Question to Millennials: Why Are You Not Mad as Hell Yet?

Millennials, why are you not angry about ...

1. Having to pay Social Security when it won't be there for you.
2. Paying exorbitant taxes for public pension handouts and boomer retirements at age 50 for which you receive negative benefits.
3. Obamacare for which you overpay to support the obese and the nicotine addicts.
4. Enormous student debt burdens for which you received little benefit.

I ask this in response to an email I received from Rich Renza who writes ...

Hello Mish

I'd like to introduce myself as a school teacher and an avid reader of your blog since 2006. I have never left a comment, but I have been reading Global Economic Analysis on a daily basis since I stumbled upon it shortly after selling a condo here in South Florida. Your analysis of the real estate bubble was spot on and aside from your astute analysis, I appreciated how you took complex economic topics and made them much easier to comprehend. Your blog was quickly added to my favorites on my home and school computer and even though I do not have a strong background in economics, it became a daily read.

As a history and mathematics teacher, I took an interest in your coverage of many topics that potentially affected my students. When you wrote about trends that I felt that I could discuss with my (8th grade) students I did. My class has enjoyed spirited discussions on the cost of college tuition, oil prices, the negative impact of the Federal Reserve and the advent of self-driving cars, thanks to your blog.

I took special notice of your blogs regarding issues that Millennials were facing, such as stagnant wages, student loan debt and delayed family formation. Since I began teaching in 2001, I've worked with several thousand students and have witnessed my high school graduates attempt to deal with these challenges. Through the classroom, my impact is limited only to the students that I personally come in contact with.

This motivated me to write an e-book that focuses on Social Security from the perspective of younger Americans. During my research, I often cited your posts on employment, Millennial trends, housing statistics and autonomous vehicles to support my key arguments.

As you know, most Millennials do not believe that they will receive any benefits from Social Security when they retire. Many are confused and disgusted that they are being taxed into a program that will not serve them. My belief is that all Americans deserve the right to choose to opt-out of participation in the Social Security program by discontinuing their payroll tax contributions, if they so desire.

I have created a site and blog, Take Back Your Six Percent to organize young Americans to pressure politicians to allow them the right to opt-out. My e-book, "How Are You Not Angry Yet" is about How Social Security is Destroying the Futures, Finances and Hopes of Generations X, Y and Z and How We Can Put an End To it. It breaks down the complex topic of Social Security in a slightly humorous way that most readers can easily understand.

The bottom line is that your blog, in part, inspired my e-book. Your work motivated me to write even when I worked a second job at night to supplement my teaching income. The amount of effort and detail that you put into each post raised the expectations that I had for my own work. I can honestly say that you inspired me to do better in my life. Thank you for that.

Thank you for your time,

R.J. Renza, Jr.

Renza was recently on a debt Dialogues podcast at the Ayn Rand Institute.

The podcast can be played at Social Security Debt Dialogues.

Mad As Hell

I have not yet read Renza's e-book, so I cannot endorse it. But I can say the notion that millennials overpay and under receive is a valid one.

For years I have been wondering when millennials as a generation will reach this "Not Going to Take It" point.



We will not see change until millennials get mad enough to change conditions.

Related Articles

• Bidding Wars Stop; Millennials Leave Their Parents' Basements, But Not For Homes; Pent Up Demand? 
• Fed "Mystified" Why Millennials Still Live at Home; My Answer May Surprise You (It Isn't Jobs, Student Debt, or Housing)
• New Housing Crisis in the Making? If So, What's the Solution? 
• LA Pledges $100 Million to Fight Homelessness: Why Stop There? Why Not $1 billion? Why Not $20 Billion?

Mike "Mish" Shedlock

#1 Reason Stocks are Declining; Is Hillary to Blame for Biotech Smash?

In the wake of yet another big market selloff (biotechs down over 6% today), the Nasdaq 100 index down 2.87%, and the S&P down 2.56%, mainstream media parrots floated numerous reasons behind the selloff.

All of the parrots are wrong.

Lack of Inflation?

Bloomberg interviewed Jeff Korzenik, Fifth Third Bank's chief strategist in its piece What's Really Driving Today's Selloff in U.S. Stocks?.

In the accompanying video, Korzenik blamed the Fed and a "lack of visible inflation".

In the same video segment, Jamie Dimon bragged about the strength of the US economy and the health of the US consumer. As long as a bubble is expanding, things always look good.

Of course the idea that inflation is a benefit to stocks and the economy is preposterous, but that's what puppets have been trained to believe, and say. 

China to Blame?

Reuters writer Noel Randewich says Wall Street Drops as Anxious Investors Eye China.

"U.S. stocks finished sharply lower on Monday and were on track for their worst quarter in four years as investors worried about the health of China's economy and its potential impact on the timing of a U.S. interest rate increase."

Is Hillary to Blame for Biotech Smash?

Reuters writers Ransdell Pierson and Bill Berkrot say Democrats Take Aim at Drug Prices, Prompting Sharp Drops in Biotech Stocks.

Democratic lawmakers on Monday attacked "massive" price increases of two heart drugs from Canada's Valeant Pharmaceuticals International Inc, fueling a rout in drugmaker shares on worries of a government and insurer clampdown on U.S. drug prices.

The Democratic House members also urged panel Chairman Jason Chaffetz, a Republican, to invite Valeant Chief Executive Michael Pearson to testify at a hearing next week. That would put him in the same hot seat as Martin Shkreli, chief executive officer of privately held Turing Pharmaceuticals, who had already been called to testify.

Tiny Turing has been widely criticized for a price hike of more than 5,000 percent for its Daraprim treatment for a dangerous parasitic infection.

Clinton on Monday called on Turing to roll back the $750 price to its original $13.50.

Clinton last week unveiled a plan that includes a $250 monthly cap on out-of-pocket costs for prescription drugs; it would allow the Medicare plan for the elderly to negotiate drug pricing, and permit Americans to buy drugs more cheaply from other countries.

"(Stock) selling hasn't really stopped since Hillary Clinton made her comments last week on Monday," said Jeff Jonas, a portfolio manager with Gabelli funds. "The Democratic committee members would certainly continue that trend that Hillary started."

Biotech Sector Daily



That looks pretty ominous. But let's put a proper perspective on things.

Biotech Sector Weekly



History suggests the recent selloff is just a start of a correction. Charts like those above smack of bubbles, and bubbles typically do not deflate in an orderly manner.

#1 Reason Stocks are Declining

To paraphrase Bill "It's the economy, stupid" Clinton, I suggest "It's the valuations, stupid."

Valuations are well beyond absurd. Many biotechs won't ever make a dime. And it's not just biotechs. Most market segments have absurd valuations.

The market is starting to care, a reflection of a change in sentiment. Hillary's statements may have been a catalyst for a sentiment change, but most likely she merely goosed sentiment that had already changed.

Not to Blame

• China is not to blame.
• Hillary is not to blame.
• Fed hikes are not to blame.

To Blame

Rate hike discussion is not to blame.

However, the Fed itself is to blame for creating the loosey-goosey conditions that fostered a bubble in equities and junk bonds.

The Fed will now have to deal with yet another asset bubble crash (they don't even see coming). Price deflation the Fed foolishly attempted to defeat, is now more likely than ever.

Price deflation never was, nor ever will be, an economic problem. Asset bubbles are always a problem. The Fed still has not figured this out. Thanks to group think, the Fed never will figure this out.

Bubble Debate

For more on bubble valuations and why I expect negative real returns for 7-10 years, please see Bubble Debate; Equity Allocations vs. Shiller PE; Simple World.

