24.11.15

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Flight Paths Over Turkey Analyzed; Obama Defends Turkey; Choose Your Friends and Enemies Wisely; Merkel Madness

Posted: 24 Nov 2015 02:39 PM PST

In the wake of Turkey shooting down a Russian aircraft over Syria, the immediate impact will be to make negotiations on the removal of Assad all the more difficult. First let's analyze the flight path of the downed aircraft courtesy of Stratfor.

Map of Flight Path of Downed Russian Aircraft



Deadly Few Seconds

The short distances involved and the speed at which fighter jets fly does support the view made by a US official: "They were in Turkish airspace only 2 to 3 seconds".

Obama Defends Turkey

Voice of America reports Turkey Has Right to Defend Its Territory, Airspace.
President Barack Obama said the downing of a Russian fighter jet along the Syrian-Turkish border Tuesday is evidence of an "ongoing problem" with Russia's military operations in Syria, and that Turkey had a "right to defend its territory and its airspace."

Speaking during a joint news conference with French President Francois Hollande, Obama said information about Turkey's downing of the Russian Su-24 was still being collected, but noted that Russian military aircraft are targeting moderate Syrian opposition groups very close to Turkey's borders.

A U.S. military spokesman confirmed that Turkish pilots issued repeated warnings to the Russian plane and didn't get a response. However, the spokesman said it was not immediately clear on which side of the border the Russian jet was flying. Moscow insists the jet never left Syrian airspace.
Moderate Al Qaeda Yet Again

There's Obama once again with more bullsheet about "moderate" Al Qaeda rebels. Nonetheless, it does appear Russia violated Turkey's airspace.

Everyone is supposed to be on the same side here, but it's all a lie. Turkey buys oil from ISIS and that provides the funds for ISIS to buy weapons and maintain fighting.

Both Turkey and the US would rather see Syrian president Assad fall than take out ISIS.

I side with Putin who stated "This event goes beyond the framework of the regular fight against terrorism. today's loss is connected to a stab in the back by accomplices of the terrorists."

Putin noted "a large amount of oil and oil products" entering Turkey from ISIS-held territory in Syria, provides the terrorist group with a "large money supply."

Turkey the "Accomplices of the Terrorists"

The Guardian analyzes Putin's viewpoint in Is Vladimir Putin right to label Turkey 'accomplices of terrorists'?
The relationship hinted at by Russian leader after warplane was shot down is a complex one, and includes links between senior Isis figures and Turkish officials.

Turkish borders have been the primary thoroughfare for fighters of all kinds to enter Syria. Its military bases have been used to distribute weapons and to train rebel fighters. And its frontier towns and villages have taken in almost one million refugees.

Turkey's international airports have also been busy. Many, if not most, of the estimated 15,000-20,000 foreign fighters to have joined Islamic State (Isis) have first flown into Istanbul or Adana, or arrived by ferry along its Mediterranean coast.

The influx has offered fertile ground to allies of Assad who, well before a Turkish jet shot down a Russian fighter on Tuesday, had enabled, or even supported Isis. Vladimir Putin's reference to Turkey as "accomplices of terrorists" is likely to resonate even among some of Ankara's backers.

Turkish businessmen struck lucrative deals with Isis oil smugglers, adding at least $10m (£6.6m) per week to the terror group's coffers, and replacing the Syrian regime as its main client. Over the past two years several senior Isis members have told the Guardian that Turkey preferred to stay out of their way and rarely tackled them directly.

Concerns continued to grow in intelligence circles that the links eclipsed the mantra that "my enemy's enemy is my friend" and could no longer be explained away as an alliance of convenience. Those fears grew in May this year after a US special forces raid in eastern Syria, which killed the Isis official responsible for the oil trade, Abu Sayyaf.

A trawl through Sayyaf's compound uncovered hard drives that detailed connections between senior Isis figures and some Turkish officials. Missives were sent to Washington and London warning that the discovery had "urgent policy implications".

