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2018-01-18T07:56:06.995Z
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I announced on February 22 Goodbye Blogger, Hello WordPress: Mish's GlobalEconomicAnalysis has Moved to MishTalk.Com.

My needs outgrew blogger.

The top reason is that I wanted a multi-page layout, with a different home page than the detail pages. Most of the top financial sites are organized that way. It's impossible with Blogger.

My entire blog has moved over intact, from the beginning, except for comments.

I failed to point out that existing subscribers to my feed were not carried over. There is no way to move a blogger feed into WordPress.

If you were an existing subscriber, you need to sign up again!

You can do so in the Upper Left of MishTalk.Com

Thanks.

Mike "Mish" Shedlock 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.
It's been a long run, but I am leaving Google Blogger for a new home on WordPress.

Please bookmark my new site: http://mishtalk.com/

Why Leave?

My needs outgrew blogger.

The top reason is that I wanted a multi-page layout, with a different home page than the detail pages. Most of the top financial sites are organized that way. It's impossible with Blogger.

In addition, WordPress offers additional features that Blogger doesn't.

  • Ability to write a post and release it at a scheduled time
  • Better development tools
  • Email notifications
  • A point of contact

My entire blog has moved over intact, from the beginning, except for comments. There are just a few more posts to pull over.

Daniel Robert and Michelle Langston at WordPress did a fantastic job with the move, converting all internal self-references to MishTalk from blogger.

Say goodbye to GlobaleconomicAnalysis.Blogspot.Com

Say hello to MishTalk.

Mike "Mish" Shedlock 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.
Ted Cruz was the surprise winner in the Iowa Republican caucuses tonight edging out Donald Trump who in turn edged out Marco Rubio in a very strong voter turnout.

On the Democratic side, Hillary Clinton is just a handful of votes ahead of socialist Bernie Sanders in a vote still too close to call. Given that Clinton was ahead of Sanders by 40 percentage points a few weeks ago, this result may raise more eyebrows than Cruz did by winning the Republican side.

Via Real Clear Politics, the delegate totals look like this.



Mike Huckabee dropped out tonight. In speeches following the caucuses, both Trump and Rubio reached out to Huckabee.

New Hampshire



Trump and Sanders are both supposed to easily win new Hampshire.

Unless Trump puts in a poor New Hampshire showing, Iowa will soon be a meaningless result. Hillary's test comes after New Hampshire.

Mike "Mish" ShedlockMike "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.
"Blue Chip" Optimism

The Atlanta Fed initial GDPNow Forecast for first quarter 2016 starts off with an anemic 1.2% whimper.

"The initial GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2016 is 1.2 percent on February 1. "

First Quarter 2016 GDPNow Forecast



The Atlanta Fed "Final" GDPNow Estimate for the 4th Quarter was posted on January 28.

The 4th quarter "Blue Chip" consensus at that time was about 1.9%. The actual BEA release was 0.7%.

Strengths and Weaknesses of GDPNow

The strength of the Atlanta Fed GDPNow model is that it mimics BEA calculations, thus providing an advance look as to what the BEA will report.

The inherent and unavoidable weakness in the GDPNow model is BEA revisions. GDPNow mimics a model in which data is revised, revised, and revised again.

Late last year the BEA announced it made a major "processing error" in regards to construction spending. The error affects GDP all the way back to 2005.

We will not know the total effect until July 2016. We do know the biggest errors pertain to 2014 GDP which will rise, and 2015 which will fall.

I discussed the forthcoming construction revisions in depth in When are Construction Revisions Coming?

Moreover, GDP is notoriously wrong around economic turns, like now....
Economists expecting a huge surge in construction spending thanks to unusually warm December weather were no doubt shocked by today's anemic report.

The Econoday Consensus Estimate was for +0.6% in a range of 0.3% to 1.3%, but not a single economist came close.
Held down by weakness in the nonresidential component, construction spending didn't get a lift at all from the mild weather late last year, rising only 0.1 percent in December following a downwardly revised 0.6 percent decline in November and a 0.1 percent contraction in October. Year-on-year, spending was up 8.2 percent, a respectable rate but still the slowest since March last year.

But there is very good news in the report and that's a very strong 0.9 percent rise in residential construction where the year-on-year rate came in at plus 8.1 percent. Spending on multi-family units continues to lead the residential component, up 2.7 percent in the month for a 12.0 percent year-on-year gain. Single-family homes rose 1.0 percent in the month for an 8.7 percent year-on-year gain.

Now the bad news. Non-residential spending fell 2.1 percent following a 0.2 percent decline in November. Steep declines hit manufacturing for a second month with the office and transportation components also showing weakness. Still year-on-year, non-residential construction rose 11.8 percent.