Mike "Mish" Shedlock

Self-Driving "WEpod" Shuttles Hit the Road in Europe; Autonomous Car Updates

This November, in the Netherlands, the WEpod six-person passenger van, will become the world's first self-driving vehicle in regular traffic, where cars and trucks also go.

The WEpod can be booked using an app which will allow passengers to reserve a seat and specify their starting points and their destinations. Vehicles are expected to select their itineraries independently.

The electric pod was originally designed by French vehicle manufacturer and robotic specialists EasyMile. It was developed for Citymobil2, an EU-funded project looking at automated road transport systems across urban Europe.

Through Citymobil2, the electric driverless shuttles have already transported 19,000 passengers in Vantaa, Finland and carried passengers on the EPFL university campus, in Lausanne, Switzerland.

The vehicles will initially ride on a fixed route, but it is expected to expand to more routes and other regions in the Netherlands from May 2016 onwards.

Test Phase

The test phase will be on real streets and roads, but not during rush hour. The WEpods will have additional equipment such as cameras, radar, laser and GPS to track the environment.

The maximum initial speed of a WEpod will be a painfully slow 25 kilometers per hour (15.53 miles per hour).

I suspect that may be too slow for safety reasons, not too fast.

Regardless, this will all be worked out soon enough.

Audi on Highway

Looking for highway tests? Then check this out.



Link if video does not play: Audi's Self-Driving Car in Action.

Cars Guide reports First Self-Driving Audi Due in Two Years.



Please note this is 2015. Some people keep telling me that my target of 2020 is way too soon. I still have some Neanderthal readers who insist it will not happen until 2050, if at all.

In limited fashion, it's happening now (November 2015 to be more precise), on real streets, with no standby driver.

Autonomous passenger cars on the US highways by 2020 now seems like a certainty. And millions of truck driving jobs will vanish by 2025.

Mike "Mish" Shedlock

Dallas Fed Region Activity Bad as Expected

The Dallas Fed Manufacturing Survey was as bad as expected in relation to Bloomberg Econoday Consensus of -9.0.

The Dallas Fed rounds out a full run of negative indications on the September factory sector with the general activity index remaining in deeply negative ground at minus 9.5. New orders are at minus 4.6 which, however, is an 8 point improvement from August. Production is actually in positive ground at 0.9.

Other readings include a decline in the workweek and the fifth straight contraction for employment. Price readings show little change for inputs but, like other reports, contraction for finished prices.

The Texas economy has been depressed all year by the energy sector while the nation's factory sector continues getting hurt by weak foreign demand and strength in the dollar.

Additional Details

Here are some additional details from the Dallas Fed Survey.

Texas factory activity was essentially flat in September, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, remained near zero (0.9), suggesting output held steady for a second month in a row after several months of declines.

Other indexes of current manufacturing activity increased in September, but some remained in negative territory. The new orders index posted a second negative reading but rose 8 points to -4.6, and the growth rate of orders index also remained below zero but rose to -4.3. The shipments index pushed to around zero from -3, and the capacity utilization index posted its first positive reading in eight months, coming in at 4.9.

Perceptions of broader business conditions remained weak in September. The general business activity index, which has been negative all year, rose 6 points to -9.5. The company outlook index plunged to -10.3 in August but recovered somewhat this month, climbing to -5.2.

Labor market indicators reflected employment declines and shorter workweeks. The September employment index posted a fifth consecutive negative reading, falling to -6.1. Twelve percent of firms reported net hiring, while 18 percent reported net layoffs. The hours worked index fell markedly from 0.6 to -11.1, suggesting a decline in workweek length from August.

Price and wage pressures were mixed in September. The raw materials prices index came in near zero—suggesting stable input prices—after a -8 reading last month. The finished goods prices index remained negative at -10.9, although it was up from a multiyear low of -15.7 in August. Meanwhile, the wages and benefits index remained positive but edged down to 15.6.

Mike "Mish" Shedlock

Refugees Shop for Best Handouts and Climate; Disgruntled Migrants Decide "Finland's No Good"

Beggars can be choosy. And they are. For example, many refugees whine 'Finland's No Good', because of the cold.

Hundreds of predominantly Iraqi migrants who have travelled through Europe to reach Finland are turning back, saying they don't want to stay in the sparsely-populated country on Europe's northern frontier because it's too cold and boring.

Migrants have in recent weeks been crossing back into Sweden at the Haparanda-Tornio border just an hour's drive south of the Arctic Circle, and Finnish authorities have seen a rise in the number of cancelled asylum applications.

"You can tell the world I hate Finland. It's too cold, there's no tea, no restaurants, no bars, nobody on the streets, only cars," 22-year-old Muhammed told AFP in Tornio, as the mercury struggled to inch above 10 degrees Celsius (50 Fahrenheit) on a recent blustery grey day.

He had already travelled from Tornio to the capital Helsinki almost 750 kilometres (465 miles) south, and then back up to the Tornio border again to return to Sweden.

Another group of around 15 Iraqi refugees waiting at the bus station that Tornio shares with its Swedish twin town Haparanda also said they wanted to go back to southern Sweden.

"Finland is no good," the men echoed each other.

Reader Blair who sent me the link commented: "So, the search continues, by those whose lives were in grave danger, for free services... in a nice climate... with a lively social scene."

Mike "Mish" Shedlock

Catalan Separatist Parties Victorious, Unprecedented Voter Turnout

The showdown in Spain between the independence parties and Madrid is sure to heat up following today's elections.

Here is a link to the Live Vote Totals.

With 70% of the vote counted, the parliament totals look like this:



In terms of popular vote, it appears the separatists will fall short of an absolute majority. Separatists will get about 47% of the popular vote.

Pro-Independence Rally on Friday



Above image from Financial Times.

Current totals show prime minister Mariano Rajoy's conservative Popular party is going down in a crushing defeat with only 8.46% of the vote.

Mike "Mish" Shedlock

Total Lunar Eclipse September 27-28: Where to See It, How to Photograph It

There is a Total Lunar Eclipse tonight visible of most of the US. You may want to watch it. The moon will likely appear strong red or orange, giving the name "blood moon".



click on table for sharper image

The Penumbral phase is weak and not easily seen so you may wish to observe it at other times.

Photographer Michael Frye took a time series of the Lunar Eclipse Over the Trona Pinnacles last April.



I missed that eclipse because it totally clouded up here. I will likely miss the one tonight because of clouds.

If your mission is to photograph the the moon, see the above article and also his article Photographing the Lunar Eclipse.



Oak tree and lunar eclipse sequence, December 10, 2011, Sierra foothills, California. ©Michael Frye

Michael Frye is one of the best, if not the best landscape photographer in the US.

I highly recommend his PDF ebook Landscapes in Lightroom: The Essential Step-by-Step Guide.

If you are a photographer using Lightroom, regardless of where you live, please do yourself a favor and get his book, recently updated to include new Lightroom 6 and Photoshop CC features including HDR Merge and the Panorama Merge.

Mike "Mish" Shedlock

How US Corporations "Cooperate" With China; Xi’s China: A Place Called Hopelessness

In response to Why I'm Never Going to "Two-Bit" China an anonymous reader sent links to a video on how US companies are forced to cooperate with China and an article on "Xi’s China" from the Daily Beast.

Both may be a bit over the top, or not, in the eyes of the viewer. Let's start with the video from China Uncensored.

