Greece Loses 17,000 Jobs in July, Most Since 2001

It's no wonder Greek prime minister Alexis Tsipras wanted elections now rather than later. He does not want the grim news of job losses and austerity to hit when he is more vulnerable.

Tsipras' problem may well be that he is too late.

Via translation from Libre Mercado, The Greek Economy Lost 17,000 Jobs in July, the Worst Result Since 2001.

Industrial production recorded a record drop in July, according to estimates by Markit.



In addition, capital controls, have resulted in record job losses according to data published on Monday the National Confederation of Commerce and Companies (ESEE ).

Consequently, economic sentiment has suffered an unprecedented collapse, returning to its lowest level since the start of the crisis.



According to the local press, Greece destroyed about 17,000 jobs in July, the worst result since 2001. In addition, another 40,000 people went to work part time from full time, with a consequent reduction in salary.

What a disaster.

Mike "Mish" Shedlock

Witch Hunt Victim "Confesses": Word Police in China vs. Word Police in US

Witch Hunt Review

As I noted earlier today China Starts Witch Hunt for Those Obstructing Government Efforts to Prop Up Stocks.

Public Confession

It took less than a day for a victim of the witch hunt to be rounded up for public display. The Financial Times reports China Reporter Confesses to Stoking Market ‘Panic and Disorder’.

A leading journalist at one of China’s top financial publications has admitted to causing “panic and disorder” in the stock market, in a public confession carried on state television.

The detention of Wang Xiaolu, a reporter for Caijing magazine, comes amid a broad crackdown on the role of the media in the slump in China’s stock market, which is down about 40 per cent from its June 12 peak. Nearly 200 people have been punished for online rumour-mongering, state news agency Xinhua reported at the weekend.

“I shouldn’t have released a report with a major negative impact on the market at such a sensitive time. I shouldn’t do that just to catch attention which has caused the country and its investors such a big loss. I regret . . . [it and am] willing to confess my crime,” [said Xiaolu]

When the market turmoil began in June, Beijing imposed restrictions on media reporting of the stock market. The independent China Digital Times, which monitors internet censorship in the country, said in June media were told to avoid stoking panic.

“Do not conduct in-depth analysis, and do not speculate on or assess the direction of the market,” it reported an official directive as saying. “Do not exaggerate panic or sadness. Do not use emotionally charged words such as ‘slump’, ‘spike’ or ‘collapse’.”

Word Police US Style

With thanks to reader Mark for the link,  Campus Reform reports that Professors Threaten Bad Grades for Saying Oppressive Words.

Multiple professors at Washington State University have explicitly told students their grades will suffer if they use terms such as “illegal alien,” "male," and “female,” or if they fail to “defer” to non-white students.

According to the syllabus for Selena Lester Breikss’ “Women & Popular Culture” class, students risk a failing grade if they use any common descriptors that Breikss considers “oppressive and hateful language.”

Much like in Selena Breikss’s classroom, students taking Professor Rebecca Fowler’s “Introduction to Comparative Ethnic Studies” course will see their grades suffer if they use the term “illegal alien” in their assigned writing.

According to her syllabus, students will lose one point every time they use the words “illegal alien” or “illegals” rather than the preferred terms of “‘undocumented’ migrants/immigrants/persons.”

White students in Professor John Streamas’s “Introduction to Multicultural Literature” class, are expected to “defer” to non-white students, among other community guidelines, if they want “to do well in this class.”

Streamas previously generated controversy by calling a student a “white sh*tbag” and declared that WSU should stand for “White Supremacist University”.

It is notable that one of the syllabus provisions warns: ‘The subject material of this class is sensitive and controversial. Strive to keep an open mind.’

How are students supposed to approach these sensitive and controversial materials at all, let alone to keep an open mind, if they have to fear that a misconstrued statement, or one that unreasonably offends a classmate will lead to a grade reduction or even removal from class?

Banned Words and Phrases Comparison

Banned Words and Phrases
China	US
Slump	Illegal Alien
Spike	Male
Collapse	Female
Panic	Illegals
Overvalued
Down Big
High PE

Repercussions China vs. US

In China, use of banned words and phrases, or even an analytical report that says a company is struggling will land you in prison or worse.

It is illegal to speak the truth in China. Heck, it's even illegal to pursue the truth. China has banned in-depth analysis!

Chinese analysts are probably scrambling right now to make sure they do not hint that sales of a company are likely to decline, be worse than expected, less than last quarter, or anything similar.

Those who make a mistake will find themselves on public display with a forced confession. Failure to confess when asked is likely to mean a death sentence or prison for life.

At Washington State University, use of politically incorrect terms will simply affect your grade. Moreover, students have the upfront option to not take inane classes in the first place.

Rest assured, classes in "multicultural literature", and "Women & Popular Culture" are not a likely foundation for a well-paying job.

Mike "Mish" Shedlock

Inventory Grows in Economic Liftoff Anticipation

The Chicago PMI reading came in just shy of the Bloomberg Econoday Estimate of 54.9.

The headline for August looks solid, at 54.4 for the Chicago PMI, but the details look weak. New orders and production both slowed and order backlogs fell into deeper contraction. Employment contracted for a fourth straight month while prices paid fell back into contraction.

Lifting the composite index are delays in shipments which point to tight conditions in the supply chain. Inventories rose sharply in the month and the report hints that the build, despite the weakness in orders, was likely intentional. But strength is less than convincing and this report suggests that activity for the Chicago-area economy may be flat going into year end.

ISM Chicago

Let's dive into the Chicago PMI Report for further details.

While New Orders and Production softened in August, both remained above their 12-month averages and significantly up from the depressed levels seen between February and June. Part of that resilience in Production and New Orders was due to stock growth as companies built inventories at the fastest pace since November 2014. Feedback from companies was mixed although our assessment is that the overall positive tone of the survey is consistent with a deliberate stock-build in anticipation of stronger demand in Q4.

Despite the latest gain, the labour component remained in contraction for the fourth consecutive month and was still close to June’s nearly 5-1/2 year low. The Employment component has been relatively weak in recent months and the survey suggests it’s unlikely to see a strong pick-up in the short-term.

Responding to a special question asked in August, 63% of our panel said they didn't plan to expand
their workforce over the next three months.

Economic Liftoff Anticipation

Once again, everyone hopes for a "second half liftoff" that perennially struggles to arrive as strong as expected.

This year, I highly doubt 2% for the entire year. 1% growth might be an achievement. Nonetheless, businesses stockpile in anticipation liftoff.



Anticipation is the word (and song) of the day.

Link if video does not play Anticipation: Carly Simon

Mike "Mish" Shedlock

Dallas Fed Region Activity Plunges Well Below Any Forecast

Repeat after me "housing and cars and part time jobs, oh my". There's little else worth cheering about, not even the stock market lately. And housing is not all that strong either.

Today, the Dallas Fed reported that activity in its region plunged to a reading of -15.8, well below any economist's prediction. The Bloomberg Consensus range was -8.0 to +0.5.

Nowhere are the effects of the oil-patch rout more evident than in the Dallas Fed manufacturing report where the general activity index fell to minus 15.8 in August from July's already weak minus 4.6. New orders fell into deep contraction this month, down more than 13 points to minus 12.5 with employment, at minus 1.4, in contraction for a fourth straight month. Hours worked are at minus 6.3 while readings on the business outlook fell steeply though both remain in slightly positive ground. Less weak readings were posted by production, shipments and capacity utilization. But price readings are very weak, with raw materials at minus 8.0 and finished goods at minus 15.7. It really doesn't get any worse than this report which points to increasing drag from the energy sector.

