Not only are the numbers straight up fabrications, many of the projects have no economic benefit. Moreover, Chinese growth estimates fail to take into account damaging pollution and cleanup costs that ought to subtract from GDP. GDP itself is a useless statistic actually. The reason is government spending, no matter how counterproductive, adds to GDP. It sounds convoluted, but if government paid someone to poison wells, that poisoning would, by definition, add to GDP. Many connected politicians got extremely wealthy off SOEs. But most of the SOE projects had little if any economic benefit, and some undoubtedly had negative benefit because environmental damage was not properly accounted for. In short, Chinese GDP does not properly reflect economically nonviable projects nor the outright poisoning of the Chinese population to hit preposterous targets. Rather than admit past GDP was grossly overstated, revisions will likely be hidden in future GDP reports for years or decades to come. Kaminska Concludes ... "In short, don't worry so much about the stock market, worry more about the potential collapse of other major Chinese asset classes like property, ghost towns and factories. That's how the credit links back to the real economy." Those were her words, not Keen's. I pinged Pater Tenebrarum at the Acting Man blog the above article and he replied ... "Something has clearly changed now. Right now, it seems it actually does matter. China is seen as an economically important (for the world) since about 2005 or so, but I have a feeling that something more profound may actually be afoot now - due to the follow-on domino effects. I would estimate that global malinvestment in commodity projects along amounts to something like $2 to $3 trillion cumulatively, perhaps more. This one sector alone may leave behind $1 trillion in unpayable debt." OK. What's Changed? China's Capital Accounts Historically, China's stock market has moved independently of the country's economy because of China's closed capital account. What if the Shanghai market has started to reflect the real fundamentals thanks to liberalization of China's capital account? One Way Streets Typically, money flowed into China in a one way street. This year, China took steps to open up the flows. Forbes noted China Pledges 'Radical' Moves To Open Capital Account In 2015. FTAlphaville notes This isn't the Chinese capital account liberalisation you're looking for. Today every Chinese individual is allowed to buy no more than US$50,000 worth of foreign currency from banks each year. But that limit was lifted from US$20,000 in 2007, and it is also not that hard for the more savvy to get around it.Needs vs. Reality China needs external capital. Instead, China sees capital flight. Resultant stress is everywhere one looks because debt exceeds carrying capacity. Symptoms of Too Much Debt
Debt the Problem Numerous bubbles have started to implode, even as property bubbles in some places expand. Central banks are hard pressed to keep all the Ponzi schemes going. Although we do not see eye-to-eye on the solution, Keen and I agree that debt is a primary problem. Many prominent economists still have not figured that out. For example: Larry Summers and Ray Dalio Seek Return of Quantitative Easing. Paul Krugman says "Debt is Good". Krugman: "There's a reasonable argument to be made that part of what ails the world economy right now is that governments aren't deep enough in debt." Debt Bubbles Debt and bubbles go hand in hand. No matter how big the bubble, no matter how much the resultant income inequality, no matter how ridiculous or nonviable the project, no matter how little the economic benefit, no matter how much government overpays (thanks to inane union work rules and prevailing wage laws), you can always count on Krugman to want more and more and more debt, even though Japan is living proof such policies do not work. In the US, the Fed used a housing bubble to bailout a dotcom bubble. And now we have QE-driven stock market and junk bond bubbles to smooth over the housing bubble. Corporations have gone into debt to buy back their own shares at absurd valuations. Debt has been used to cure debt problems and over again. Apparently the cure is the same as the disease. Mike "Mish" Shedlock |