China Tells US Tech Companies to "Cooperate"



Xi’s China: A Place Called Hopelessness

Next please consider  Xi’s China: A Place Called Hopelessness

As China’s President Xi Jinping visits the United States this week, Americans will have little sense what it’s like for his people back home. His top internet censor, Lu Wei, organized a technology summit in Seattle earlier this week.  Alibaba’s Jack Ma and Apple’s Tim Cook have been in tow, in addition to other tech giants. After a round of diplomatic pomp in Washington D.C., President Xi will address the United Nations General Assembly in New York on Monday before returning to Beijing in time for National Day celebrations at home. His message will be of success in the present and for the future.

Ask the ant tribe. They’re educated, young professionals who live in near-poverty conditions, grinding away at soul-crushing jobs—not careers—that yield no personal satisfaction and zero financial growth. Typically from rural areas, most have settled in northwest Beijing, where their living quarters are cramped and they have no personal space. They’re smart, they work hard, yet receive no recognition and can’t shake off anonymity. So, people call them ants.

This year, nearly 7.5 million fresh Chinese university graduates entered the workforce, or attempted to. But because of the massive influx of new labor, increased year on year, competition has become cutthroat even as salaries have fallen, in some cases, lower than the wages received by factory workers. Cost of living continues to increase in tier-one cities, and prospects for members of the ant tribe eventually to own their own houses are slim. “I’ll never be able to get married and provide for a family. I feel like I’ll always be stuck in these six square meters,” groaned Xiao. Rent is ¥1300, or about US$200, a month. That may not seem like much, but after other expenses, most of Xiao’s ¥3,300 ($520) paycheck is gone.

In the fantasy world that the Chinese Communist Party has created for its revised history books, the state takes care of every citizen. But the ant tribe knows firsthand that this is not the case. Calling the Chinese president by his nickname, Xiao said, “Xi Dada says the youth are this country’s future, but most of us don’t have any opportunities. We graduated from university but there aren’t any jobs available to us, at least not in the subjects we studied.”

Xi Jinping’s crusade against corruption has “swatted flies” and “hunted tigers,” who conveniently are the Chinese leader’s political enemies. China’s millionaires can’t leave the country fast enough. China’s rural areas have a gaping security vacuum; forced demolitions, evictions, and land seizures still take place frequently, at times with deadly results. Soon, the CCP will begin transforming 82,000 square miles of land around Beijing into a megacity that’s about the size of Kansas, and it will hold over 100 million people, or more than one-third of America’s population. What will the ant tribe look like when that time comes? What does it mean for Chinese society when routine overtakes imagination, if it hasn’t already?

China is hardly the miracle its proponents make it out to be. And it's system of government outright sucks.

Make statements like that in China and you will get arrested, or worse.

Mike "Mish" Shedlock

How Long Will Janet Yellen Last as Fed Chair? Fed Declines to Comment on Her Health, I Will

Fed Chair Janet Yellen's health is in question after she could not read her prepared text in a lecture on inflation last Thursday.

About 50 minutes into her speech, she paused for about 25 seconds, then repeated phrases and missed words.

MarketWatch reports Yellen Stumbles Towards End of Speech at Amherstt. 

Yellen Video #1



Fed Declines to Comment

The Wall Street Journal reports Fed Declines to Comment on Yellen’s Health

The Fed chairwoman, 69 years old, faltered roughly 50 minutes into a lecture on the economy and inflation Thursday at the University of Massachusetts Amherst. She stumbled over her prepared text, paused for long stretches several times, missed and jumbled some words in the text, and coughed before concluding her speech and leaving the stage.

The Fed spokeswoman, Michelle Smith, on Thursday said Ms. Yellen “felt dehydrated at the end of a long speech under bright lights” and was seen by emergency medical technicians as a precaution, but “felt fine afterward” and attended a dinner on campus.

Bloomberg News reported Ms. Yellen appeared fine after her dinner and flew back to Washington on Friday from Hartford, Conn., telling fellow passengers at the airport that she felt better. “I look good now, don’t I?” she said, according to the news outlet.

Yellen Video #2 - Close Up



Claim Investigation

Inquiring minds may wish an investigation of Yellen's claim "I look good now, don’t I?"

Here is a sample of recent images from which readers can judge.



It's Better to Look Good Than Feel Good

Yellen says she looks good. And you know what they say.



Link if video does not play: "Fernando's Hideaway"

Let's be honest. Yellen looks God awful. She is 69 but looks 80. There is a load of pressure on the Fed Chair, and I highly doubt she can last another year.

How many rate hikes will she get in before she steps down for health reasons? Any?

By the way, the Fed has not hiked in 20 years in any year in which the stock market was negative year-over-year at the time.

Mike "Mish" Shedlock

Herman Stekler Award for Bold, Inaccurate Recession Forecasting: 2015 Lakshman Achuthan of ECRI; Mish 2016?

I received a nice email today from Prakash Loungani. He gave a presentation at the Federal Forecasters Conference yesterday. His presentation was on the inability and unwillingness for forecasters to predict recessions.

Loungani says that to get forecasters to predict recessions (even inaccurately) we should have a Stekler Award for Courage in Forecasting. The award would be in honor of noted forecaster Herman Stekler who has always insisted that forecasters should predict recessions early and often and that he himself has predicted 9 of the last 5 recessions.

The 2015 award would go to Lakshman Achuthan of ECRI, who called for a U.S. recession in 2012 in September 2011. ECRI recently admitted that the call had been a false alarm but gave a detailed and useful explanation for why it made the call.

I am in the running for the 2016 award because in January, I predicted that Canada and the U.S. would slip into recession this year.

The slides are quite funny.



Click on the right and left arrows, not the down arrow.

Link if slideshow does not play. Herman Stekler Award for Inaccurate Recession Forecasting

Related Links

• January 21, 2015: Canadian Recession Coming Up: Yield Curve Inverts Following Unexpected Rate Cut; Loonie at Six-Year Low
• January 31, 2015: Canada in Recession, US Will Follow in 2015 
• September 2, 2015: Canada in Recession with Two Consecutive Quarters of Negative Growth 

Mike "Mish" Shedlock

Market Rallies then Fades on News Yellen Expects Hikes This Year; Futures Still Imply No Hikes

Stocks Rallied a bit today on news that Yellen still expects a hike this year, but have since given up those gains.

S&P 500 10-Minute Chart



Reuters reports Wall Street Up on Yellen Comments; Health Stocks Drag Nasdaq

U.S. stocks were higher in early afternoon trading on Friday after Federal Reserve Chair Janet Yellen said she expects interest rates to be raised this year, easing concerns about slowing global growth and prompting a rally in bank shares.

However, the continuing selloff in health stocks and a drop in Google's shares due to a regulatory investigation limited gains on the Nasdaq.

Yellen said on Thursday that the Fed does not expect recent global economic and financial market developments to significantly affect its policy.

If the above chart holds the story after the closing bell will look like this: "Wall Street Down on Yellen Comments".

Futures Still Imply No Hikes

A quick check of CME Fedwatch shows the Fed Fund Futures gave a big yawn to the notion Yellen is going to hike.



Fed fund futures did not change a bit. The CME still has the probability of a hike at 35%.

Bear in mind, those odds reflect a quarter point hike. I am of the opinion the Fed will hike in eighths, or possibly quarter point ranges starting not with a hike from the current 0%-.25% to .25%-.50%, but rather a hike to the range .125%-.375%.

That of course assumes the Fed will hike at all. If Yellen wanted to convince the market she was going to hike, she should not have given the market a litany of 10 reasons the Fed did not hike at the last meeting.

Mike "Mish" Shedlock

Tracking the Implosion of Brazil; Be Careful of What You Wish; Perfect Storm; Email from Brazil; More Intervention Madness

Perfect Storm

Reader Lucas from Brazil writes about the "perfect storm".