Dallas Fed Business Indicators



Note that wages and benefits are up big, while prices received and new orders are in deep contraction.

The above table from the Dallas Fed Texas Manufacturing Outlook Survey.

Some of the comments are interesting.

Primary Metal Manufacturing

• Overall business is slowing.
• The strength of the dollar is impacting us through an inability to export and high volume of imports.
• The price of finished product dropped dramatically.

Fabricated Metal Manufacturing

• New orders have dropped to half of what they were last year. Capital project equipment continues to be sourced in China and Korea as the owners are chasing every dollar of savings possible. We had our first layoff in 15 years.
• We are currently experiencing a large surge in the automotive industry due to our relationship and close proximity to an automotive plant during a new vehicle implementation period.
• It seems like if you are in a position to take on work and able to turn it around quickly there seems to be plenty of small to medium-range quantity types knocking. We are hoping that as oil prices continue to fall, food and other commodities fall also.
• A little more deflation could certainly help.
• Our oil and gas business, historically 50 percent of our revenues, is still down. Inventories have been consumed fairly well, which now offsets the second drop of oil prices. The growth we expect is due to our efforts to grow our non-oil and gas business.
• The continued decline in the West Texas Intermediate crude oil price is expected to soften the demand for our basic fabricated products.
• The volatility in the stock market and decreased energy costs always have a negative impact on replacement windows orders.
• Even though there is a substantial decrease in raw material prices, capacity levels in PVC and glass are extremely constrained.
• The reason for the decreased capacity levels is that during the housing crisis no capital expenditures were made and now most vendors are at full capacity.

Mike "Mish" Shedlock

China Starts Witch Hunt for Those Obstructing Government Efforts to Prop Up Stocks

In China, a massive witch hunt is underway.

Beijing regulators now seek individuals who  have destabilized the markets and spread rumors.

Official want someone to blame after their Large-Scale Share Purchases failed to halt a huge stock market slide.

China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials.

For two months, a “national team” of state-owned investment funds and institutions has collectively spent about $200bn trying to prop up a market that is still down 37 per cent since its mid-June peak.

After standing on the sidelines for more than a week, the government resumed large-scale stock-buying in the last hour of trade on Thursday. This helped to lift the Shanghai benchmark index from a small loss to end the day up more than 5 per cent. The market rose by almost 5 per cent again on Friday.

Senior financial regulatory officials insist that this was an anomaly, and that the government will refrain from further large-scale buying of equities.

Instead, authorities are planning to sharpen their focus on investigating and punishing individuals and institutions they believe have taken advantage of the state bailout to make profits or have obstructed the government’s attempts to shore up the market.

The regulator said 22 cases of insider trading, market manipulation and “spreading market rumours” had been handed over to the police.

Last Tuesday, following a 22 per cent fall in China’s stock market over four trading days — the worst drop for almost 20 years — police detained 11 people suspected of “illegal market activities”.

Inane Policies

If China wants to find the culprits behind the selloff, its leaders ought to look in a mirror.

Totally inane growth targets, worthless or near-worthless SOEs, and currency manipulation by China's central bank are obvious problems that helped create a huge property bubble followed by a huge stock market bubble.

Instead of blaming their own bubble-blowing incompetence, Chinese regulators seek scapegoats.

Eight managers from Citic Securities, one of China’s largest investment banks, two officials from the China Securities Regulatory Commission, and a journalist from the financial magazine Caijing are among those already detained for "illegal activities" in the early stages of this witch hunt.

When the selloff resumes, the intensity of the witch hunt will pick up, and so will the intensity of capital flight.

Mike "Mish" Shedlock

Greek Snap Election Confusion; Tsipras' Questionable Gamble; Unwieldy Coalition Coming Up?

Questionable Gamble

In the wake of reneging on major election promises, Greek prime minister Alexis Tsipras resigned and called for snap elections. He did so out of fear of losing a vote of confidence that would have forced the same result down the road.

In addition, Tsipras wanted the vote out of the way before further rounds of pension cuts and tax hikes took their toll on the economy.

His gamble now appears questionable.

Please consider Alexis Tsipras Rallies Supporters as Syriza Takes Knock in Polls.

Alexis Tsipras tried to rally Syriza party members behind him at the weekend in advance of a snap election, as opinion polls reflected deepening disappointment among voters with his government’s record.

His message to the weekend meeting was undermined by infighting among senior party officials, reflecting Syriza’s disarray in the wake of mass defections last week to Popular Unity, a new radical party led by the former energy minister Panagiotis Lafazanis, according to people who were present at the event on Saturday.

In another blow to the Syriza leader’s authority, a usually loyal party faction known as the “Group of 53”, which includes several former cabinet ministers, circulated a document at the meeting sharply criticising the premier’s decision last month to make a policy “somersault” and agree to a third rescue package totalling €86bn after months of tense negotiations.

“We need to come up with a persuasive alternative plan . . . that will lead us out of the memorandum [bailout agreement],” the document said.

More than 50 members of Syriza’s central committee and 27 of its MPs, including a former deputy finance minister, have switched to Popular Unity, which is campaigning on a defiant platform that calls for a voluntary exit from the eurozone and the re-adoption of the drachma.

“Re-adopting the drachma is not a catastrophe. . . There are plenty of European countries doing well that are not members of the eurozone,” Mr Lafazanis said at the weekend.

However, Syriza is still expected to win the election by a narrow margin, according to six opinion polls published over the weekend.

All give Syriza a lead of between 1.5 and 2.5 points over the centre-right New Democracy party, marking a sharp decline from its commanding 12 to 15-point lead in June — before Athens agreed to further tax increases and spending cuts in the latest rescue package.

Unwieldy Coalition Coming Up?

US News reports New Greek election could mean new govt partners for Tsipras and his Syriza party.

Greece's outgoing prime minister, Alexis Tsipras, is banking on his popularity to win a national election next month and strengthen his grip on power after purging his radical left Syriza party of dissenters.

But as the political jostling heats up ahead of the Sept. 20 vote, it appears increasingly likely that Tsipras will have to form a new, more unwieldy coalition government — possibly with as many as three other parties.

The first major opinion poll since elections were called, published Friday in the left-leaning Efimerida ton Syntakton newspaper, showed Syriza as the most popular party, with 23 percent saying they intend to vote for it. That was down from 26 percent in early July.

The second-biggest party, the conservative New Democracy, appears to be catching up, with 19.5 percent of the intended vote, up from 15 percent in July.

Short of a majority, Tsipras would first look to renew Syriza's coalition with the Independent Greeks, a small right-wing party that had quietly backed all his policies. But in the ProRata poll, only 2 percent said they would support the Independent Greeks, below the 3 percent needed to enter Parliament.

If the Independent Greeks cannot guarantee Syriza a majority, things get more complicated.

Syriza would almost surely reject the idea of an alliance with the Popular Unity, the new party formed by its own dissidents.

Tsipras Rules Out Coalitions

Adding to the election confusion, Reuters discusses other Setback Possibilities.

Syriza would get 29 percent and New Democracy party 27.8 percent if elections were held now, a poll conducted by Metron Analysis for Parapolitika newspaper showed. The result includes undecided voters.

Another poll by the University of Macedonia for Greek Skai TV showed Syriza leading the conservative opposition by three percentage points, with 61.5 percent saying Tsipras had pursued a wrong negotiating strategy with official lenders.

