Mish's Global Economic Trend Analysis |
- Attitudes, Attitudes: Dear Nate Silver, Regarding Donald Trump, You Are Missing Something Big!
- Disastrous Discussion: US Corporate Profits vs. GDP: How Sustainable is Corporate Profit Trend? Do US Equities Deserve a PE Premium?
- Import/Export Price Deflation: Export Prices -0.6%, Double Consensus Estimate; Import Prices -0.4% Half Estimate; Net Negative for GDP
- Truck Rates Plunge; What About Actual Shipping Volumes? Strong Case for Pending Recession
| Attitudes, Attitudes: Dear Nate Silver, Regarding Donald Trump, You Are Missing Something Big! Posted: 10 Dec 2015 07:57 PM PST I am a big fan of Nate Silver. He was spot on in the last two presidential elections and I bought into his methodology, in advance, confidently predicting the results. Nate adjusted his odds as the campaign progressed and got 49 out of 50 correct in 2008. I am not sure which one he missed, but I got 49 out 50 correct before Obama even won the nomination. Missouri showed me up. Initially, my methodology was quite a bit different. I was certain the economy was headed for disaster and that every remotely close state would swing Democratic. It was that simple for me, but I became a huge fan of his methodology as the election campaign progressed. Nate got all 50 right in 2012. I missed a couple. But I made my picks early in a bragging rights bet with friends. Had I predicted in the final week, I likely would have just gone with Silver's picks or his methodology for the same outcome. So yes, I am a fan. Yet, I have to say "Dear Nate, you are missing something big time! Polls Relevant? Week after week Donald Trump surges in the polls, and week after week Silver says ignore them. I say you can no longer ignore them. I will explain why below. First let's look at how Nate sees things.
South Carolina Poll Here are results from a South Carolina Poll released December 9.
Support for Trump rose 8 points after his statement he would bar Muslims from entering the US. Graham is from South Carolina. Five Key Points
Would Trump Bolt? In a USA Today poll releases December 8, 68% of Trump's supporters would vote for him if he bolts the GOP. That's one hell of a lot of loyalty. Do I believe that? No. But, that is a strong measure of strong sentiment. Nearly Two-Thirds Of Likely GOP Voters Back Trump's Muslim Ban A Talking Points Memo reports Nearly Two-Thirds Of Likely GOP Voters Back Trump's Muslim Ban. Republican presidential frontrunner Donald Trump's recent proposal to ban all Muslims from entering the U.S. has far from hurt his poll numbers; in fact, a poll released Wednesday found that almost two-thirds of GOP primary voters back the widely-condemned plan.Attitudes The role of attitudes is precisely what Silver misses. Opinions of candidates can come and go. But are the attitudes towards banning Muslim's likely to change? What Inning Is It? Silver says "campaign time is not linear. We're still in the functional equivalent of the top of the second inning." Is it the 2nd inning or the 3rd? Either way, I would agree with Silver that it's early. But what is the lead? Is it no runs, one run, or perhaps as many as four runs? What About Undecideds? Silver points out the vast majority of people make up their minds in primaries late in the game but voters make up their minds earlier in national elections. That makes sense, because there are only two candidates to choose from in the election, and primarily it's only the independents who swing. But is it really as lopsided as Silver suggests below?  I suggest that table is a poor reflection of reality. For starters, I doubt there are truly 80% undecided, but for the sake of argument I will accept that number. The chart is unrealistic because although voters may be undecided, it likely they are undecided between two or at most three candidates, not totally clueless. For example some voters may be undecided between say Trump and Carson one week, and Trump and Rubio the next, while totally ruling out Bush, Fiorina, Huckabee, and Christie. So, there's undecided, and there's totally clueless. Stubborn Facts Silver concludes his "Dear Media, Stop Freaking Out About Donald Trump's Polls" article with ... So, could Trump win? We confront two stubborn facts: first, that nobody remotely like Trump has won a major-party nomination in the modern era. And second, as is always a problem in analysis of presidential campaigns, we don't have all that many data points, so unprecedented events can occur with some regularity. For my money, that adds up to Trump's chances being higher than 0 but (considerably) less than 20 percent. Your mileage may vary. But you probably shouldn't rely solely on the polls to make your case; it's still too soon for that.More Stubborn Facts