Hello Mish

Brazilian interest rates are skyrocketing. Rates went up more than 2 percentage points in a month. Bond trading was suspended due to the quick devaluation.

Nobody is talking much about it, but energy corporation Petrobras is down 95% from the peak (in dollars). They have a high dollar exposure, and some estimates say that since June, Real devaluation alone was responsible for a +R$100B increase in debt.

Brazil's majors oil investments are in (really) deep water drilling, and they may be not worthy anymore. Petrobras debt is now equivalent to 8% of the whole country GDP.

And while. our president doesn't have support to do anything.

It's a perfect storm here.

Lucas

Petrobras



In classic bubble action, shares of Petrobas went from $4 to $77 back to $4. Executives no doubt, cashed out at every opportunity.

Brazil Real



The Brazilian Real went from 1.6 to the US dollar to 4.1 to the US dollar. That's a decline of about 54% .

Brazil 1-Year Government Bonds



Since 2007, the yield on 1-year Brazil government bonds went from just over 7% to over 16%.

Flashback March 2012

Please note the inserts on the second two charts. I highlighted the March 2012 candle because that's when Brazil Declared New Currency War on US and Europe.

“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” said Guido Mantega, the finance minister who was the first to use the controversial term "currency war" in 2010.

President Dilma Rousseff later weighed in on the debate, vowing to defend Brazilian industry and stop developed countries’ policies from causing the “cannibalisation” of emerging markets.

The move comes as Brazil’s central bank also steps up direct intervention in the market, selling dollars and offering derivatives called reverse currency swaps to curb the real’s near 9 per cent surge against the US dollar this year.

Be Careful of What You Wish

It was just a few short years ago that Brazil was bitching about the strength of the Real. Brazil got its wish.

More Intervention Madness

On Thursday, we learned Brazil Real Mounts Biggest Rally in 7 Years on Intervention Suggestions

The Brazilian Real rallied nearly five percent Thursday following statements by the country’s central bank president, which stated that he will explore the use of foreign exchange (FX) reserves to defend the currency against persistent declines versus the US Dollar. Brazil Central Bank (BCB) President Alexandre Tombini mentioned that different options will be used to stabilize the currency. Options that may be employed include swap contracts and dollar repurchase agreements.

What If Intervention Fails?

One day proves nothing.

I have a simple question for Brazil: What if intervention fails?

If Brazil blows all of its reserves defending a pseudo-peg that cannot be maintained, it will find itself in very dire straits. Untenable currency prop jobs are the way to ruin.

Ask Argentina; Ask Russia; Ask China who recently tried and failed to prop up its stock market. Heck ask Switzerland who recently had to abandon its peg to the euro.

The only thing that will stabilize the Real is sound economic policy and a stable government.

Until then, there is no question. Intervention "will" fail.

Mike "Mish" Shedlock

3rd Quarter GDP Now Forecast Ticks Down to 1.4%

The Atlanta Fed GDPNow Forecast model ticked slightly lower today following recent economic reports.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.4 percent on September 24, down slightly from 1.5 percent on September 17. The decline occurred on Monday when the model's forecast for third-quarter real residential investment growth fell in response to the existing home sales release from the National Association of Realtors.



I thought today's Durable Goods report (see Orders Decline 2%, Led by Transportation; QE Bounce Effect is Over; Recession on the Way?) would have knocked a tick or two off the model forecast, but it was actually existing home sales that did it.

Mike "Mish" Shedlock

Why I'm Never Going to "Two-Bit" China

I would never go to China, even if someone paid for the trip and all expenses.

My reason can be explained in one headline: China Arrests US Citizen for 'Endangering National Security'.

An American businesswoman has been formally arrested in China on suspicion of “endangering national security” just days before Chinese President Xi Jinping arrives in the US for his first official state visit.

Phan Phan-Gillis, 55, who also uses the name Sandy, disappeared in late March while traveling as part of a delegation made up of local officials from her home town of Houston, Texas.

Her husband, Jeff Gillis, told US media he later discovered she had been detained by China’s Ministry of State Security and that she was suspected of espionage and stealing state secrets.

Judging from news reports and corporate websites, Ms Phan-Gillis has been an active promoter of Sino-US ties.

During her trip to China in March she identified herself as executive president of the America Asia Trade Promotion Association (AATPA) and president of the Houston Shenzhen Sister City Association.

Missing Since March

Gillis went missing on March 19. We are only hearing about it just now because her husband was afraid publicity might jeopardize her chances of being released.

Since then, he has awakened to reality: He is at the mercy of merciless, corrupt Chinese leaders.

As noted by the Financial Times, "In China the definition of state secrets is broad and vague and often encompasses things that would be considered public information in other countries. Authorities regularly detain foreign citizens they suspect of spying but ethnically Chinese foreign citizens are far more likely to be held and charged."

Reader Questions

When I write about China I frequently get comments along the lines "What do you know about China? Have you ever been there?"

In the not-so distant past, such questions were accompanied by comments like "China is booming. Have you seen all the building cranes? They are everywhere. Every city is expanding ..."

My reply was along the lines of "There were cranes all over Florida as well, right before US real estate collapsed."

Now reports of vacant cities, malls, and corruption are all over news about China. Capital flight is the order of the day. China has to prop up the yuan or it might sink.

One does not need to go to China to see the pollution or understand the untenable fraud inherent in its massive State Owned Enterprise (SOE) schemes.

National Security Risk

I am an outspoken critic of planned government, GDP lies, pollution, and in general everything associated with China's corrupt central planning model.

It is questionable whether I could last a day without being arrested.

In regards to Gillis, I have to ask: WTF was a delegation from Houston in China for in the first place? Most likely it was a taxpayer boondoggle.

Regardless, Gillis was no more danger to China's "national security" than I am. But that's the problem, isn't it?

I do not get to decide, nor does an unbiased jury get to decide what constitutes "national security". In China, some unelected Communist bureaucrat attempting to prop up his regime gets to decide what constitutes not only national security, but anything and everything else.

If the state decides to burn Gillis at the stake, then that's precisely what will happen.

How China is Ruled

The BBC explains "How China is Ruled".

The Chinese Communist Party has ruled the country since 1949, tolerating no opposition and often dealing brutally with dissent.

The country's most senior decision-making body is the standing committee of the politburo, heading a pyramid of power which tops every village and workplace.

Politburo members have never faced competitive election, making it to the top thanks to their patrons, abilities and survival instincts in a political culture where saying the wrong thing can lead to a life under house-arrest, or worse.

Two-Bit China

The idea that a centrally planned communist country will soon be the preeminent economic power and its currency the world's reserve currency is laughable.

No one in their right mind believes Chinese growth estimates. And much of the growth we do see is nothing but malinvestment. China does not have a large, open, or liquid bond market that a global reserve currency requires. Heck, China dare not even float the yuan.

As noted above, those in China better be careful about what they say. Anyone who bothers to bluntly speak the truth, like I just did, would not last a day in China.

China may be a big economic power, but at the heart of it all, China is nothing but a two-bit, scandalous, central planning dictatorship when it comes to property rights, human rights, freedom of speech, and freedom of press.

Those who gloat over China's miracle growth and think the yuan will soon supplant the US dollar are mistaken on both counts.

Mike "Mish" Shedlock

Durable Goods Orders Decline 2%, Led by Transportation; QE Bounce Effect is Over; Recession on the Way?

Those looking for "lift off" material for Fed hikes will not find it in the latest Durable Goods report from the US Department of Commerce.

Durable Goods orders declined 2.0% in line with Bloomberg Consensus Estimates, but details and year-over-year numbers weak.