Syriza would get 25.3 percent of the vote versus 23.2 percent for New Democracy party another survey by polling company Marc for Alpha TV showed.

Popular Unity, the party formed last week by Syriza rebels who oppose the bailout, was backed by 3.5 percent in the ProRata poll - above the 3 percent threshold needed to enter parliament - and 4.1 percent in the poll by Metron Analysis.

The University of Macedonia poll showed it would score 5 percent.

But the Independent Greeks, the ally in Tsipras' former coalition government, scored roughly 2 percent in three polls, meaning Syriza would be forced to seek another coalition partner.

Tsipras this week ruled out cooperating with the main pro-euro opposition parties - New Democracy, the Socialist PASOK and the centrist To Potami. The poll's result suggested that, in that event, the country would face a second round of elections.

One third of those who supported Tsipras' party in the January 2015 elections that took him into office said they were unsure if they will do so again, the ProRata poll said.

It also showed 25.5 percent of voters were still undecided, making them the biggest bloc.

Election Ploy

Ruling out cooperation with other pro-euro parties looks like an obvious election ploy.

If Tsipras sticks to his word, questionable at best in light of recent events, then he will be out of power if the polls remain as they are now. And if so, another round of elections would be necessary.

Mike "Mish" Shedlock

Cost of PUTs on Shanghai Index Hits Record vs. Calls; Sentiment vs. Valuation

In spite of the recent plunge on the Shanghai index, as recently as August 24, CALL options on the index were more expensive than PUT options.

This Bloomberg headline "If the Options Market Is Right, China's Stock Rescue Is Doomed" reads like something one would find in a tabloid, but the reverse is now true.

Options traders have never been so pessimistic on China’s stock market, betting the government’s renewed effort to prop up share prices is doomed to fail.

The cost of bearish contracts on the China 50 exchange-traded fund surged to the highest level versus bullish ones since they started trading in Shanghai six months ago. The so-called skew also climbed to a record for a similar ETF in the U.S., even as government buying drove China’s benchmark index to a 10 percent rally in the final two days of last week.

Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points.

Equities on mainland bourses traded at a median of 53 times reported earnings last week. That’s the most among the 10 largest markets and more than twice the 19 multiple for the Standard & Poor’s 500 Index. Analysts have cut their 2015 profit estimates for Shanghai Composite companies by 8.8 percent this year, according to data compiled by Bloomberg.

Options Skew



click on chart for sharper image

Valuation Still Extreme

Fundamentally speaking, the Shanghai stock market is hugely overpriced. I concur with BofA strategist David Cui, who says equity valuations and earnings growth aren’t appealing enough to support the market in the absence of government buying.

Cui estimates the Shanghai Composite needs to fall another 35 percent before shares become attractive. “The government will not support the market forever.”

Sentiment vs. Valuation

Valuation aside, sentiment is extreme enough that a corrective rally could get going.

However, it's important to note that stock market crashes do not occur on overbought conditions but rather on oversold conditions when no one wants shares at even plunging prices.

Mike "Mish" Shedlock

Still "Too Early" to Decide on Rate Hikes: Let the Market be Your Guide

Still "Too Early"

After all the hemming and hawing by nearly every Fed governor, and despite the fact the Fed has to do something in just over two weeks, the Fed still does not know what to do.

Speaking in Jackson Hole Fed governor Stanley Fisher Keeps September Rate Hike Option on the Table.

With market turbulence casting a cloud over the outlook for US monetary policy, a senior Federal Reserve official strove on Friday to keep the option of an interest rate rise alive at September’s key meeting.

Stanley Fischer, the vice-chair of the Fed’s Board of Governors, said at talks in Jackson Hole, Wyoming, that it was too early to say how the recent market tumult had affected the argument for a move next month, and that no decision had yet been made.

“The change in the circumstances which began with the Chinese devaluation is relatively new and we’re still watching how it unfolds, so I wouldn’t want to go ahead and decide right now what the case is — more compelling, less compelling etc,” he told CNBC business news.

“We’ve got a little over two weeks before we make the decision,” he said. “And we’ve got time to wait and see the incoming data, and see what is going on now in the economy.”

Fisher Not Certain

Here's the funniest line by Fisher in the interview: "The economy is returning to normal. We’re not certain we are there yet.”

I am certain the economy is nowhere near normal, and the Fed is the primary reason why.

My speech was all prepared for Jackson Hole, but somehow I was not on the invite list. It was a severe oversight by someone.

Where They Stand

Meanwhile, let's take a look at where all the Fed governors stand.

MarketWatch details Where every Fed member stands on raising interest rates.

• Chairwoman Janet Yellen: Not at Jackson Hole. Told Congress in July that a rate hike this year would likely be appropriate.
• Vice Chair Stanley Fischer: In an interview Friday, he said it’s too early to tell if case for rate hike was more compelling or less compelling. Before China yuan move, Fischer said case for September hike was “pretty strong” but not conclusive. He says level of confidence “pretty high” inflation will return to 2% target. He delivers a formal speech at Jackson Hole on Saturday.
• Gov. Lael Brainard: Said in June that the Fed should give the data time to show labor-market progress, inflation rising.
• Gov. Jerome Powell: Said in early August that he’s not sure whether to support a September rate hike.
• Gov. Daniel Tarullo: Said in June that the U.S. economy has lost momentum.
• New York Fed President William Dudley: Said on Wednesday that a rate hike is “less compelling” than a few weeks ago.
• Chicago Fed President Charles Evans: Didn’t want rate hikes until middle of next year, as of July.
• Richmond Fed President Jeffrey Lacker: Due to give a speech next month titled “The Case Against Further Delay.”
• Atlanta Fed President Dennis Lockhart: Sees even odds of a September rate increase.
• San Francisco Fed President John Williams: Said in June he expected two rate hikes this year.

Those are the voting members. It's difficult to say how recent moves have changed the opinions of those last offering a view months ago.

None of this matters of course. Such discussions are for entertainment purposes only.

Despite the fact the Fed is clueless about whether or not the economy is "normal", they will line up like ducks if Yellen decides to hike.

Let the market be your guide. It's still "too early" to know what the market view will be two  weeks from now.

Mike "Mish" Shedlock

Imagination Sets In

One of my constant themes over the past few years is the underfunding of state and local pension plans. Illinois is particularly bad, but let's look at some aggregate data.

The National Association of State Retirement Administrators (NASRA) provides this grim-looking annual picture.

Annual Update



Between the end of 2007 and end of 2014, pension plan assets rose from $3.29 trillion to $3.71 trillion. That's a total rise of 12.76%.

Plan assumptions are generally between 7.5% to 8.25% per year!

S&P 500 2007-12-31 to 2014-12-31



In the same timeframe, the S&P 500 rose from 1489.36 to 2058.90.

That's a total gain of 590.54 points. Percentage wise that's a total gain of 40.22%. It's also an average gain of approximately 5.75% per year.

Analysis

• In spite of the miraculous rally from the low, total returns for anyone who held an index throughout has been rather ordinary.
• The first chart is not a reflection of stocks vs. bonds because bonds did exceptionally well during the same period.

Drawdowns Kill!

To be fair, the first chart only shows assets, not liabilities, but we do know that pensions in general are still enormously underfunded, with Chicago and Illinois leading the way.

Negative Flow

Reader Don pinged me with this comment the other day: "Nearly all public pension funds have a negative cash flow, meaning they pay out in benefits each year more than they receive in contributions. For all public pension funds, the negative cash flow is approximately 3% of assets, which means an average fund needs to produce an annual return of 3% to maintain a stable asset value."