Opinions Do Christie, Paul, Fiorina, Huckabee have any chance? I suggest close to zero but let's put them at 1% each. Let's generously put Bush at 5%. Although it's highly doubtful Carson can recover, let's Generously put Carson at 5% Now what do we have? Revised Support Suggestion  Which Way Will Undecideds Break? Are those undecideds really likely to vote for anyone other than Trump, Carson, Cruz, or Rubio? Come on Nate, really? Put Bush in the list if you want but even Carson in the swing is generous. I suspect Carson will lose more of what he has now than pick up new undecided voters. Bush can pick up undecideds. That's why I raised Bush to five from Nate's one. Even if most have not decided who they will vote for, it's highly likely those voters have decided one or more candidates they won't vote for. And that matters. Based on attitudes, Trump for now, clearly belongs in the "possible list" of a huge percentage of those undecided voters! By the way, I'm not really talking about just Iowa above, but rather national numbers. The results of the first few primaries will be the tell. Looked at this way, even though it's only the second or third inning, the odds of Trump winning would seem to be no worse than about 25%. But are they better? Of course they are. Attitudes are the key. 65 percent of likely Republican primary voters said they back the ban on Muslim immigration! Key Questions of the Day
Those five key points above are about voter attitudes as well. This means Trump's strong attitudes on Muslim's and immigration are aligned with strong voter attitudes on the same issues. Importantly, no other candidate has those attitudes! So unless Trump sticks his foot in his mouth on some issue, attitudes may be enough for him to carry the day. And while anything can happen, some things are far more likely than others. Nate, care to rethink your odds? Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Posted: 10 Dec 2015 10:34 AM PST US Corporate Profits vs. GDP The latest GMO Quarterly Report, released yesterday as a 26-page PDF, has some interesting charts and commentary on valuations, PEs, and a premium on US equities. Let's put a spotlight on a chart and commentary starting on page 10. Questions
1A. I side with Ben Inker that US equities do not deserve much of PE premium. 2A. As far as profitability goes, ignoring another massive war such as WWII, the US cannot hold an edge in profitability for long. Aside from labor issues and tax consequences, whatever US companies are doing better productivity-wise, other companies will eventually figure out. But that statement does not really answer the question of trend. Even if the US deserves a premium, the trend itself will mean revert. Simply put, corporate profits as a percentage of GDP are not going to stay in the 9% to 10% range, and 10-year smoothed PEs will not stay at a level they are now, only exceeded in 1929, 2000, and 2007. There is no reason to believe "this time is different" for either PEs or corporate profits. Here's the critical question: If the trends mean revert, what will US equities return? 7-Year Asset Class Real Return Forecasts  The above from latest GMO Forecast. GMO Disclaimer 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.How Good or Bad Can Returns Get? I like Inker's approach of putting a range on things. Here is the key paragraph from above: Our best estimate is that profit margins are about 24% better than normal, but there is a wider than normal range of possibilities here, with the plausible figures anywhere from 5% to 40% above normal. The impact on our forecast is a range as high as +2% real to a disastrous -4% real for the next seven years, depending on which measure of profitability was the "true" one.Disastrous Discussion Inker labeled -4% real returns as "disastrous". Actually, 0% for seven years would be disastrous for pension funds expecting 8% returns or better for the same timeframe. States like Illinois would likely be wiped out. And if 0% is disastrous, I am not sure what the correct word for -2% or -4% should be. Even 2% real returns (3%-4% nominal) vs. expected nominal returns of 8% or better would be an outright disaster to many pension plans. Yet, 2% is likely as good as it gets. Looking back on today, seven years from now, Inker may very well look like an optimist. Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Posted: 10 Dec 2015 08:27 AM PST Import/Export Price Deflation Import/export price deflation continues in November. The kicker this month is a decline in exports prices greater than the decline in import prices with agricultural products leading the way, down a steep 1.1%. The Bloomberg Econoday consensus estimate was for export prices to dip -0.3% and import prices to dip -0.8%. The actual result was a dip in export prices twice as big as economists expected and export prices half as much as economists expected. oops. Moreover, the decline in export prices was outside the -0.4% to 0.0% range of any individual estimate. Year-over-year export prices are down 6.3% and import prices down 9.4%. With that, let's check out the Econoday Report. Cross-border price pressures remain negative with import prices down 0.4 percent in November and export prices down 0.6 percent. Petroleum fell 2.5 percent in the month but is not an isolated factor pulling prices down as non-petroleum import prices fell 0.3 percent in the month. Agricultural exports are the wildcard on the export side and they fell a sizable 1.1 percent but here too, the deflationary pull is widespread with non-agricultural export prices down 0.6 percent.Since exports add to GDP and imports subtract, today's numbers, in isolation, suggest further weakening in GDP estimates. Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Truck Rates Plunge; What About Actual Shipping Volumes? Strong Case for Pending Recession Posted: 10 Dec 2015 12:01 AM PST Trucking Spot Prices Plunge Here's an interesting chart and commentary courtesy of James Jaillet who writes Truckload Rates Sunk Again in November. Average per-mile rates on the spot market fell again for all three major truckload segments in November, according to data from loadboard Truckstop.com.Fuel Costs Let's dive into Freight Rate Index Data to see the reason for the plunge.  The index includes the following costs: Fuel, Wages, Equipment, Depreciation, Financing, Admin, Compliance, and Insurance. Nearly all of the volatility pertains to fuel and wages.  For August through November the downward trend is nearly all due to lower fuel costs. In the December 2 report a nearly 3 cent drop in fuel was nearly offset by a 3 cent rise in wages. That tells us nothing about shipping volumes, the numbers I am really interested in. For shipments, let's look elsewhere starting with the Cass Freight Index. Cass Freight Shipments Index  Cass nicely provides the data for both costs and shipments. Here is a subset of one of their tables.
This was the worst October for shipments since 2011 and the worst September since 2010. In addition, Every month this year except January and February were worse than the same month a year ago. That's eight consecutive months of declining shipments year-over-year. Next let's take a look at a few highlights from the Cass Freight Report for October. Cass Freight Index Report Following the trend observed in the last four years, both total spend and the number of shipments for North American freight declined in October. The indexes have been below 2013 levels for the last several months. The first reading on third quarter GDP was a disappointing 1.5 percent annual growth rate, compared to 3.9 percent in the second quarter.Mish Comments All in all that was a balanced report by Cass. And providing the actual data to look at was a very nice touch. Let's now discuss other points of view regarding GDP, inventories, and consumer spending. Consumer Spending as Percent of GDP It is widely believed that consumer spending accounts for approximately two-thirds of the economy. A few dispute that claim. In Is the US Economy Close to a Bust, Pater Tenebrarum at the Acting Man Blog points out ... One thing that we cannot stress often enough is that the manufacturing sector is far more important to the economy than its contribution to GDP would suggest. Since GDP fails to count all business spending on intermediate goods, it simply ignores the bulk of the economy's production structure. However, this is precisely the part of the economy where the most activity actually takes place. The reality becomes clear when looking at gross output per industry: consumer spending at most amounts to 35-40% of economic activity. Manufacturing is in fact the largest sector of the economy in terms of output.To that I would add much of consumer spending is transfer payments: Food stamps, Medicare, Medicaid, etc. And health care costs have soared. In The GDP Illusion Tenebrarum writes ... Sure enough, in GDP accounting, consumption is the largest component. However, this is (luckily) far from the economic reality. Naturally, it is not possible to consume oneself to