Transportation equipment, specifically aircraft orders, are once again skewing durable goods orders which fell 2.0 percent in August as expected. Excluding transportation, durable goods were unchanged which is slightly lower than expected. Weakness here in part reflects a pause for core capital goods as nondefense ex-auto orders slipped 0.2 percent following two prior months of very solid growth.

Looking at transportation equipment, both aircraft and motor vehicles were weak. Orders for civilian aircraft fell 12 percent in the month while vehicle orders fell 1.5 percent. Vehicle shipments were down 1.6 percent but follow July's big 4.7 percent surge.

Total shipments were flat in the month but follow solid gains in July and June. Core capital goods shipments, like orders, slipped 0.2 percent but also follow prior gains. Still, the dip in core shipments will not be lifting third-quarter GDP estimates. Factories held inventories unchanged in August and worked off backlog orders slightly, down 0.2 percent.

Shipments and Orders Current vs. Prior



The transportation decline was expected. The decline ex-transportation was not expected.

Also note the revision to last month's ex-transportation number. These numbers certainly will not add to third quarter GDP estimates.

Durable Goods New Orders



Durable Goods New Orders vs. Year Ago



Note the over-sized effect that transportation has on order. Yet the picture is not pretty even when transportation is excluded.

Durable Goods New Orders vs. Year Ago Detail

  

Recession on the Way? 

The effect of QE, and central bank stimulus in general, is over (assuming it was ever really in play in the first place).

If the strength in autos is over, and I suppose a global scandal on Volkswagen would mark a fitting top, then recession cannot be too far off.

Mike "Mish" Shedlock

Japan Manufacturing PMI Borders on Contraction as New Export Orders Plunge

Japan's Manufacturing PMI is still growing, but barely.

Key Points

• Flash Japan Manufacturing PMI™ at 50.9 (51.7 in August). Operating conditions improve at slower rate.
• Flash Japan Manufacturing Output Index at 51.4 (51.1 in August). Growth in production little changed from August’s modest pace.

Markit Comment

Amy Brownbill, economist at Markit, which compiles the survey, said: "September PMI data pointed to a general slowdown in the expansion of the Japanese manufacturing sector. New order growth moderated, having increased in August at the fastest rate since January. Underpinning the slowdown in total new order growth was a sharp reduction in international demand as new export orders dropped to the greatest extent for 31 months. A number of panelists blamed a fall in sales volumes from China leading to a decrease in new exports. Subsequently, employment levels declined for the first time since March."

Japan PMI Charts



Treading Water

Japan is clearly treading water here as 50 is the break-even rate. Right now it looks like China will pull Japan down with it. And what about prices?

Glad you asked.



Both input and output prices are back in negative territory. Wasn't Abenomics supposed to cure that problem?

Indeed it was, not that it posed any real problem though. The only problem is going into debt to fight deflation. All you get out of it is more debt.

Mike "Mish" Shedlock

LA Pledges $100 Million to Fight Homelessness: Why Stop There? Why Not $1 billion? Why Not $20 Billion?

Public Emergency

In yet another example that proves economic stupidity has no bounds, Los Angeles Puts $100 Million Into Helping Homeless.

Flooded with homeless encampments from its freeway underpasses to the chic sidewalks of Venice Beach, municipal officials here declared a public emergency on Tuesday, making Los Angeles the first city in the nation to take such a drastic step in response to its mounting problem with street dwellers.

The spending proposal will need to be approved by the City Council and allocated by its Homelessness and Poverty Committee. The $100 million figure was chosen in part for its symbolism, said Herb J. Wesson Jr., the City Council president, to show county, state and federal officials that the city was willing to make a significant contribution to an urgent problem.

“Encampments used to be contained to Skid Row, where city officials would try to control or ignore them,” said Gary Blasi, a law professor at the University of California, Los Angeles, who has studied homelessness in the region for years. “Plans have been made, and never made it off the paper they’re written on. It’s not clear what will be delivered. And do the math here — it doesn’t amount to much at all.”

In New York, Mr. Blasi said that hundreds of existing housing vouchers went unused because homeless people could not find landlords who would accept them.

Ding Ding Ding

Ding, ding, ding, we have a math winner!

I am not quite certain if Blasi is arguing for more or less spending, but he is the first person other than me, that I am aware of, to bring math into the equation.

LA vs. EU

Question of the day: Other than a sense of scale, is the homelessness crisis in Los Angeles that much different than the refugee crisis in Europe?

Unlimited Demand for Free Services 

In LA, as in the EU, there is a virtually unlimited demand for free food, free shelter, and free services.

Offer $100 million and the need will grow overnight to $1 billion. Offer $1 billion and the need will grow overnight to $20 billion.

Offering free food, free services, and free shelter cannot possibly cure a problem caused by free services, especially in a desirable temperate climate.

Blasi says: "Do the math here — it [$100 Million] doesn’t amount to much at all."

On Tuesday, in regards to Europe (but it may just as well have been LA), I wrote EU Ministers Ram Through Quota Plan; Mish Does "The Math" .

By all means, let's have a math discussion.

Mike "Mish" Shedlock

Chicago Tax Collector Hath Arrived With Massive Tax Hike: Emanuel Says "No Stone Unturned ... Not Done Yet"

On May 4th I wrote Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering.

Six months ago, Chicago Mayor Rahm Emanuel warned that without state legislation to modify the structure of police and fire pensions and implement a “smart funding formula,” Chicago property tax bills would “explode” in 2016.

Today I report, the tax man hath arrived.

Mayor Rahm Emanuel says Now is the Time to Hike Taxes.

The “explosion” that Emanuel warned about in mid-March hit Chicago Tuesday as the mayor unveiled his $7.8 billion budget for 2016, and it wasn’t pretty — even with the risky assumption that Gov. Bruce Rauner will sign legislation giving Chicago 15 more years to ramp up to 90 percent funding of police and fire pensions.

Emanuel’s $712 million package of tax and fee hikes includes a four-year $588 million property tax increase for police and fire pensions and school construction; a $9.50-a-month garbage collection fee; $13 million in higher fees for building permits; a $1 million tax on e-cigarettes and $48 million in fees and surcharges on taxicabs and ride-sharing services that have siphoned business away from them.

The phased-in property tax increase would be the largest in Chicago history. Even so, the garbage fee has emerged as the biggest lightning rod — and Emanuel fully understands why.

It’s a new fee for a service many homeowners believe, “is kind of baked in” to the normal property tax bill that would add $114 to the annual cost heaped on 613,000 Chicago owners of single-family homes, two-, three- and four-flats that still get city pickups. Senior citizens would get a 50 percent discount.

Emanuel said the dire alternative to a property tax increase is 2,500 police layoffs, 2,000 fewer firefighters, 48 fire station closings and twice-a-month garbage collection, instead of weekly pickups.

[Alderman Will] Burns agreed there is simply no other way out, but to place the burden squarely on homeowners — with both the $588 million property tax increase and the garbage collection fee.

“I am out of magic beans and magic pixie dust,” Burns said.

Dire Predictions

The Chicago Tribune reports Emanuel Paints Dire Future Without Record Property Tax Hike.

Mayor Rahm Emanuel called on the city's 50 aldermen Tuesday to summon the courage to pass the largest property tax increase in modern Chicago history, and told them they could sell it to voters by painting a dire, if not quite dystopian, alternative.

If Emanuel cut the budget instead of raising taxes, then one out of five police officers would be dismissed. Half the fire stations shuttered. Rats would overrun graffiti-ridden alleys filled with overflowing Dumpsters as the city stopped rodent control and trash got picked up just twice a month. Streets would be riddled with even more potholes and little money to fix them.