That's fine if assets have kept up with future payout liabilities and plans are close to fully funded.

However, it is 100% safe to suggest that neither condition is true.

So here we are, after a massive 200% rally from the March 2009 low, and pension plans are still in miserable shape.

And plan assumptions are still an enormous 8% per year. Let me state emphatically, that's not going to happen.

Stocks and junk bonds are enormously overvalued here.

GMO Forecast



"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."

Over the next 7 years GMO believes US stocks will lose money (on average), every year. Those are in real terms, but returns are at best break even, assuming 2% inflation.

Bonds are certainly no safe haven either. I strongly believe GMO has this correct.

Assume GMO Wildly Off

Even if one assumes those GMO estimated returns are wildly off to the tune of four percentage points per year, pension plans needing 8% per year will be further in the hole with 4% per year annualized returns.

Imagination

I have a musical tribute to imagination in regards to pension finances, especially imagination in Illinois.



link if video does not play: Creedence Clearwater Revival - Lookin' Out My Back Door

Illinois Non-Answer

Illinois house speaker Michael Madigan and Chicago governor Rahm Emanuel believe tax hikes are the answer.

Both are sorely mistaken. Here are a few viewpoints to consider.

• Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering
• Emanuel Fiddles While Chicago Burns; Public Schools Over the Edge; 9% Cloud Tax on Data Streaming; Emanuel Eyes Property Tax Hikes
• CNBC's Santelli and Mish Discuss Municipal Bonds; Egan-Jones on Chicago; S&P Blames Moody's; Message to Bondholders

The only way out of this mess is a pension restructuring coupled with municipal defaults.

Mike "Mish" Shedlock

Fed Queen Race: Personal Income Rises 0.4% as Expected; Good for Rate Hikes? GDP?

Personal income for July rose as expected in today's Personal Income and Outlays report. Consumer spending rose nearly as expected, led of course by auto sales. Price pressure was nonexistent.

There's no hurry for a rate hike based on the July personal income and outlays report where inflation readings are very quiet. Core PCE prices rose only 0.1 percent in the month with the year-on-year rate moving backwards, not forwards, to a very quiet plus 1.2 percent. Total prices are also quiet, also at plus 0.1 percent for the monthly rate and at only plus 0.3 percent the yearly rate.

On the consumer, the data are very solid led by a 0.4 percent rise in income that includes a 0.5 percent rise in wages & salaries which is the largest since November last year. Other income details, led by transfer receipts, also gained in the month. Spending rose 0.3 percent led by a 1.1 gain in durables that's tied to vehicle sales. The savings rate is also healthy, up 2 tenths to 4.9 percent.

The growth side of this report is very favorable and marks a good beginning for the third quarter. This at the same time that inflation pressures remain stubbornly dormant. And remember this report next month will reflect the August downturn in fuel prices. With the core PCE index out of the way, next week's August employment report looks to be the last big question mark going into the September 17 FOMC.

Favorable Beginning for Third Quarter GDP?

Let's investigate the above Bloomberg claim "The growth side of this report is very favorable and marks a good beginning for the third quarter."

Today's GDPNow Forecast 

The Atlanta Fed GDPNow Forecast sees it this way:

"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.2 percent on August 28, down from 1.4 percent on August 26. The forecast for real GDP growth in the third quarter decreased by 0.2 percentage points following this morning's personal income and outlays report from the U.S. Bureau of Economic Analysis. The slight decline in the model's forecast was primarily due to some weakness in real services consumption for July, which lowered the model's estimate for personal consumption expenditures from 3.1 percent to 2.6 percent for the third quarter."

GDP Now Model



GDP By Quarter

2015 Q1: 0.6%
2015 Q2: 3.7%
2015 Q3: 1.2% GDP Nowcast

Fed Queen Race

Consumer spending is supposedly humming along. GDP is not doing much of anything.

This reminds me of the Red Queen Race, an incident in Lewis Carroll's Through the Looking-Glass that involves the Red Queen and Alice constantly running but remaining in the same spot.

"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else—if you run very fast for a long time, as we've been doing."

"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"

Clearly we need to sell twice as many autos to get GDP where the Fed wants it to go.

Mike "Mish" Shedlock

Steve Keen on Economic Forecasts, Ponzi Schemes, GDP, China; One Way Streets and Poison

Economic Forecasts

Economist Steve Keen pinged me in response to my post Regional Manufacturing Expectations From Mars.

In that post, I compared Richmond Fed manufacturing survey expectations (six month look ahead projections made in February for August), to what actually happened in August.

In response, Steve Keen Tweeted

@MishGEA gets it wrong! Says "Regional Manufacturing Expectations From Mars" when they're really from Uranus.

I duly stand corrected. I am now planetarily aligned with Keen on the distinction between Mars and Uranus.

China Implosion

On a more serious note, please consider the Financial Times article Why China’s stock market implosion might not be very meaningful, by Izabella Kaminska.

Kaminska quotes Steve Keen as follows ...

One key peculiarity about China’s economy—and there are many—is that much of its growth has come from the expansion of industries established by local governments (“State Owned Enterprises” or SOEs). Those factories have been funded partly by local governments selling property to developers (who then on-sold it to property speculators for a profit while house prices were rising), and partly by SOE borrowing. The income from those factories in turn underwrote the capacity of those speculators to finance their “investments”, and it contributed to China’s recent illusory 7% real growth rate.

With property price appreciation now over, those over-levered property developers aren’t buying local government land any more, and one of the two sources of finance for SOEs is now gone. Borrowing is still there of course, and the Central Government will probably require local councils to continue borrowing to try to keep the growth figures up. But the SOEs are already losing money, and this will just add to the Ponzi scheme. The collapse of China’s asset bubbles will therefore hit Chinese GDP growth much more directly than the crashes in the more fully capitalist nations of Japan and the USA.

Heart of the Matter

Keen indeed gets to the heart of the matter about SOEs, borrowing, and illusory growth rates.

I have commented time and time again, no one in their right mind believes Chinese growth rates. Not only are the numbers straight up fabrications, many of the projects have no economic benefit.

Moreover, Chinese growth estimates fail to take into account damaging pollution and cleanup costs that ought to subtract from GDP.

GDP itself is a useless statistic actually. The reason is government spending, no matter how counterproductive, adds to GDP.

It sounds convoluted, but if government paid someone to poison wells, that poisoning would, by definition, add to GDP.

Many connected politicians got extremely wealthy off SOEs. But most of the SOE projects had little if any economic benefit, and some undoubtedly had negative benefit because environmental damage was not properly accounted for.

In short, Chinese GDP does not properly reflect economically nonviable projects nor the outright poisoning of the Chinese population to hit preposterous targets.

Rather than admit past GDP was grossly overstated, revisions will likely be hidden in future GDP reports for years or decades to come.

Kaminska Concludes ...

"In short, don’t worry so much about the stock market, worry more about the potential collapse of other major Chinese asset classes like property, ghost towns and factories. That’s how the credit links back to the real economy."

Those were her words, not Keen's. I pinged Pater Tenebrarum at the Acting Man blog the above article and he replied ...

"Something has clearly changed now. Right now, it seems it actually does matter. China is seen as an economically important (for the world) since about 2005 or so, but I have a feeling that something more profound may actually be afoot now - due to the follow-on domino effects. I would estimate that global malinvestment in commodity projects along amounts to something like $2 to $3 trillion cumulatively, perhaps more. This one sector alone may leave behind $1 trillion in unpayable debt." 

OK.
What's Changed?