"Turkey thought they could control it all," said one senior western official. "But it got out of their hands. It has come back to bite them in the heart of Ankara [a double suicide bombing in October that was claimed by Isis] and it will haunt them for a long time."
Merkel Madness

Turkey is guilty as charged. And yet, Angela Merkel wants to strike a deal with Turkey that would allow 75 million Turkish access to the Schengen border-free area from as soon as 2016.

For details, please see Bargaining With the Devil: Germany Bribes Turkey With Aid Package, EU Sidelines Highly Critical Report on Turkey's Free Speech Record.

Simply put, Angela Merkel is crazy.

What to Expect Next

Stratfor discusses the implications of this madness in What to Expect After the Downing of a Russian Fighter Jet.
Turkey's downing of a Russian fighter jet in Syria has raised the stakes in an already crowded and complicated conflict. The Nov. 24 incident will also likely undermine efforts to find a solution to the country's protracted civil war.

The destruction of a Russian search-and-rescue helicopter sent to find the downed jet's crew will only aggravate the situation more. Rebels brought down the helicopter with small arms fire, killing one Russian marine, and then destroyed it with a TOW anti-tank guided missile — a weapon built and supplied by the United States. Even though the rest of the crew survived the attack, Russia will not be pleased that another outside party's weapons are being used against it in the fight.

Peace Moves Further Out of Reach

The incident with the fighter jet will no doubt raise the risk of clashes occurring in the airspace over Syria. The United States had made considerable progress in deconflicting Syrian airspace by signing a memorandum of understanding with Russia that laid out procedures to prevent problems from arising as each side carried out airstrikes. But with the Russians angry at the Turks, and the Turks operating in close concert with the Americans — especially in the planned anti-Islamic State operation over northern Aleppo — the United States and its coalition partners may find themselves drawn into the spat between Ankara and Moscow.

The dispute will also undermine ongoing attempts to find a solution to the Syrian civil war, especially since Turkey is an important foreign patron of many of the rebel groups that were expected to have a seat at the negotiating table. With video circulating of Turkmen fighters from these units shooting at the Russian pilots, Moscow probably will no longer accept their participation in the talks. Since some of these groups also belong to the Free Syrian Army and are part of Syria's more moderate opposition, this will make it much more difficult to reach a roster of representatives that all sides can agree on before heading into negotiations. And as long as talks on a power-sharing agreement in Syria remain elusive, the foreign sponsors of the Syrian civil war will be dealing with an increasingly complex battlefield.
Choose Your Friends and Enemies Wisely

Broadly speaking, this mess is precisely what one should expect under the idiotic doctrine "the enemy of my enemy is my friend".

When everyone is everyone else's enemy, everyone becomes everyone else's friend under the practiced doctrine.

Under such a doctrine, we are now friends with Al Qaeda terrorists even though we blew up Iraq on the mistaken premise Saddam Hussein was harboring them.

Al Qaeda is now in our friends group because they seek to overthrow Assad. But ISIS also wants to overthrow Assad.

US response in the region shows the US is more intent on taking out Assad, than taking out ISIS, even though Assad is no threat to anyone except those seeking to overthrow him.

In turn, this proves the US can pick neither its friends nor its enemies wisely! But look on the bright side: It's good for those who seek perpetual war.

For more on the sheer ridiculousness of US policy, please see New Cold War; Circular Absurdity.

Mike "Mish" Shedlock

Richmond Fed Region Negative Again; Inventories Suggest Outright Disaster on Horizon

Posted: 24 Nov 2015 12:05 PM PST

Economists expected manufacturing activity in the Richmond Fed region would bounce into positive territory this month.

The Bloomberg Econoday Consensus Estimate was +1 in a range of 0-4, but the reading of -3 came in below any economist's estimate.
Early indications for the November factory sector are soft right now after Richmond Fed reports a much lower-than-expected minus 3 headline for its manufacturing index. Order data are very negative with new orders at minus 6, down from zero in October, and backlog orders at minus 16 for a 9-point deterioration. Shipments are also in contraction, at minus 2, with the workweek at minus 3. Employment, at zero, shows no monthly change but the declines for backlog orders and the workweek don't point to new demand for workers. Price data are subdued but do show some constructive upward pressure.