"Our city would become unlivable," Emanuel said. "That would be totally unacceptable."

The reception was tepid, and at one point Emanuel had to repeat an applause line before the hand-clapping commenced.

The political reality is this: Emanuel is asking aldermen to put their jobs on the line and vote for a massive property tax hike while the mayor himself has not decided whether he too will face the voters again. Even if Emanuel does seek a third term, he has taken a step many politicians take: stack all the unpopular tax hikes and fee increases in the first year of the new term, the one furthest away from the next election.

Not Done Yet

Chicagoans beware! Emanuel explicitly warned he’s "not done raising property taxes". 

Emanuel also pledged "No Stone Unturned".

"We are going to address our challenges, and I think when the governor looks at the whole budget he will see that we didn't leave any stone unturned. It is fair, it is equitable. It's progressive," said Emanuel.

Not Fair, Not Equitable

What are taxes for if not services like garbage pickup, street sweeping, etc? The answer of course is untenable police, fire, and school pensions.

Yes, it's "progressive" all right, "progressive idiocy". Emanuel did not do, nor has he ever done anything to fix the structural problems.

The proper way to fix the school problem is for the school district to declare bankruptcy, a tactic Emanuel does not want to take.

Actually, the school district cannot take that action because Illinois does not allow municipal bankruptcies. However, if the mayor were behind the idea, it would likely pressure the Illinois legislature into action.

Emanuel claims he is being courageous. Passing tax hikes immediately after an election is not courageous. Admitting the school system is broke, unions are the reason, and taxpayers should not bear the brunt of the costs would be courageous.

Emanuel is both a coward and a pickpocket. With his dire warning about Chicago becoming unlivable, he is also a fear monger.

There is one thing you can count on, however. Emanuel is not yet done picking the pockets of Chicagoans. When Emanuel promised, "no stone unturned" you can bet your last tax dime on that.

Mike "Mish" Shedlock

Bubble Debate; Equity Allocations vs. Shiller PE; Simple World

Yale University market scholar Robert Shiller entered the bubble debate last week as noted in the Financial Times article Fears Grow Over US Stock Market Bubble.

The Nobel economics laureate told the Financial Times that his valuation confidence indices, based on investor surveys, showed greater fear that the market was overvalued than at any time since the peak of the dotcom bubble in 2000.

“It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market,” he said.

Prof Shiller added there was no historical evidence for a link between interest rates and share prices. “You would think that when interest rates are higher people would sell stocks, but the financial world just isn’t that simple.”

He defended his now famous measure of valuation, often referred to as the Cape (for cyclically adjusted price/earnings multiple), which compares share prices to average earnings over the previous 10 years. This adjusts for the cyclicality of earnings.

Mr Shiller pointed out the fall in earnings in 2008 came as part of a severe recession. “Companies like to take write-offs right away during a recession. Then their earnings can recover from there. If I average over 10 years I don’t see that as a problem. The average includes the actual losses that companies have made.”

He said changing accounting standards could create difficulties for his model but added: “I think we’re better off with changed accounting standards than if we ignored all the changes that happened since 1871.”

Equity Allocations vs. Shiller PE



Michael Green at Ice Farm Capital emailed the above chart as well as the reference to the Financial Times article.

The chart shows equity allocations on the left axis vs. the Case-Shiller smoothed PE ratio on the right.

It is based on Ice Farm analysis using Shiller's and Fed Flow of Funds data.

Simple World

I had seen the Shiller piece before, but something caught my eye when I read it a second time.

“You would think that when interest rates are higher people would sell stocks, but the financial world just isn’t that simple,” said Shiller.

I am a big fan of Shiller's model. However, the above statement makes no sense because quite frankly, what Shiller suggests is impossible!

Simple Math

Here's a simple economic truism: Someone must hold every equity share and every bond 100% of the time.

In aggregate, it's impossible for people to sell stocks to buy bonds when interest rates are high (or vice versa). For every buyer of common stock there is a seller. Likewise, for every buyer of bonds there is a seller.

Sentiment can change (and pricing with it), but because of simple math, if there was an aggressive sentiment shift towards getting out of stocks in favor of high-yielding bonds, then bond yields would plunge.

At an individual level one can make changes, but at an aggregate level it is impossible.

Thus, the financial math is indeed simple. It's the timing of sentiment changes that makes it difficult for the individual and impossible for the aggregate investor.

Stocks vs. Bonds

Individually, one can sell stocks to buy bonds or vice versa. But what about the possibility that neither is the place to be?

Seven-Year Asset Class Real Return Projections

As of 2015-08-31 (posted on September 15), GMO sees things like this:



Purple highlights mine.

I like to repeat GMO's disclaimer so I do not misrepresent the chart.

*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 forwardlooking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Care to Trade?

Care to trade US stocks for US Bonds?

If so, be prepared to trade negative 1.1% real returns in equities for negative 0.9% returns in US bonds.

If that were for a single year, no one would care. But that is the forecast every year for the next seven years on average.

In practice, it will not happen that way. For example, there easily could be a 40% plunge over the next year or so followed by a slow trudge sideways for three years then a rally back to where we are today over the next two years.

The possibilities are endless, that's just one example.

Note that GMO "real" returns assume mean reversion to 2.2% inflation over the next 15years. Nominal returns could be slightly better or worse, depending on how quickly the 2.2% inflation target is hit.

Pension Plan Assumptions

In general, pension plans assume 7.5% or so returns every year. Many pension plans, especially those in Illinois will be close to bankrupt if GMO's forecast is in the ballpark.

I personally think GMO is somewhat optimistic. I expect negative real returns for about 10 years.

Mike "Mish" Shedlock

China Manufacturing PMI Sinks to 78 Month Low

If you think a global economic rebound is just around the corner, then please note China Manufacturing PMI is in contraction, and at a 78 month low.

Key Points

• Flash China General Manufacturing PMI at 47.0 in September. 78-month low
• Flash China General Manufacturing Output Index at 45.7. 78-month low

In support of the idea that economic cheerleaders are nearly everywhere one looks ...

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

"Overall, the fundamentals are good. The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices. Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front. Patience may be needed for policies designed to promote stabilization to demonstrate their effectiveness."

Good Grief

Mike "Mish" Shedlock

Rate Hike Odds Shift to March 2016

Today we saw another stock market decline and yet another shift further away from rate hikes this year.

I put this table together from CME FedWatch data.

FOMC Meeting Date	No Hike Probability on Sep 22	No Hike Probability on Sep 21
28-Oct-15	88.5	86.2
16-Dec-15	64.5	56.2
27-Jan-16	55.3	45.4
16-Mar-16	40.3	33.1

The above table is a bit simplified because there is a chance of hikes higher than a quarter point. However, I believe it is safe to discount multiple hikes until we at least see the first one.

December 16, 2015 Probability



January 27, 2016 Probability



As noted in the table at the top, one has to go all the way to March 16, 2016 before the Fed Fund Futures imply a quarter point hike.

Also, and as I have pointed out before, when the Fed does move, there is no good reason to assume the first hike will be to the range 0.25% to 0.50% from the current 0.00% to 0.25%.

Even if the Fed sticks with quarter-point ranges, the first hike (assuming there is one), may very well be to 0.125% to 0.375.

That range would give the Fed a quarter point to play with and it would change the implied "no-hike" odds. The key point now however, is the increasing chance there is no hike at all.

Mike "Mish" Shedlock

EU Ministers Ram Through Quota Plan Over 4 Objections; Fairy Tale Material; Mish Does "The Math"

EU Solidarity has splintered widely as Ministers Ram Through Refugee Quota Plan over the objections of numerous countries.