China's Capital Accounts

Historically, China's stock market has moved independently of the country's economy because of China's closed capital account.

What if the Shanghai market has started to reflect the real fundamentals thanks to liberalization of China's capital account?

One Way Streets

Typically, money flowed into China in a one way street. This year, China took steps to open up the flows.

Forbes noted China Pledges 'Radical' Moves To Open Capital Account In 2015.

FTAlphaville notes This isn’t the Chinese capital account liberalisation you’re looking for.

Today every Chinese individual is allowed to buy no more than US$50,000 worth of foreign currency from banks each year. But that limit was lifted from US$20,000 in 2007, and it is also not that hard for the more savvy to get around it.

So we’re in a situation where China’s capital account is more open than it has been before and recent relaxations of control have increased the size and volatility of flows. Including, obviously but crucially, outflows.

This is a system that needs external capital very badly. It is happy to welcome it in, vastly less happy to see it leave. More so, it doesn’t take much to draw a lesson about attitudes to control and stability from China’s reaction to the recent stock market puke.

Needs vs. Reality

China needs external capital. Instead, China sees capital flight. Resultant stress is everywhere one looks because debt exceeds carrying capacity.

Symptoms of Too Much Debt

1. Yuan devaluation
2. Stock market prop jobs by Chinese regulators
3. Emerging market currency crashes
4. Global equity bubbles
5. Commodity price crashes
6. Junk bond bubbles
7. Slower global growth
8. Still raging property bubbles in Australia, Canada, and the US West Coast (thanks to influx of money from China)

Debt the Problem

Numerous bubbles have started to implode, even as property bubbles in some places expand. Central banks are hard pressed to keep all the Ponzi schemes going.

Although we do not see eye-to-eye on the solution, Keen and I agree that debt is a primary problem. Many prominent economists still have not figured that out.

For example: Larry Summers and Ray Dalio Seek Return of Quantitative Easing.

Paul Krugman says "Debt is Good".

Krugman: "There’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt."

Debt Bubbles

Debt and bubbles go hand in hand.

No matter how big the bubble, no matter how much the resultant income inequality, no matter how ridiculous or nonviable the project, no matter how little the economic benefit, no matter how much government overpays (thanks to inane union work rules and prevailing wage laws), you can always count on Krugman to want more and more and more debt, even though Japan is living proof such policies do not work.

In the US, the Fed used a housing bubble to bail out a dotcom bubble. And now we have QE-driven stock market and junk bond bubbles to smooth over the housing bubble. Corporations have gone into debt to buy back their own shares at absurd valuations.

Debt has been used to cure debt problems over and over again. Apparently the cure is the same as the disease.

Mike "Mish" Shedlock

Yet Another Dispute Over GDP; What's Really on the Fed's Mind?

Disputes over GDP go on and on and on. MarketWatch reports By another measure, the U.S. economy was ho-hum in second quarter.

There are two ways to compute how well the economy is doing.

One is to tally all the goods and services produced during a given time period — that’s called gross domestic product.

Another is to measure all the incomes earned in the production of those goods and services — that’s called gross domestic income.

Over time, they should be exactly the same. But measurement isn’t easy, and so the Commerce Department not only reports both figures, but also for the first time on Thursday averaged the two together.

The result wasn’t great: It’s showed a 2.1% average for the second quarter, since GDP growth was a sterling 3.7% and GDI was a meager 0.6%.

According to Josh Shapiro, chief U.S. economist at MFR, that’s the largest gap between the two measures of the economy since the third quarter of 2007.

“Some research has shown the GDI figures to be a more accurate representation of economic activity, but the evidence is mixed and the debate continues. Nonetheless, the disparity reported in Q2 does lend credence to the notion that the GDP growth reported in the quarter likely overstates the underlying vitality of the economy in the span,” he said in a note to clients.

Two Measures



That may look significant, but let's investigate further.

DGI vs. GDP Percent Change from Year Ago



DGI vs. GDP Percent Change from Year Ago Detail



Large Gap?

On a year-over-year basis it's hard to discern any gap. The dispute of Josh Shapiro, chief U.S. economist at MFR, is easily seen as total nonsense.

I don't believe the economy is as strong as most claim, but I certainly won't post easily disproved charts to make my point.

What's Really on the Fed's Mind

Still, one has to wonder "What's really on the Fed's mind?"

I surely doubt it is fear of inflation, at least as they claim to measure it. It's possible they fear bubbles, but I doubt that too. The Fed historically has been blind to bubbles.

Rather, I suspect they have come to the conclusion this recovery is as good as it gets, and if they cannot hike now, they will not be able to.

That may sound lame, but it is exactly how economic clowns think.

Let me phrase it this way: "We need to hike now so we have ammunition to cut when we need to."

Meanwhile, nothing the Fed says at all is believable if for no other reason than historical precedent that proves without a doubt, they clearly have no idea what's really going on, especially at turning points.

They cannot really come out and say "We are clueless bubble blowers", can they?

Mike "Mish" Shedlock

GDP by Other Measures; Will the "Real" GDP Please Stand Up?

In the wake of a stronger than expected GDP report (see Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing), some are questioning the stated growth.

For example, the Consumer Metrics Institute says "On the surface this report shows solid economic growth for the US economy during the second quarter of 2015. Unfortunately, all of the usual caveats merit restatement".

Consumer Metrics Caveats

1. A significant portion of the "solid growth" in this headline number could be the result of understated BEA inflation data. Using deflators from the BLS results in a more modest 2.33% growth rate. And using deflators from the Billion Prices Project puts the growth rate even lower, at 1.28%.
2. Per capita real GDP (the number we generally use to evaluate other economies) comes in at about 1.6% using BLS deflators and about 0.6% using the BPP deflators. Keep in mind that population growth alone (not brilliant central bank maneuvers) contributes a 0.72% positive bias to the headline number.
3. Once again we wonder how much we should trust numbers that bounce all over the place from revision to revision. One might expect better from a huge (and expensive) bureaucracy operating in the 21st century.
4. All that said, we have -- on the official record -- solid economic growth and 5.3% unemployment. What more could Ms. Yellen want?

Revisions

I certainly agree with point number three. Significant GDP revisions are the norm, even years after the fact. The numbers are of subjective use at best because GDP is an inherently flawed statistic in the first place.

As I have commented before, government spending, no matter how useless or wasteful, adds to GDP by definition.

Moreover, inflation statistics are questionable to say the least, as are hedonic price measurements and imputations.

Imputations

Imputations are a measure of assumed activity that does not really exist. For example, the BEA "imputes" the value of "free checking accounts" and ads that number to GDP.

The BEA also makes the assumption that people who own their houses would otherwise rent them. To make up for the alleged lost income, the BEA actually assumes people rent their own houses from themselves, at some presumed lease rate. Imputed rent is an addition to GDP.

Why stop there? On the same basis people who cut their own grass would have to pay someone else to do it for them. And married men might go to prostitutes if they were not married.

And what about back scratching? You scratch mine and I scratch yours. Clearly there is unreported economic activity here.

There are limitless imputations the government can concoct if GDP needs a future boost.

By the way, Europe did recently revise up GDP on the grounds of unreported prostitution and illegal drug profits.

GDP by Other Deflators

Every month there are questions in regards to GDP deflators.

This month, Consumer Metrics notes that the CPI as a deflator would result in a more modest 2.33% growth rate. Computing GDP using the Billion Prices Project would put the growth
rate even lower, at 1.28%.

That's interesting, but is it valid?

