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.
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.
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'."
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
My friend Don Campbell 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 have 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.
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."
"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."
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.
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.
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 believe Chinese growth rates. Not only are the numbers straight up fabrications, many of the projects have no economic benefit.
Moreover, Chinese growth estimates fail to take into account damaging pollution and cleanup costs that ought to subtract from GDP.
GDP itself is a useless statistic actually. The reason is government spending, no matter how counterproductive, adds to GDP.
It sounds convoluted, but if government paid someone to poison wells, that poisoning would, by definition, add to GDP.
Many connected politicians got extremely wealthy off SOEs. But most of the SOE projects had little if any economic benefit, and some undoubtedly had negative benefit because environmental damage was not properly accounted for.
In short, Chinese GDP does not properly reflect economically nonviable projects nor the outright poisoning of the Chinese population to hit preposterous targets.
Rather than admit past GDP was grossly overstated, revisions will likely be hidden in future GDP reports for years or decades to come.
Kaminska Concludes ...
"In short, don't worry so much about the stock market, worry more about the potential collapse of other major Chinese asset classes like property, ghost towns and factories. That's how the credit links back to the real economy."
Those were her words, not Keen's. I pinged Pater Tenebrarum at the Acting Man blog the above article and he replied ...
"Something has clearly changed now. Right now, it seems it actually does matter. China is seen as an economically important (for the world) since about 2005 or so, but I have a feeling that something more profound may actually be afoot now - due to the follow-on domino effects. I would estimate that global malinvestment in commodity projects along amounts to something like $2 to $3 trillion cumulatively, perhaps more. This one sector alone may leave behind $1 trillion in unpayable debt."
OK. What's Changed?
China's Capital Accounts
Historically, China's stock market has moved independently of the country's economy because of China's closed capital account.
What if the Shanghai market has started to reflect the real fundamentals thanks to liberalization of China's capital account?
One Way Streets
Typically, money flowed into China in a one way street. This year, China took steps to open up the flows.
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
Yuan devaluation
Stock market prop jobs by Chinese regulators
Emerging market currency crashes
Global equity bubbles
Commodity price crashes
Junk bond bubbles
Slower global growth
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.
Krugman: "There's a reasonable argument to be made that part of what ails the world economy right now is that governments aren't deep enough in debt."
Debt Bubbles
Debt and bubbles go hand in hand.
No matter how big the bubble, no matter how much the resultant income inequality, no matter how ridiculous or nonviable the project, no matter how little the economic benefit, no matter how much government overpays (thanks to inane union work rules and prevailing wage laws), you can always count on Krugman to want more and more and more debt, even though Japan is living proof such policies do not work.
In the US, the Fed used a housing bubble to bailout a dotcom bubble. And now we have QE-driven stock market and junk bond bubbles to smooth over the housing bubble. Corporations have gone into debt to buy back their own shares at absurd valuations.
Debt has been used to cure debt problems and over again. Apparently the cure is the same as the disease.
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?
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
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%.
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.
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.
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%.
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.
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.
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.
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.
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."
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.
"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.