| Yet Another Dispute Over GDP; What's Really on the Fed's Mind? Posted: 27 Aug 2015 05:43 PM PDT Disputes over GDP go on and on and on. MarketWatch reports By another measure, the U.S. economy was ho-hum in second quarter. There are two ways to compute how well the economy is doing.Two Measures  That may look significant, but let's investigate further. DGI vs. GDP Percent Change from Year Ago  DGI vs. GDP Percent Change from Year Ago Detail  Large Gap? On a year-over-year basis it's hard to discern any gap. The dispute of Josh Shapiro, chief U.S. economist at MFR, is easily seen as total nonsense. I don't believe the economy is as strong as most claim, but I certainly won't post easily disproved charts to make my point. What's Really on the Fed's Mind Still, one has to wonder "What's really on the Fed's mind?" I surely doubt it is fear of inflation, at least as they claim to measure it. It's possible they fear bubbles, but I doubt that too. The Fed historically has been blind to bubbles. Rather, I suspect they have come to the conclusion this recovery is as good as it gets, and if they cannot hike now, they will not be able to. That may sound lame, but it is exactly how economic clowns think. Let me phrase it this way: "We need to hike now so we have ammunition to cut when we need to." Meanwhile, nothing the Fed says at all is believable if for no other reason than historical precedent that proves without a doubt, they clearly have no idea what's really going on, especially at turning points. They cannot really come out and say "We are clueless bubble blowers", can they? Mike "Mish" Shedlock |
| GDP by Other Measures; Will the "Real" GDP Please Stand Up? Posted: 27 Aug 2015 12:30 PM PDT In the wake of a stronger than expected GDP report (see Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing), some are questioning the stated growth. For example, the Consumer Metrics Institute says "On the surface this report shows solid economic growth for the US economy during the second quarter of 2015. Unfortunately, all of the usual caveats merit restatement". Consumer Metrics Caveats
I certainly agree with point number three. Significant GDP revisions are the norm, even years after the fact. The numbers are of subjective use at best because GDP is an inherently flawed statistic in the first place. As I have commented before, government spending, no matter how useless or wasteful, adds to GDP by definition. Moreover, inflation statistics are questionable to say the least, as are hedonic price measurements and imputations. Imputations Imputations are a measure of assumed activity that does not really exist. For example, the BEA "imputes" the value of "free checking accounts" and ads that number to GDP. The BEA also makes the assumption that people who own their houses would otherwise rent them. To make up for the alleged lost income, the BEA actually assumes people rent their own houses from themselves, at some presumed lease rate. Imputed rent is an addition to GDP. Why stop there? On the same basis people who cut their own grass would have to pay someone else to do it for them. And married men might go to prostitutes if they were not married. And what about back scratching? You scratch mine and I scratch yours. Clearly there is unreported economic activity here. There are limitless imputations the government can concoct if GDP needs a future boost. By the way, Europe did recently revise up GDP on the grounds of unreported prostitution and illegal drug profits. GDP by Other Deflators Every month there are questions in regards to GDP deflators. This month, Consumer Metrics notes that the CPI as a deflator would result in a more modest 2.33% growth rate. Computing GDP using the Billion Prices Project would put the growth rate even lower, at 1.28%. That's interesting, but is it valid? Deflator Differences EconPort compares the Differences Between the GDP Deflator and CPI Although at first glance it may seem that CPI and GDP Deflator measure the same thing, there are a few key differences. The first is that GDP Deflator includes only domestic goods and not anything that is imported. This is different because the CPI includes anything bought by consumers including foreign goods. The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.Difference Between further adds to the explanation. CPI and GDP deflator generally seem to be the same thing but they have some few key differences. Both are used to determine price inflation and reflect the current economic state of a particular nation.I am not going to suggest the GDP deflator is by any means correct. Indeed, I believe some prices are inherently difficult if not impossible to measure. But substituting the CPI as a more valid measure is as likely as not to be even more inaccurate. Solid Growth? In regards to point number four, average growth through three quarters is certainly not solid. Q1 is 0.6%, Q2 is 3.7%, and the GDPNow estimate for Q3 is 1.4%. For 2015, through three quarters, we are talking about growth of about 1.6% or so. This is not rate hike material. Since point four above was obvious sarcasm targeted at Fed Chair Janet Yellen, I am in agreement with Consumer Metrics on this point. Per Capita GDP Finally, and in reference to point number two, real per capita GDP remains quite anemic.  The above chart from Advisor Perspectives. Per capita GDP reflects aging boomers, student debt, government debt, slow household formation, untenable pension promises, and extremely poor central bank and governmental policies that have effectively wiped out the middle class. Mike "Mish" Shedlock |