This report along with Empire State, as well as yesterday's manufacturing PMI, are pointing to a downbeat month for the factory sector which is being held down by weak foreign demand, as evidenced in the decline for goods exports in this morning's advance release of international trade data.
Ahead of the release, Bloomberg had this to say: "Regional Fed surveys have been showing improvement in November and the same is expected for the Richmond Fed's manufacturing index." 

"Details in this report, as in other manufacturing surveys, did show life in October but there were points of weakness including lack of growth for new orders and extended contraction for backlog orders."

Improvement?

The New York region came in at -10.74 below the lowest Econoday guess of -8.50. The prior (October) release was -11.36, but -10.74 is not an improvement, it's a decline at a lesser rate.

For more details please see Empire State Manufacturing Negative Fourth Month, Work Week Lowest Since Mid-2011.

There was an improvement in the Philly Fed region, to +1.9 (See Philly Fed Slightly Positive After Two Months of Contraction) but I labeled that "noise" given the new orders and shipment components were negative and the workweek collapsed to -16.2

No Signs of Life

Diving into the Richmond Fed Report, we see shipments, backlog of orders, and the average workweek all negative for the third month consecutive. New orders were down two of the last three months, and flat the third.



Check out those inventories!

Manufacturers are not only stockpiling raw materials, they have stockpiled finished goods with declining orders, hoping sales will pick up.

Outright Disaster on Horizon

Looking ahead, growth in inventories vs. declining shipments and new orders does not bode well for employment or the workweek. In fact, inventories suggest an outright disaster is on the horizon.

But hey, the six-month look ahead numbers look great.



Absurd Expectations

Unfortunately, history shows those expectations are ridiculous. I analyzed the New York region look-ahead expectations and in 167 months, nearly 14 years of data, there were only five months (just under 3% of the time) in which current conditions exceeded projections made six months previous!

For details, please see Tracking Manufacturing's Perpetual Overoptimism.

For a followup, also see Persistent Overoptimism Three Ways: Truckers, Fed Economists, Manufacturers.

Mike "Mish" Shedlock

Turkey Shoots Down Russian Plane; Two Seconds; New Cold War; Circular Absurdity

Posted: 24 Nov 2015 10:42 AM PST

Theater of Absurd

The tangled web of friend-foe relationships in the Mideast has reached a new high point of circular absurdity.

  • The US and Turkey are fighting ISIS (allegedly), as is Russia and Iran.
  • Turkey just shot down a Russian plane on the Syrian-Turkey border.
  • Turkey freely buys oil from ISIS which gives ISIS the money needed buy weapons. 
  • The US and France are working with Russia to fight ISIS.
  • Syrian rebels, armed with US Anti-Tank missiles just shot down a Russian helicopter.
  • The US backs alleged "moderate" Al Qaeda rebels seeking to overthrow Syrian president Assad.
  • ISIS also seeks to overthrow Assad.

Turkey Shoots Down Russian Plane

The Financial Times reports Turkey Shoots Down Russian Fighter Jet on Syrian Border.
Vladimir Putin has accused the Turkish government of providing financial and military support to Isis, in a furious response to the downing of a Russian fighter jet near the Syria-Turkey border.

Turkey said it shot down the Russian Sukhoi Su-24 on Tuesday morning after it violated Turkish airspace, escalating tensions between international powers with competing aims in war-torn Syria.

Mr Putin warned that the "tragic incident" will bring "serious consequences" for relations between the two countries, and alleged that Turkey had helped bankroll Isis through oil sales.

Turkey has disputed Moscow's version of events. A government official said the crew was given "repeated warnings", beginning from when the jet came within 15km of the Turkish border.