EU interior ministers on Tuesday imposed a plan to relocate 120,000 refugees across the EU, outvoting four eastern European countries strongly opposed to the scheme.

The use of majority voting to push ahead with the burden-sharing scheme — regarded as politically unacceptable in some capitals — is a rare move in a bloc that typically acts by consensus on sensitive issues. It is certain to amplify tensions over the migrants crisis.

Slovakia’s Robert Fico was defiant, saying he would not be bound by the decision. "As long as I am prime minister, mandatory quotas will not be implemented on Slovak territory," he told MPs in Bratislava.

Milan Chovanec, the Czech interior minister, tweeted that the policy would not work: “Soon we will find out that the emperor has no clothes. Reason lost today.”

EU diplomats said Hungary, Slovakia, Romania and the Czech Republic voted against the plan, with Finland abstaining, but they were unable to stop its proponents, led by Germany and France.

Syrian, Iraqi and Eritrean asylum-seekers would qualify for the programme, but the logistics of how they will be distributed are still to be worked out.

Jean Asselborn, the Luxembourg minister who chaired the meeting, said ministers “would have preferred to have an agreement by consensus”, but said the EU expected the objectors to abide by the redistribution plan, as required under EU law.

Fairy Tale Material

The statement by Asselborn that the "EU expected objectors to abide by the redistribution plan, as required under EU law" is fairy tale material given statements by the Czech Republic and Slovakia and actions by Hungary.

Actions Speak Loudly

On Monday evening, Hungary, a transit country, stepped up its confrontational approach, passing a law that allows the army to use rubber bullets, tear gas and nets against migrants. Viktor Orban, prime minister, warned that the flow of people was “breaking the doors down on top of us”. Budapest has previously taken steps to close its borders with Serbia, Croatia and Romania to try to stop the flows of migrants.

"The Math"

The Financial Times noted that another 3,000 to 4,000 migrants hit Greece every day. But there is no work in Greece and no money either. Ranko Ostojic, Croatia’s interior minister, said he would call on Athens to stop moving Middle Eastern refugees to other parts of the EU.

Excuse me for asking the obvious, but what the hell is Greece supposed to do with an influx of three to four thousand refugees a day but pass them on?

And please do the math on that. 3,000 times 30 is a rate of about 90,000 a month. 4,000 times 30 is 120,000 refugees a month.

The EU imposed a plan to relocate 120,000 refugees over the course of a year. Its plan will cover the inflow for a month or so.

What then?

As I have stated numerous times, there is an unlimited demand for free services. And please bear in mind there are some 4 million refugees waiting in the wings in Turkey, Lebanon, and other places.

Potential EU Refugees

The Mercy Corp provides this map to consider.



Map updated as of September 2015.

More Math

Counting just those in Turkey and Lebanon, there is a potential for another 3,111,752 refugees who may find free handouts from Germany and Sweden to their liking.

If just 1/4 of them try, that's another 778,000 or so. Make it easy enough, and hand out enough free food, shelter, and services, and every one of them would jump at the chance.

We are not talking about 120,000 a year. Rather we are talking about the possibility of relocating 3,111,752 refugees over the course of a year. That would be about 259,000 a month for a full year. Needless to say, quotas cannot possibly work.

Question of the Day

How is it that the EU nannycrats cannot figure out this simple math? Or have they figured it out but simply do not care, hoping it will solve the alleged "deflation problem" or further some ridiculous socialist goal?

Mike "Mish" Shedlock

Richmond Fed Region Unexpectedly Bad; New Orders, Backlogs, Workweek Plunge

The already bleak manufacturing reports took another step for the worse today as evidenced by the Fifth District Survey of Manufacturing Activity by the Richmond Fed.



Volume of new orders, backlog of new orders, capacity utilization, and average workweek have crashed making the report details far worse than the headline reading.

Nonetheless, manufacturers remain optimistic.

"Producers anticipated positive business conditions for the six months ahead. They continued to expect steady growth in shipments and in the volume of new orders. The indexes for expected shipments and new orders strengthened to readings of 48 and 42, respectively."

It's been amusing watching the look ahead projections in these reports. They have been consistently wrong for months on end.

Economists Overoptimistic Too

Manufacturers and economists alike have been overoptimistic about manufacturing. The Bloomberg Consensus reading for the Richmond Fed region was for a strengthening to +3.

Early indications on the September factory sector are negative and now include a minus 5 headline from the Richmond Fed. New orders, unfortunately, are even more deeply in the negative column at minus 12 which points to even weaker activity in the months ahead. Shipments are already in the negative column for a second straight month at minus 3. And manufacturers in the region have already worked down their backlogs to keep up production with backlogs in deep contraction at minus 24 and minus 15 the last two months. Employment is in the plus column but just barely at 3 and it won't stay there for long if orders and production continue to weaken. Price readings are moderating further to round out an unpleasant picture of unexpected slowing.

More regional reports will be out in the next week or so. There is no reason to expect any of them to be good.

Mike "Mish" Shedlock

Fed Household Spending Survey Projections in Firm Downtrend

Fed Survey of Households

Every month the New York Fed interviews a rolling group of 1200 people to produce a detailed Survey of Consumer Expectations.

Interested parties can download the Survey Questionnaire PDF.

The Fed states:

Where existing surveys look at consumer sentiment and the decisions households make, their coverage of household expectations is limited; the Survey of Consumer Expectations seeks to collect information on a wide variety of consumer expectations – including inflation, future earnings, household income, house prices, access to credit, layoff risk and reemployment prospects, and US economic conditions overall. Through a set of quarterly special surveys it also aims to focus in depth on special topics such as household finances as well as labor and housing market issues and outcomes.

NY Fed - One Year Look Ahead Spending Survey Projections



click on chart for sharper image

Projections

• High-end spending projections have been slowly drifting lower for quite some time, but the decline became more noticeable about a year ago. 
• Median spending projections took a sustained turn for the worse in December of 2014.
• Low-end spending projections took a sustained dive starting November of 2014.

Given the Fed places so much faith in various consumer confidence numbers, I have a simple question: Why don't they believe their own survey?

Mike "Mish" Shedlock

Existing Home Sales Down 4.8%, Decline More Than Expected; "Still Healthy and Trending Higher" Says Bloomberg - Let's Investigate

Existing Home Sales Decline More Than Expected

Existing home sales in August dipped 4.8% month-over-month to a seasonally adjusted rate of 5.31 million units.

Although a decline of 1.7% was anticipated, the actual number was below any estimate in the Bloomberg Consensus Range of 5.4 to 5.6 million.

Though slowing in August, existing home sales are still healthy and trending higher. Existing home sales came in at a lower-than-expected 5.31 million annual rate in August which is the lowest since April. July was revised down just slightly but is still an 8-year high at 5.58 million. At 6.2 percent, growth in year-on-year sales is the lowest since February. The year-on-year median price, up only 4.7 percent to $228,700, is the lowest since August 2014. The report cites no special reasons behind August's softness, but notes that it follows prior strength, in fact six months of strength.

With the in dip sales, supply relative to sales is less tight, at 5.2 months from 4.9 months in the prior two months. But there's still a lack of homes on the market, evidenced by a comparison with the year-ago supply at 5.6 months.

Details show high mid-single digit declines across regions except the Northeast where the August sales rate was unchanged. Year-on-year, data are very well balanced with high mid-single gains for all.

Despite low mortgage rates and soft prices, the housing sector isn't exactly on fire. Watch for FHFA house prices on tomorrow's calendar, which are expected to rise, and also for new home sales on Thursday which are also expected to rise.