Rates of growth in the public readings are led by highway & streets, at a 9.4 percent surge for December and a year-on-year rate of plus 12.0 percent. Educational growth...
Manufacturing in January continues its dismal track record with the latest ISM reading. Econoday reports ...
Employment sank the ISM index in January which could muster no better than a 48.2 for what, following annual revisions to 2015, is the fourth sub-50 reading in a row. This is by far the worst run for this closely watched indicator since the Great Recession days of 2009.

Employment fell a very steep 2.1 points to 45.9 to signal significant contraction for manufacturing payrolls in Friday's employment report, which however would not be much of a surprise given the sector's prior payroll contraction. This is the third sub-50 reading for employment of the last four months and the lowest reading since, once again, 2009.

There is good news in the report and that's a snapback for new orders, to 51.5 for only the second plus 50 reading of the last five months and which points to overall improvement in the coming reports. But backlog orders, at only 43.0, remain in deep contraction, and what strength there is in orders isn't coming from exports which are in contraction for the seventh of the last eight months. Manufacturers have been working down backlogs to keep production up, which came in at 50.2 to signal fractional monthly growth. Inventories remain steady and low but the sample still say they are too high, sentiment that points to lack of confidence in the business outlook.

Confirming the weakness is breadth...
China's manufacturing extended its long slump according to the Caixin China General Manufacturing PMI.
Chinese manufacturers signaled a modest deterioration in operating conditions at the start of 2016,  with  both  output  and  employment  declining  at  slightly  faster  rates than in December. Total new business meanwhile fell at the weakest rate in seven months, and despite a faster decline  in  new  export  work.  Nonetheless,  lower  production  requirements  led  companies  to cut back on their purchasing activity and inventories of inputs. On the prices front, both input costs and output charges fell again in January, though at the weakest rates in seven months.

Weaker client demand led manufacturers to discount their prices charged again in January, thereby extending the current sequence of deflation to 18 months (although the rate of reduction was the slowest seen since June 2015). Lower selling prices were supported by a further fall in average input costs at the start of the year. In line with the trend for charges, the rate of decline eased to the weakest in seven months. Lower cost burdens were generally linked to reduced raw material prices.
China PMI



China Hoping to Avoid Hard Landing

Commenting on the China General Manufacturing PMI™ data, Dr. He Fan, Chief Economist at Caixin Insight Group said:

"The Caixin China General Manufacturing PMI for January is 48.4, up 0.2 points from December. Sub-indexes show a softer fall in new orders, which...
On January 18, I sent the article below (starting with the title Nate Silver Off the Mark on Donald Trump Nomination Odds)  to the New York Times as an Op-Ed.

They did not publish it.

It's hard enough  getting something timely to major news organizations, and when you do, you have to sit and wait days for no response. The New York times has the best turnaround of the bunch, three days so I could have used this earlier.

This would have been more timely on the 18th and even more timely when I first started writing, but here it is now. What I have to say is still relevant.

Nate Silver Off the Mark on Donald Trump Nomination Odds

I am a big fan of Nate Silver. His calling of the last two elections was nothing short of brilliant. However, I just cannot accept Silver's current assessment of Trump's chances of winning the Republican nomination.

In footnotes to his January 8 article Three Theories Of Donald Trump’s Rise Silver expressed belief that "Trump’s chances are about half of what betting markets say they are. I think they’re about half that - 12 or 13 percent."

Trump Odds According to Nate Silver



Historical Precedents

Given Trump's commanding lead in the polls, one might instinctively think Silver is crazy. But Silver cites historical precedents:

  1. Polls before the first primary...
Economists have a perfect track record of 100% failure in ability to predict a recession. In a recession that's at least 20% likely to have already started, Economists See 20% Chance of US Recession this Year.
A Financial Times survey of 51 economists, conducted in the days after the Fed’s January meeting, underscores the impact of the past month’s severe market turbulence and a string of lacklustre economic reports out of the US and China.

The fear that the world’s largest economy — considered the lone engine of global growth — is on the verge of recession has intensified. In the FT’s December survey economists had put the odds of a US recession at 15 per cent during the next two years. Now, they see a one-in-five chance of recession in the next 12 months.

Economists surveyed by the FT emphasised that while the odds of a recession had climbed, a large majority still expected the US to escape one. Several who have fielded increased investor calls on the subject said that the conversation had been skewed because of the near obsession with the price of oil — a point that they argued had more to do with supply than global demand.

Mr Gapen, who put the odds of a recession between 10 and 15 per cent, said that he still thought strong consumption trends would keep the US economy from contraction.

Rate Hikes Odds

No one has called long-duration treasury yields better than Lacy Hunt at Hoisington Management. He says they are going lower. If the US is in or headed for recession then I believe he is correct.

Gordon Long, founder of the Financial Repression website interviewed Lacy Hunt last week and Hunt stated "Inflation and 10-Year Treasury Yield Headed Lower".