A special meeting of Nato's North Atlantic Council was called for later on Tuesday at Turkey's request, prompting further anger in Moscow.

"Instead of immediately getting in contact with us, the Turkish side immediately turned to their partners with Nato to discuss this incident, as if it was us who downed a Turkish jet and not vice versa," said Mr Putin.

"Do they want to put Nato at Isis's service?"

Alexei Pushkov, chairman of the foreign affairs committee of Russia's lower house, tweeted that Turkey's economic losses as a result of the deterioration of relations with Moscow would "exceed tenfold the profits of those who have established a profitable oil business with Isis".

Turkish media and local activists said the Russian jet came down in Yamadi on the Turkish-Syrian border. However the Syrian Observatory for Human Rights, a UK-based activist group, put the crash site in the Jabal Turkman area of northern Latakia.

Earlier, several parts of the rural northern Latakia region were being shelled from the air during clashes involving regime forces and loyalist militia on one side and rebels and Islamist divisions on the other.
Where is Latakia?

Latakia is the principal port city of Syria, as well as the capital of the Latakia Governorate. Thus, the Russian plane was over Syria, not Turkey when it was shot down.

Two Seconds

US officials told NBC "They were in Turkish airspace only 2 to 3 seconds, a matter of seconds" before the Turkish F-16s attacked.
A U.S. military spokesperson in Baghdad backed the Turkish claim that they warned the Russian pilots they were in Turkish airspace before shooting down the aircraft.

"I can confirm that, yes," Col. Steve Warren told a briefing but could not say whether the incursion was deliberate.

He added that the U.S. did not observe the shoot down, but heard what transpired because the aircraft were operating on open channels.

A spokesman for the rebels in the area told NBC News that some of its fighters had opened fire on the pilots as they fell to the ground, killing one of them. The body was being held by the rebels, said the commander Jahid Ahmed, who added that he had no information on the second pilot.

Ian Shields, a professor of international relations at Anglia Ruskin University, warned the Turkish downing of the Russian warplane has the potential to spark a new Cold War.
Rebels Down Russian Helicopter with US Supplied Anti-Tank Missile

As part of the circular absurdity, ZeroHedge reports Syrian Rebels Destroy Russian Helicopter With US-Supplied Anti-Tank Missile.

"It would be bad enough if the US were supplying TOWs to anyone in Syria. But this is Washington and Riyadh handing anti-tank missiles to forces that are firing them at the Iranians who are operating under cover of Russian airstrikes [to fight ISIS]. Just to drive that home: the US is waging war against Iran and Russia with but one degree of separation," commented ZeroHedge.

Perpetual War

Does anyone recall the US took out Saddam Hussein on the false premise, Iraq was harboring Al Qaeda?

The statement Hussein was harboring Al Qaeda was not even true. But after the US took out Hussein and disbanded the Iraqi military, Al Qaeda and ISIS filled the military vacuum, fighting over Iraqi and Syrian territory.

Al Qaeda terrorists became our friends, and ISIS a much in demand enemy. In the case for perpetual war, we need friends to sell weapons to, and enemies to fight.

New Cold War

Ian Shields, a professor of international relations at Anglia Ruskin University, warned the Turkish downing of the Russian warplane has the potential to spark a new Cold War.

I suggest Cold Wars are so passé. No one wants one of those.

Not enough people were killed, not enough weapons were sold, and not enough new enemies were made in the cold war to keep the war machine well oiled.

Perpetual war is the solution, the bigger the better.

Citizens United for WWIII

Citizens United for WWIII, a think-tank led by US Senator John McCain and various presidential candidates of both parties, demands no less than a global hot war, preferably nuclear, including Russia and China.

In case you are wondering, I made up the name Citizens United for WWIII. Unfortunately, the idea is correct, even if the think-tank name does not exist.

Mike "Mish" Shedlock

Swiss Bank Hits Customers With Negative Interest Rates; Crazy? What About Velocity?