Deflator Differences

EconPort compares the Differences Between the GDP Deflator and CPI

Although at first glance it may seem that CPI and GDP Deflator measure the same thing, there are a few key differences. The first is that GDP Deflator includes only domestic goods and not anything that is imported. This is different because the CPI includes anything bought by consumers including foreign goods. The second difference is that the GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.

Difference Between further adds to the explanation.

CPI and GDP deflator generally seem to be the same thing but they have some few key differences. Both are used to determine price inflation and reflect the current economic state of a particular nation.

GDP Deflator takes into account goods that are produced domestically. It does not bother with imported goods and it reflects the prices of all the commodities, services included. The GDP deflator is calculated quarterly and it weights may change per calculation.

There are so many price indices out there and GDP is unlike some of them that are based on a predetermined basket of goods and services. In the GDP deflator, the so-called basket in a year is weighted by the market value of all the consumption of each good therefore it is allowed to change with people’s investment and expenditure patterns since people do respond to varying prices.

CPI tends to consider insignificant goods, even the outdated ones that are not really purchased by the consumers anymore. Nevertheless, they are still considered for pricing in the fixed basket. Consumption goods are the main priority of the CPI measure. The prices of other items used in production are not considered as well as the prices of investment goods. Only consumer items are taken into account. The machines and the industrial equipment that are used to make them are not considered.

I am not going to suggest the GDP deflator is by any means correct.

Indeed, I believe some prices are inherently difficult if not impossible to measure. But substituting the CPI as a more valid measure is as likely as not to be even more inaccurate.

Solid Growth?

In regards to point number four, average growth through three quarters is certainly not solid. Q1
is 0.6%, Q2 is 3.7%, and the GDPNow estimate for Q3 is 1.4%.

For 2015, through three quarters, we are talking about growth of about 1.6% or so. This is not rate hike material.

Since point four above was obvious sarcasm targeted at Fed Chair Janet Yellen, I am in agreement with Consumer Metrics on this point.

Per Capita GDP

Finally, and in reference to point number two, real per capita GDP remains quite anemic.



The above chart from Advisor Perspectives.

Per capita GDP reflects aging boomers, student debt, government debt, slow household formation, untenable pension promises, and extremely poor central bank and governmental policies that have effectively wiped out the middle class.

Mike "Mish" Shedlock

Kansas City Region Activity Remains in Deep Contraction

Unlike housing and auto sectors, economic regions dependent on oil activity remain severely stressed.

For example, the Kansas City Fed regional factory report came in today at -9, compared to an Economic Consensus of -4.

Factory activity in the Kansas City Fed's region remains in deep contraction, at minus 9 in August vs minus 7 in July and deeper than the Econoday consensus for minus 4. New orders are also at minus 9 with backlog orders at minus 21. These are deeply depressed readings that point to a long run of weak activity in the months ahead. Production is already far into the negative column at minus 16 with hiring at minus 10. Price readings in the August report are in contraction.

This report speaks to significant distress for the region which is getting hit by the oil-led fall in commodity prices. Taken together, regional reports have been mixed to soft so far this month, pointing to slowing for a factory sector that got a bit boost from the auto sector in June and July.

Mike "Mish" Shedlock

Second Quarter GDP Revised Up, as Expected, Led by Autos, Housing

Economists had been expecting today's second quarter GDP estimate to rise from initial readings, based largely on auto sales and housing, and they were correct.

"The GDP estimate released today is based on more complete source data than were available for the 'advance' estimate issued last month. In the advance estimate, the increase in real GDP was 2.3 percent. With the second estimate for the second quarter, nonresidential fixed investment and private inventory investment increased. With the advance estimate, both of these components were estimated to have slightly decreased."

Advance Estimate vs. Second Revision



Economic Consensus

GDP was a bit higher than the Bloomberg Economic Consensus.

The second-quarter did show a big bounce after all, up at a revised annualized growth rate of 3.7 percent which is 5 tenths over the Econoday consensus and just ahead of the high estimate. The initial estimate for second-quarter GDP was 2.3 percent. This report points to better-than-expected momentum going into the current quarter.

Consumer demand was strong with personal consumption expenditures at a 3.1 percent rate led by an 8.2 percent rate for durables, a gain that was tied to vehicle spending. Residential investment was very strong, at plus 7.8 percent, as was nonresidential fixed investment which, boosted by an upward revision to structures, came in at plus 3.2 percent. Inventories contributed to second-quarter growth as did improvement in net exports. Final demand proved very solid, at plus 3.5 percent. The GDP price index, unlike many other price readings, is showing some pressure, at 2.1 percent and just above the Fed's general policy goal.

The economy's acceleration is now much more respectable from the first quarter when growth, at only 0.6 percent, was depressed by heavy weather and special factors. Splitting the difference, first-half growth came in a bit over 2 percent which, as it turns out, is right in line with the similar performance of 2014 when first-quarter growth, again depressed by severe weather, fell 2.1 percent followed by a 4.6 percent surge in the second quarter. Growth in the third quarter last year was 4.3 percent which would be a very good performance for this third quarter.

The impact of today's report on Fed policy for September's FOMC is likely to be minimal. Focus at the upcoming meeting will be on the state of the global financial markets and, very importantly, the strength of next week's employment report for August.

GDPNow Third Quarter

I do not believe today's report will impact estimates for third quarter for the Atlanta Fed GDPNow Model by much if any. We will find out on the next update, tomorrow.



GDP Average

The GDPNow forecast for third quarter is 1.4%. Through three quarters, annualized growth is about 1.57%, not exactly rate hike material.

Growth is fueled by autos and housing, the only two strong aspects of this economy. Last year, the third quarter was strong, this year will not repeat.

Mike "Mish" Shedlock

Hall of Mirrors: Jim Grant on the "Paper Moon", No Price Discovery Economy; Psychology of Bubbles

Reason TV had an excellent interview with Jim Grant, editor of Grant's Interest Rate Observer on the recent stock market turmoil. Grant says The Fed Turned the Stock Market Into a 'Hall of Mirrors'.

“Confoundingly to me, people have come to be quite accepting of the value attached by fiat to these pieces of paper we call currency,” says Jim Grant, who’s the editor of Grant’s Interest Rate Observer and the author of The Forgotten Depression: The Crash That Cured Itself.

“Are prices meant to be imposed from on high, or discovered by individuals acting spontaneously in markets? The readers and viewers of Reason known the answer to that but they’re regrettably in the minority."

Grant sat down with Reason magazine editor-in-chief Matt Welch on Tuesday to discuss the underlying causes of the recent market turbulence, why we don’t really “have interest rates anymore,” and how the classic jazz song “It’s Only a Paper Moon” provides a fitting metaphor for the equities market.

Grant Interview



Psychology of Bubbles

Central banks have blown another massive set of bubbles by removing every aspect of price discovery for the sole benefit of banks and the already wealthy. That's the bottom line, and it's remarkably easy to see.

Yet, very few see it that way.

Why?

Wall Street, academia, and the media, all have a vested interest in denial. Bad news does not sell. And people believe what they want to hear: Stocks are cheap and the economy is getting better.

Expect another "no one could possibly have seen this coming" set of excuses.

Mike "Mish" Shedlock

Durable Goods Boost Third Quarter GDP Estimate to 1.4% Annualized

Durable goods orders this morning leapfrogged all economic estimates (see Durable Goods Orders Surprise to Upside, Led by Autos).