Fed Tactics

Debt only works if it generates an income to repay principle and interest.

Research indicates that when public and private debt rises above 250% of GDP it has very serious effects on economic growth. There is no bit of evidence that indicates an indebtedness problem can be solved by taking on further debt.

One of the objectives of QE was to boost the stock market, on theory that an improved stock market will increase wealth and ultimately consumer spending. The other mechanism was that somehow by buying Government securities the Fed was in a position to cause the stock market to rise. But when the Fed buys government securities the process ends there. They can buy government securities and cause the banks to surrender one type of government asset for another government asset. There was no mechanism to explain why QE should boost the stock market, yet we saw that it did. The Fed gave a signal to decision makers that they were going to protect financial assets, in other words they incentivized decision makers...
As proof of how badly German chancellor Angela Merkel has handled the refugee crisis, a new Poll Shows 40 Percent of Germans want Merkel to Quit.
Nearly 40 percent of German voters think Chancellor Angela Merkel should quit over her liberal asylum policy after almost 1.1 million newcomers arrived last year, a poll showed Friday.

As the mood in Germany has shifted from a euphoric welcome for people fleeing war and persecution last September to growing doubts about the country's ability to accommodate and integrate the record influx, the popular Merkel has come under increasing pressure.

However, the poll for Focus news magazine conducted by the independent opinion research institute Insa among 2,047 German citizens showed that a larger share -- nearly 45 percent -- did not think Merkel should resign.

Among members of her conservative Christian Union bloc, nearly 27 percent said they wanted Merkel, who has been in power since 2005, to step down.
Peak Merkel

I called for this well in advance, on October 18, 2015 to be precise: Swamped By Stupidity; Peak Merkel.

But politicians don't resign. They just keep on insisting they are right until they are forced out or voted out of office.

As recently as January 20, Merkel insisted Austrian cap on refugees 'not helpful' for European solution.

Yesterday, Merkel supposedly "struck an accord late Thursday with her fractious left-right coalition to tighten asylum policies, notably...
The BEA "Advance GDP" estimate for 4th quarter came in today at +0.7% vs. an Econoday Consensus Estimate of 0.9%.
Consumer spending is the central driver of the economy but is slowing, at least it was during the fourth quarter when GDP rose only at a 0.7 percent annualized rate. Final demand rose 1.2 percent, which is the weakest since first quarter last year but is still 5 tenths above GDP.

Price data are not accelerating, at plus 0.8 percent for the GDP price index which is the lowest reading since plus 0.1 in the first quarter last year. The core price reading is only slightly higher, at plus 1.1 percent which is also the weakest reading in a year.

There are definitely points of concern in this report, especially the weakness in exports and business investment, but it's the resilience in the consumer, despite a soft holiday season, that headlines this report and should help confirm faith in the domestic strength of the economy.
GDPNow Final Estimate 1.0%

The Atlanta Fed "Final" GDPNow Estimate for the 4th quarter was posted on January 28.



That was the final estimate the GDPNow model will make for the 4th quarter.

The Atlanta Fed's first estimate of 2016 1st quarter GDP growth will be released Monday, February 1. 

Q&A #1: Why Did GDPNow Rise After Durable Goods Report? 

The above...
Meaning of "Now"

Eight days ago, the Bank of Japan governor Haruhiko Kuroda, said No Plan to Adopt Negative Rates Now.

Well, that was then, and this is now.

Negative Rates Announced

Today we learn Bank of Japan Adopts Negative Interest Rates.
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...
Future of Farming

The future of farming has arrived. It's vertical, soilless, and run by robots.

Tech Insider reports World's First Robot-run farm will harvest 30,000 heads of lettuce daily.
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...
Crash!

Durable goods orders and shipments crashed in December.

The Econoday Consensus Estimate for durable goods new orders was a 0.2% rise. Here are the amazing results.

 

Crash vs. Thud

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,...
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.

Practical Considerations

Those hand-picked constants happened to work in prior recessions with varying degrees of success as noted in a New York Fed paper appropriately called The Yield Curve as a Leading Indicator: Some Practical Issues.

The report failed...
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

  1. Will the yields be any lower tomorrow? Next week? Why?
  2. How the heck is the school district going to close a hole of at least $1 billion?
  3. Will Emanuel push for yet another massive tax hike just to pay teacher pensions?
  4. How can another tax...
"Levels Not Seen in 80 Years"

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.

Comments From EIA Weekly Report

Here are some interesting comments from the Weekly EIA Report.

"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

Despite the record inventory surge, crude jumped a bit from extremely oversold levels on news Russia Dangles Prospect of OPEC Cooperation.
Oil...
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...
Fed Balance Sheet vs. S&P 500

I was playing around with some ideas on the St Louis Fed "Fred" database and came up with this.



Mike "Mish" ShedlockMike "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.