Posted: 24 Nov 2015 02:25 AM PST

Alternative Bank Schweiz (ABS), a small bank in Switzerland broke the negative interest rate on deposits barrier, CHARGING customers to take their money. (emphasis in caps from the article).
The Alternative Bank Schweiz wrote to customers telling them they would face a -0.125 per cent rate on their money from 2016 – and a -0.75 per cent rate on deposits above 100,000 Swiss francs.

The move echoes the Swiss central bank's -0.75 per cent negative deposit rate imposed on financial institutions placing money with it.

Sweden's central bank also introduced negative rates, which currently stand at -0.35 per cent, while the European Central Bank introduced them in part with its -0.2 per cent overnight deposit rate.

The Bank of England's chief economist Andy Haldane delivered a speech in September discussing how Britain could have to consider negative interest rates as an extreme measure in a future crisis.

The big Swiss banks passed on some of the pain from the Swiss central bank's -0.75 per cent rate to their institutional clients, but Alternative Bank Schweiz is believed to be the first retail bank to hit savers with a charge.

The bank describes itself as an ethical organisation focused on backing firms investing in social and environmental projects.

With its balance sheet totalling nearly 1.6 billion Swiss francs last year, most of its activities are concentrated in cooperative housing projects, providing affordable housing and sustainable energy solutions, as well as organic farming.
Less Than Zero

Bloomberg offers a "quick take" on Less Than Zero.
Imagine a bank that pays negative interest. Depositors are actually charged to keep their money in an account. Crazy as it sounds, several of Europe's central banks have cut key interest rates below zero and kept them there for more than a year. For some, it's a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else. Either way, it's an unorthodox choice that has distorted financial markets and triggered warnings that the strategy could backfire. If negative interest rates work, however, they may mark the start of a new era for the world's central banks.

The Situation

With the fallout limited so far, policy makers are more willing to accept sub-zero rates. Having once said that the European Central Bank had hit the "lower bound," President Mario Draghi signaled in October and November that the deposit rate could be cut even further into negative territory. The ECB became the first major central bank to venture below zero in June 2014, and it now charges banks 0.2 percent to hold their cash overnight. Sweden also has negative rates, Denmark used them to protect its currency's peg to the euro and Switzerland moved its deposit rate below zero for the first time since the 1970s.

That means investors holding to maturity won't get all their money back. Banks have been reluctant to pass on negative rates for fear of losing customers, though Julius Baer began to charge large depositors.



The Background

Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. Rates below zero have never been used before in an economy as large as the euro area. While it's still too early to tell if they will work, Draghi pledged during the height of Europe's debt crisis in 2012 to do "whatever it takes" to save the area's common currency, signaling the ECB's willingness to be innovative. It chose to experiment with negative rates before turning to a bond-buying program like those used in the U.S. and Japan.

The Argument

In theory, interest rates below zero should reduce borrowing costs for companies and households, driving demand for loans. In practice, there's a risk that the policy might do more harm than good. If banks make more customers pay to hold their money, cash may go under the mattress instead. Janet Yellen, the U.S. Federal Reserve chair, said at her confirmation hearing in November 2013 that even a deposit rate that's positive but close to zero could disrupt the money markets that help fund financial institutions. Two years later, she said that a change in economic circumstances could put negative rates "on the table" in the U.S., and Bank of England Governor Mark Carney said he could now cut the benchmark rate below the current 0.5 percent if necessary.
Economic Distortions

That's actually a balanced synopsis by Bloomberg as far as it went.

But unlike Europe, the US has large money market funds that would be destroyed by negative rates. Banks may be able to hold out for a while by raising other fees, but money market funds would immediately be in trouble.

Customers would withdraw money, put it into banks charging the lowest fees, stuff cash under the mattress, or open safe deposit boxes.

If rates get negative enough, there would be a run on the banks, but a run on money market funds would likely happen first.

Someone Has to Hold the Cash

The central bank thesis is to get people to spend the money. But note the absurdity. Someone must hold every dollar printed at all times.