Yet the GDPNow Forecast only rose by .01%.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 was 1.4 percent on August 26, up from 1.3 percent on August 18. The forecast for real GDP growth increased 0.1 percentage point to 1.4 percent after this morning's advance report on durable goods from the Census Bureau. The report boosted the model's forecast for equipment spending in the third quarter from 7.7 percent to 8.9 percent, and led to a slight improvement in the contribution of real inventory investment to third-quarter GDP growth.

GDPNow August 26, 2015



It's been entertaining and informative watching the evolution of these forecasts. Really big swings in some economic numbers often barely budge the expected result.

GDP growth of 1.4% is hardly the material on which rate hikes have historically been based.

Mike "Mish" Shedlock

Unidentified Investors Lend Belgium €50 Million, for 100 Years, With Flexible Conditions, at 2.5% Interest

In yet another sign of economic madness, investors have concluded that rates in Belgium are likely to stay low for decades to come.

Via translation, please consider Unidentified Investors Lent Belgium €50 Million for 100 Years at 2.5% Interest.

The director of the Belgium debt agency, Jean Deboutte, announced Belgium borrowed 50 million euros, for a hundred years at an interest rate 2.5 percent.

The borrowing for a hundred years is via EMTN loans. These are loans with more flexible conditions than the traditional OLO government bonds.

Who granted Belgium the loan is unknown.

"These are professional investors. Goldman Sachs International contacted us stating that it had investors who were interested in such a long term investment," said Deboutte.

According Deboutte, hundred year life of this debt shows that investors have great confidence in the reliability of Belgium as a good payer.

EMTN Defined

I looked up the term "EMTN". It stands for Euro Medium Term Note.  If 100 years is "medium term", dare I ask the definition of "long term"?

100 years at 2.5% and flexible conditions. What can possibly go wrong with that?

In the grand scheme of things €50 Million is a trivial amount to the global economy. Nonetheless,  the transaction does reflect how one-sided sentiment is in belief of perpetually low rates.

Mike "Mish" Shedlock

Durable Goods Orders Surprise to Upside, Led by Autos

Durable goods orders surged in July, beating the top-end of Bloomberg Consensus Estimates. Despite the surge, year-over-year orders are still in the red.

Exports have been weak but they didn't hold down July's durable orders which, for a second straight month, are strong, and strong nearly across the board. New orders rose 2.0 percent in the month which easily beat out top-end Econoday expectations for 1.2 percent. Excluding transportation, orders rose 0.6 percent which is near the top-end forecast for 0.7 percent. Capital goods data show special strength with nondefense ex-aircraft orders up 2.2 percent following June's 1.2 percent gain and with related shipments up 0.6 percent following a gain of 0.9 percent.

Motor vehicles led the industrial production report for July and they're a standout in this report also. Orders for vehicles surged 4.0 percent in the month on top of June's 0.8 percent gain. Vehicle shipments are right behind, up 3.9 percent following a 0.9 percent gain. Commercial aircraft, a center of strength for the nation's factory sector, fell back with orders down 6.0 percent following June's 70 percent surge.

The good news continues with total shipments up 1.0 percent vs June's 0.9 percent gain which are very strong readings. Unfilled orders rose 0.2 percent while inventories, reflecting strength in shipments, were unchanged.

The factory sector has had a tough year, that is up until June when demand for vehicles began to take hold. This report speaks to domestic strength and should help offset ongoing concerns over global volatility.

In a special note on year-on-year change, total new orders are down 19.6 percent which reflects an aircraft comparison with the Farnborough airshow in July last year. Excluding transportation, orders are down 2.5 percent which is an improvement vs declines of 4.5 and 2.7 percent in the prior two months.

Monthly vs. Yearly



The skew in aircraft orders made the year-over-year comparisons this month (yellow highlight) especially tough. Next month, the year-over-year comparison (pink highlight) will be especially easy.

Discounting the huge swings, this is the first time durable goods have had consecutive month-to-month gains in a year.

Once again autos lead the way. I keep wondering how long that can possibly last.

Mike "Mish" Shedlock

Economic and Social Tipping Points: Have We Arrived?

Economic Tipping Points

• Was the Surprise Devaluation and Currency War by China two weeks ago an economic tipping point?
• How about the 1000+ Point Plunge in the Dow partially recovered on Monday?
• Oil prices at six year lows?

Social Tipping Points

I will return to economic tipping points in a moment.

Meanwhile, let's refocus the spotlight on social problems. Here's an image of a protest on Monday, in Germany.



Police confront rightwing demonstrators at the Heidenau refugee centre in eastern Germany

Spread Them Around

Please consider Merkel and Hollande Call For Equal Spread of Refugees Across EU

Angela Merkel and François Hollande on Monday called for a more equal distribution of asylum seekers across the EU, as violent clashes outside a German refugee centre highlighted the rising political tensions over record inflows of migrants into Europe.

“There was an aggressive xenophobic atmosphere which is no way acceptable,” said the German chancellor. “It is disgusting how rightwing extremists and Neo-Nazis have tried to spread dumb messages of hate. But it is also shameful that citizens, some of them with children, have supported the demonstration by going along to it.”

Ms Merkel and Mr Hollande backed the European Commission’s push to revive controversial proposals for all 28 EU countries to sign up to a binding quota agreement, under which newly arrived refugees would be distributed around the bloc. Such a move would to ease the burden on Germany and a handful of other states which currently take a majority of asylum seekers.

Germany expects to receive a record 800,000 refugees this year, more than the entire EU received in 2014 and around 1 per cent of the country’s population.

Ms Merkel and Mr Hollande also called for the full implementation of EU asylum rules — which cover areas such as legal rights and rights to medical and social care — across the bloc.

The German Interior Minister, Thomas de Maiziere, called for "freedom of movement and open borders." More specifically, he added "A European answer to maintain open borders and no controls in the Schengen region is needed."

Schengen Area

The Schengen Area comprises 26 European countries that have abolished passport and any other type of border control at their common borders. Twenty-two of the twenty-eight European Union (EU) member states participate in the Schengen Area. Ireland and the United Kingdom maintain opt-outs.

Note that the UK is pissing and moaning over a few thousand refugees, not the 800,000 Germany gets.

A quick check shows David Cameron says Britain will Accept Just 'a Few Hundred' More Syrian Refugees despite 4 million displaced by the war.

Cameron a Liar or Delusional?

UK prime minister David Cameron insists he can get the EU treaty changes he wants even though Germany and France want something 180 degrees different.

Cameron is either a liar or delusional.

By the way, let's place the blame for the Syrian refugee mess where it belongs: President Bush was a direct sponsor of Isis, and president Obama sure did not help any.

EU Rules

Under EU rules, refugees are required to obtain asylum in the country in which they first arrive. Italy and Greece have not enforced that rule, for obvious reasons. They are the countries in which most refugees arrive.

Imagine Italy and Greece absorbing 800,000 refugees.

Unlimited Demand for Free Services

Germany and France want to spread the refugees.

Is that the answer? If so, at what cost?

Bear in mind refugees have "rights to medical and social care". Who pays?

That we can answer: taxpayers.

Also bear in mind, Greece has an unemployment rate of 25.6%, and Italy 12.6%. Youth unemployment in Greece is 49.7%, Spain is 49.3%, and Italy is 41.5%.

That is one hell of a lot of disgruntled people worried, with due cause, about others taking their job.

It's no wonder we have seen the rise of Golden Dawn in Greece, neo-Nazis in Germany, Beppe Grillo's M5S (five star movement in Italy), and Marine le Pen's National Front in France.

People are fed up.