Still Healthy?

What caught my eye in the analysis was the statement by Bloomberg that sales were "still healthy and trending higher."  Let's investigate that claim two different ways.

Existing Home Sales in Number of Units



click on any chart for sharper image

For several years prior to and shortly after the 2001 recession, existing home sales were trending at about 5.2 million units at a seasonally-adjusted annualized rate.

During the bubble years, existing home sales rose as high as 7.26 million homes in September of 2005. In July of 2010, sales fell to 3.45 million units, less than half of the peak bubble rate.

Home sales are now back to about where they were between January 1999 and August 2002.

Existing Home Sales in Number of Units Population Adjusted



In the above chart, I take the civilian noninstitutional population into consideration.

The civilian noninstitutional population is defined as people 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (penal, mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

On a population-adjusted basis, the number of units sold per thousands of people was pretty steady at about 25 units from 1999 to August 2002. It hit a bubble peak of 32 in September of 2005 and crashed to 14.5 in July of 2010.

For August, the number is 21.15 per 1,000 people, a significant gap to years just prior to the housing bubble.

Trending Higher or Chopping Around?



In the second chart I was pretty generous to Bloomberg in reference to the idea that existing home sales are trending higher.

There was certainly a clear trend between July 2010 and July 2013. Since then, existing home sales have mainly been chopping around sideways.

It's often easy to play games with trend lines to support one's view.
 
Mike "Mish" Shedlock

Millennials Surpass Boomers: Why are They Still in the Basement? Eight Reasons; Attitudes and Pendulums

Millennials Overtake Boomers

According to Pew Research Millennials will overtake Baby Boomers this year.

This year, the “Millennial” generation is projected to surpass the outsized Baby Boom generation as the nation’s largest living generation, according to the population projections released by the U.S. Census Bureau last month. Millennials (whom we define as between ages 18 to 34 in 2015) are projected to number 75.3 million, surpassing the projected 74.9 million Boomers (ages 51 to 69). The Gen X population (ages 35 to 50 in 2015) is projected to outnumber the Boomers by 2028.

Why are So Many Millennials Still in the Basement?

Bloomberg has some interesting charts and commentary in its report Here's Evidence That Millennials Are Still Living With Their Parents.

In 2015, 15.1 percent of 25 to 34 year olds were living with their parents, a fourth straight annual increase, according to an analysis of new Census Bureau data by the Population Reference Bureau in Washington. The proportion is the highest since at least 1960, according to demographer Mark Mather, associate vice president with PRB.



The tough job market for young people since the recession ended in June 2009 is also contributing to a lower mobility rate. Adults under 30 are typically the most mobile part of an American workforce, constantly on the move since the 19th century. That mobility has been seen as a key advantage of the flexible U.S. labor market compared with places like Europe.

The latest Census data show just 3.1 percent of Americans from 25 to 29 relocated in the last year between states, just half the share of 2002. While moves between counties in the same state — less likely to be for jobs — have increased some, they too remain below pre-recession levels, according to PRB's analysis.



Goldman Sachs economists, who examined the phenomenon of "kids living in the basement" in an August report, found a few reasons to explain it.

Millennials, the 82 million people born between 1981 and about 2000, have been plagued by chronic underemployment since the recession — consider the college grad working as coffee barista — and rising student debt is proving to be a lasting burden.

"Above-average youth underemployment rates alone account for about one-third of the increase in the share of young people living with their parents, and lagged effects of the recession probably account for a bit more," Goldman's David Mericle and Karen Reichgott wrote.

Goldman Sachs just touched on the reasons. I think we can do much better. Let's expand the list.

Eight Reasons Millennials Living With Parents

1. Student debt
2. Soaring Tuition Costs
3. Unaffordable home prices
4. Shrinking real earnings
5. Participation rate of those aged 25-34
6. Demographics of aging
7. Changing attitudes towards debt
8. Changing attitudes towards family formation

Student Debt

Problem number 1, student debt is well understood.

But note that the trend towards living at home started rising sharply in 2000, well before the 2007 recession and well before the current student debt crisis. We must go well beyond student debt to explain the trend.

Tuition

The trend towards living at home took a sharp jump higher just as tuition costs, went through the roof.



Chart from Doug Short's Thoughts on Student Debt.

What else happened in the 2000-2002 time frame?
The answer is home prices went through the roof.

Real Home Prices



The above from Doug Short at Advisor Perspectives.

Home Prices vs. Owners' Equivalent Rent



The above chart from my article Housing Prices, "Real" Interest Rates, and the "Real" CPI.

Now let's look at real earnings, not just jobs.

Here are some snips from my article Real Median Earnings for Men at 1971 Level, Women at 2001 Level

Earnings of Men vs. Women - Fulltime Workers




Earnings Progress

• The female-to-male earnings ratio is at an all-time high of 79 percent
• Real median earnings of male fulltime workers is at a 1971 level
• Real median earnings of female fulltime workers is at a 2001 level

By the way, those "real earnings" numbers assume you believe the government's measure of inflation. Note that the CPI does not reflect home prices or property taxes, and is at best a crude, inefficient, measure of prices.

Participation Rate

Those aged 18-24 typically do not buy houses and more millennials than ever before are in school. But let's remove school from the equation by looking at the participation rate of those aged 25-34.


Once again we see bad news starting in or around 2000, just as home prices soared.

Aging Demographics

Until this year, "boomers" were the largest group demographically speaking. Boomers are aging. Many are in poor health, cannot take care of themselves, and cannot afford or do not want to be placed in a nursing home.

This need forces many millennials to move in with their parents, simply to take care of them.  

Silver Lining?

Goldman's David Mericle and Karen Reichgot see a "silver lining" based on the idea children will one day leave their parents' basements, and that household formation will prove to be a huge boost to a subpar housing recovery.

I take the opposite view based on changing attitudes, real earnings, and a certain inevitability.

The inevitability is death. As boomers die off many will simply choose to stay where they are living. This especially holds true where homes are not fully paid off.

And there is no reason to believe the trend in real earnings is about to change.

So how are the "young and not-so restless" supposed to suddenly get restless unless real earnings take a sharp rise higher?

Finally, neither Bloomberg nor Goldman discussed points seven and eight regarding attitudes.

Changing Attitudes

The Fed has been perplexed as to why its policies have not worked.The explanation is pretty easy. I have been writing about it ever since the housing bust.

Kids see their parents and grandparents arguing over debt and ability to pay bills. Many lost their houses to foreclosure.

Divorce, suicides, and clinical depressions over the loss of jobs or homes are widespread. And the once widely-held notion that one's home is a retirement nest-egg has been smashed on the hard rocks of reality.

Millennials (at least those hit hard in the crisis) don't want to be like their parents, chasing the suburban dream, ill-equipped to take on debt when they have poor-paying jobs and a mountain of student debt on top of it.

Pendulums

Attitudes are like pendulums in that they move from one extreme to the other before reversing. Unlike pendulums, attitudes take a very long time to go from one end to the other. It took multiple generations for people to fully forget the great depression.

Many who were wiped out in the stock market crash of 1929 never got back in. In contrast, boomers had no recollection of the crash. Instead they have recollection of the Fed bailing them out time, after time, after time.

Those 18-34 have no recollection of being bailed out of anything. They see the problems that debt caused their parents, and a significant number do not want any part of chasing the boomer's dreams.

Eventually the boomers will die and the number of millennials living with their parents will start to reverse. Just don't expect an economic boom from it any time soon.

Attitudes towards debt have changed. There is no economic nor demographic reason that suggests the attitude pendulum is close to a reversal.

Mike "Mish" Shedlock