If you buy a candy bar and eat it, or a coat and wear it, the store that sold those items to you has the money. Mathematically, someone at all times must hold all the money.

What About Velocity?

Reader "Vince" has been bugging me to write about the velocity of money. Velocity purportedly measures the speed at which money circulates in the economy.

I have commented before on the absurdity of the velocity thesis, but this seems like a good time for a rehash.

Velocity = Value of transactions / supply of money 
The value of transactions = price * transactions = GDP.

Thus, velocity is nothing more than GDP divided by money supply. Here is the equation, two ways.

V = PT / M
V = GDP / M

Right now, velocity is falling simply because money supply is increasing faster than GDP.

But what constitutes money supply?

M1, M2, MZM, base money, and true money supply all yield different measures of velocity.

M2 Velocity



M1 Velocity



MZM Velocity



TMS Velocity



So is velocity 1.7, 5.9, 1.5, 1.3 or something else?

If we rearrange the equation, GDP / Velocity = M.

Supposedly we know GDP but what do we plug into the equation for velocity to derive M? Can one independently measure velocity?

The answer to that question is a resounding no.

Since GDP = PT, GDP can rise if prices rise and GDP can go up if transactions go up. GDP can rise if transactions decline, provided prices rise enough. And GDP can rise if prices decline, provided transactions rise enough.

  • Velocity can rise with rising prices
  • Velocity can fall with rising prices
  • Velocity can rise with increasing transactions
  • Velocity can fall with increasing transactions

Conclusions

  1. Velocity has no life of its own.
  2. Velocity does not cause anything to happen.
  3. Velocity cannot be measured by any independent means.

Curiously, economists are concerned about "falling velocity" as if it means something other than the central banks are printing money that sits as excess reserves.

Inquiring minds may also be interested in Frank Shostak's 2002 article Is Velocity Like Magic? Much of my understanding of velocity comes from that article.

Shostak used the phrase "Velocity has no life of its own." On this Murray Rothbard wrote "It is absurd to dignify any quantity with a place in an equation unless it can be defined independently of the other terms in the equation."

Mario Draghi on Velocity

On November 20, Draghi Pledged to 'Do What We Must' to Boost Sluggish Inflation.
Mario Draghi has dropped his clearest hint yet that the European Central Bank is about to inject more monetary stimulus into the eurozone economy, brushing aside staunch opposition from Germany's powerful Bundesbank.

The ECB president said yesterday that ECB policymakers would "do what we must to raise inflation as quickly as possible". The remark echoed a promise Mr Draghi made during the region's debt crisis in 2012 to do "whatever it takes" to save the single currency.

The ECB is widely expected to unleash a souped-up version of its €1.1tn quantitative easing package and consider cutting one of its benchmark rates deeper into negative territory.

"If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate," Mr Draghi said. "In particular, we consider the APP [asset-purchase programme] to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary policy stance."

He added: "The level of the deposit facility rate can also empower the transmission of [QE], not least by increasing the velocity of circulation of bank reserves."
Question for Draghi

I laughed out loud at that last line. If QE increases velocity, then why is velocity declining in the US, in Europe, and in Japan?

By the way, bank reserves do not circulate. Reserves are deposits that are not lent out. One can even argue that money does not really circulate per se, as it has to be held at all times by someone.

Negative Interest Rates Crazy?

Let's return to this statement by Bloomberg: "Crazy as it sounds, several of Europe's central banks have cut key interest rates below zero and kept them there for more than a year".

Yes, negative interest rates are crazy.



Link if video does not play: Crazy - Patsy Cline.

Desperation and Hubris

  • Negative interest rates are a sign of central bank desperation. 
  • They are a sign central banks are clueless about how the economy really works. 
  • And they are a sign of extreme hubris coupled with extreme stubbornness as Japan has proven over the course of three decades that unconventional measures do not work as economists expect.

It's crazy to keep trying things that cannot possibly work, over and over again.

Mike "Mish" Shedlock

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