Spreading Refugees Cannot Possibly Work

The idea that unlimited refugees can be spread around like cream cheese on a bagel, with no repercussions, is absurd.

The more free services a county gives, and the more convenient it is for people to get those free services, the more takers there will be.

Spread refugees around, give them more care and services, the more you will have. Make it easy enough and half of Africa would move to Germany.

The US has the same problem of course, and no one seems to have figured that out (or cares to admit the real problem). The real problem is free services, not the lack of a wall.

Tipping Point?

What about those three questions I posed at the beginning? Are any of them economic tipping points?

Is immigration a social tipping point in Europe? The yuan devaluation? Oil price plunge? Stock market plunge?

Think carefully.

Here is the answer: All four points are symptoms of bigger problems. They are not tipping points in and of themselves. Rather they are signs of underlying economic weakness, that the economy has already tipped but has been propped up to no lasting avail.

When times are good, neo-Nazis don't thrive; Growth does not flounder; Few want to build walls across entire 2,000 mile borders.

Wealth Effect of Bubbles

The "wealth effect" of stock market bubbles can only go so far (assuming of course the overall effect is positive in the first place, and that I question).

Regardless, if the economy has tipped (and I think it has), the Fed prop-job has been so relentless, for so long, this may be the end of the line for a long time to come.

Mike "Mish" Shedlock

Another Wild Ride; Stocks Collapse Into Close; Dip Buyers Hammered; Overhead Supply

When I went to bed last night (actually something like 3:30 AM this morning), Dow Futures were up something like 366 points, S&P futures were up about 50 points or so, and Nasdaq futures were up on the order of 100 points.

Given only 6 stocks on the S&P rose yesterday, one might reasonably have expected a rebound for at least a day. Let's take a look at what actually happened in the cash markets today.

S&P 500 10-Minute Chart



Dow 10-Minute Chart



Nasdaq 100 10-Minute Chart



Russell 2000 10-Minute Chart



Overhead Supply

Dip buyers had another rough go of it today.

That stocks could not muster even a one day rally in spite of extremely oversold conditions could be an ominous sign.

Despite significant gaps up, with further momentum until noon, the indices all closed in the red. This indicates a huge amount of overhead supply.

Mike "Mish" Shedlock

Regional Manufacturing Expectations From Mars

Last month, economists were excited when the Richmond Fed Manufacturing index unexpectedly rose from 6 to 13. The excitement lasted one month.

A new Richmond Fed report for August came out this morning. The forecast range of economic activity for August was 8 to 15, with the Consensus Estimate at 10. The actual result was a goose egg.

Early indications on August factory conditions are mixed with Richmond the latest, coming in at a disappointing zero. Orders are flat this month at only 1 vs 17 and 10 in the prior two reports. And backlogs are in deep contraction at minus 15. Shipments are also negative at minus 4 and capacity utilization is at minus 5. Hiring is flat and price data are mute. This report follows last week's big fall in the Empire State report and respectable readings in the Philly Fed and manufacturing PMI reports. All together, they point to a bumpy month for the still struggling factory sector.

Current Activity vs. Expectations

Diving into the Richmond Fed Manufacturing Report we see the same perpetual optimism that never seems to arrive.



Note the current conditions vs. expectations six months from now. Also note the level of inventories vs. current conditions.

For grins I downloaded historical data of future expectations. Let's take a look.

Future Expectations

Date	Shipments	Volume of New Orders	Backlog of Orders	Capacity Utilization	Vendor Lead Time	Number of Employees	Average Workweek
Jan-15	35	36	19	28	5	17	14
Feb-15	41	34	16	33	7	18	16
Mar-15	46	44	19	31	7	24	13
Apr-15	44	37	24	31	9	21	18
May-15	42	41	21	32	9	25	17
Jun-15	39	35	13	31	1	19	14
Jul-15	34	34	17	22	7	22	3
Aug-15	28	29	16	27	4	13	7

Projections From Mars vs. Actual US Activity

Date	Shipments	Volume of New Orders	Backlog of Orders	Capacity Utilization	Vendor Lead Time	Number of Employees	Average Workweek
Aug 2015 Actual	-5	0	-14	-4	6	5	8
August 2015 Projection (From February)	41	34	16	33	7	18	16
September 2015 Projection (From March)	46	44	19	31	7	24	13

I believe it's safe to say September will look nothing like the projections made six months ago in March.

These look ahead forecasts are so useless they may as well be from Mars. Yet, economists perpetually point to them as if they offer some sort of insight as to what will happen.

Mike "Mish" Shedlock

New Home Sales Rise From July Downdraft; Surprise Softness in Home Prices

A pair of housing reports were out today, new home sales, and the Case-Shiller index of home prices. Let's start with the latter.

Surprise Softness in Home Prices

The Bloomberg Consensus Estimate for the Case-Shiller home price index was +0.1%, but month-over-month prices actually declined.

Inventories may be low and sales rates firm, but both Case-Shiller and FHFA are pointing to a surprising flat spot for home-price appreciation. Case-Shiller's 20-city adjusted index fell 0.1 percent in June vs Econoday expectations for a 0.1 percent rise. Year-on-year, 20-city prices, whether adjusted or unadjusted, are unchanged at plus 5.0 percent. This rate has been inching higher but looks like it may be ready to fall back unless prices pick up.

Eleven of 20 cities show declines in the month with Chicago showing the steepest at minus 1.7 percent. The biggest gainer in the month is Portland, Oregon, up 0.5 percent to extend a long run of solid gains. Year-on-year, Chicago is the weakest at plus 1.3 percent with Denver at the top at plus 10.2 percent followed by San Francisco at 9.5 percent.

Softness in home prices is a surprise and suggests that sellers are offering price concessions. Flexibility in price is a positive right now for sales but tightness in available homes for sales, along with strong demand tied to health in the labor market, point to firming prices ahead.

New Home Sales Rise From July Downdraft

New home sales rose in July, rebounding from a dismal downdraft in July, but far less than the Bloomberg Consensus Estimate of 516,000 annualized.

New home sales rose solidly in July from a downdraft in June, up 5.4 percent to a 507,000 annual pace. Year-on-year, sales have surged, up 26 percent. The strength in sales has thinned an already tight market where supply is at 5.2 months, down from 5.3 months in June and compared with 6.1 months a year ago.

Regional data show a surge for the Northeast where, however, readings are skewed by very low sales rates. Still, the Northeast is out front with a year-on-year gain of 39 percent followed by the West at 30 percent and the South, which is much bigger than all the other regions combined, at a very strong 29 percent. The Midwest is lagging at no change.

Price data are of special interest given signs of weakness in this morning's FHFA and Case-Shiller reports. And here the story is much the same. Though the median price did rise 3.0 percent in the month to $285,900, the year-on-year gain, however, is only 2.0 percent which is a tiny fraction of the sales gain.

Though prices may not be soaring, supply is low and rates are low which should continue to encourage builders to enter the market. The housing sector may not be soaring, but it is a center of strength for the economy.

New Home Sales



click on chart for sharper image

Mixed Bag

The above chart puts a needed perspective on new home sales. Year over-year sales growth seems impressive, but actual sales in number of units don't. And home prices seem to have hit a wall.

Bloomberg says "supply is low and rates are low which should continue to encourage builders to enter the market."

That sounds much like "If you build it, people will buy" speculation. Perhaps they will. But at what price? Who is left that wants a house, needs a house, and can afford a house?

Stalling home prices likely provides the answer.

Housing will be a net contributor to GDP, just nothing like the mid-2000s.

Mike "Mish" Shedlock