| Kansas City Region Activity Remains in Deep Contraction Posted: 27 Aug 2015 10:07 AM PDT Unlike housing and auto sectors, economic regions dependent on oil activity remain severely stressed. For example, the Kansas City Fed regional factory report came in today at -9, compared to an Economic Consensus of -4. Factory activity in the Kansas City Fed's region remains in deep contraction, at minus 9 in August vs minus 7 in July and deeper than the Econoday consensus for minus 4. New orders are also at minus 9 with backlog orders at minus 21. These are deeply depressed readings that point to a long run of weak activity in the months ahead. Production is already far into the negative column at minus 16 with hiring at minus 10. Price readings in the August report are in contraction.Mike "Mish" Shedlock |
| Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing Posted: 27 Aug 2015 09:46 AM PDT Economists had been expecting today's second quarter GDP estimate to rise from initial readings, based largely on auto sales and housing, and they were correct. "The GDP estimate released today is based on more complete source data than were available for the 'advance' estimate issued last month. In the advance estimate, the increase in real GDP was 2.3 percent. With the second estimate for the second quarter, nonresidential fixed investment and private inventory investment increased. With the advance estimate, both of these components were estimated to have slightly decreased." Advance Estimate vs. Second Revision  Economic Consensus GDP was a bit higher than the Bloomberg Economic Consensus. The second-quarter did show a big bounce after all, up at a revised annualized growth rate of 3.7 percent which is 5 tenths over the Econoday consensus and just ahead of the high estimate. The initial estimate for second-quarter GDP was 2.3 percent. This report points to better-than-expected momentum going into the current quarter.GDPNow Third Quarter I do not believe today's report will impact estimates for third quarter for the Atlanta Fed GDPNow Model by much if any. We will find out on the next update, tomorrow.  GDP Average The GDPNow forecast for third quarter is 1.4%. Through three quarters, annualized growth is about 1.57%, not exactly rate hike material. Growth is fueled by autos and housing, the only two strong aspects of this economy. Last year, the third quarter was strong, this year will not repeat. Mike "Mish" Shedlock |
| Hall of Mirrors: Jim Grant on the "Paper Moon", No Price Discovery Economy; Psychology of Bubbles Posted: 26 Aug 2015 11:23 PM PDT Reason TV had an excellent interview with Jim Grant, editor of Grant's Interest Rate Observer on the recent stock market turmoil. Grant says The Fed Turned the Stock Market Into a 'Hall of Mirrors'. "Confoundingly to me, people have come to be quite accepting of the value attached by fiat to these pieces of paper we call currency," says Jim Grant, who's the editor of Grant's Interest Rate Observer and the author of The Forgotten Depression: The Crash That Cured Itself. "Are prices meant to be imposed from on high, or discovered by individuals acting spontaneously in markets? The readers and viewers of Reason known the answer to that but they're regrettably in the minority." Grant sat down with Reason magazine editor-in-chief Matt Welch on Tuesday to discuss the underlying causes of the recent market turbulence, why we don't really "have interest rates anymore," and how the classic jazz song "It's Only a Paper Moon" provides a fitting metaphor for the equities market. Grant Interview Psychology of Bubbles Central banks have blown another massive set of bubbles by removing every aspect of price discovery for the sole benefit of banks and the already wealthy. That's the bottom line, and it's remarkably easy to see. Yet, very few see it that way. Why? Wall Street, academia, and the media, all have a vested interest in denial. Bad news does not sell. And people believe what they want to hear: Stocks are cheap and the economy is getting better. Expect another "no one could possibly have seen this coming" set of excuses. Mike "Mish" Shedlock |
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