prosperity. The ability to consume more is the result of growing prosperity, not its cause. But this is the kind of deranged economic reasoning that is par for the course for today: let's put the cart before the horse!Both articles are worth a closer look. Inventory Levels Cass cautioned "Inventory levels remain a looming problem as the Federal Reserve has been actively hinting that an interest rate hike is very possible in December. The combination of record inventory levels and an interest rate increase will cause a significant hike in inventory carrying costs." That's an accurate synopsis but I suggest Cass understates the inventory problem. Let's recap what I said Wednesday morning in Wholesale Trade: Another Bad Report, Inventories Decline, Prior Month Revised Way Lower; Expect Negative Revisions to 3rd and 4th Quarter GDP; What About Autos? Inventories to Sales Economists missed the wholesale trade report numbers by a mile. The Econoday Consensus Estimate for today's trade numbers was +0.2% in a range of 0.0% to 0.4%. The actual report (for October) came in at -0.1%. That's bad enough, but some of the much touted inventory build for 3rd quarter (See Wholesale Trade Inventories Surge Led By Autos) did not happen. Last month's report had me scratching my head. I certainly didn't expect such a jump. And it didn't happen. Today, September inventories were revised from +0.5% to +0.2%. Positives for Production? Bloomberg comments "[Wholesale trade inventories] may be negatives for third-quarter GDP but are positives for the production and employment outlooks." Let's investigate that claim with a dive into the actual Census Report on Wholesale Trade for a chart and more details. Inventories to Sales  The inventory-to-sales ratio is clearly in the danger zone. Over-optimism across the board is generally what causes these spikes. Year-on-year, inventories are up 3.6 percent but sales are down 3.7 percent. Inventories contributed heavily to rather anemic GDP growth this year. For more on perpetual overoptimism, please see Persistent Overoptimism Three Ways: Truckers, Fed Economists, Manufacturers What About Autos? Inquiring minds may be wondering about autos. So, let's take a look at autos and other categories.
Autos are one of the key things that has been strong most of the year. Sales are up 2.3 percent but inventories are up 13.1%. And subprime lending has been a driving force behind those sales. Across the board, inventories-to-sales seem way out of line. Unless sales pick up dramatically (and I highly doubt they will), inventories will be a huge drag on growth that will not only negatively impact 3rd Quarter GDP estimates, but also GDP estimates for multiple quarters looking ahead. Demographics The demographic picture is not that pretty. I covered that recently in When Does the Demographically-Related Pension Ponzi Scheme Blow Up? As a reader pointed out "Aging populations consume less, and have different consumption patterns to working populations. Retirees consume less food, autos and real estate compared to young working couples. They use more healthcare instead. Also, aging populations take on less debt. These factors combined make the economic effect of lowering interest rates and printing money less pronounced than they would be in different circumstances." We're not talking about lower rates (until the Fed dramatically reverses course in 2016). Meanwhile, what prices are going up substantially more than others? And who is affected?
Rising medical expenses are part of consumer spending, but not a very productive one. And soaring rent prices strongly affect those who cannot afford a house. Millennials are in that group. Overseas, we have outright Population Deflation: Spain Joins Germany with Negative Net Birth Rate; Italy on Threshold; Who's to Blame? The US is much better off than Europe and Japan, but what does that say for US export prospects? Jobs Cass noted "A report from the Labor Department showed new applications for unemployment benefits last week hovering near levels last seen in late 1973." That's accurate. But what does that mean looking ahead? That things are going to get even better? If so, how much better? Initial Claims  Strong Case for Recession Jobs are the laggiest of laggy indicators. A turn down here would not be welcome at all. But why shouldn't jobs turn down precisely here?
What's next? No hiring? Outright layoffs? I believe there's a pretty decent chance the US is about to slip into recession, if it hasn't done so already. Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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