6.11.15

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Capital Flight from Italy High and Rising

Posted: 06 Nov 2015 10:26 PM PST

In response to Eurozone Target2 Imbalances Creeping Back Up, I received a nice email from Dr. Eric Dor, Director of Economic Studies at IESEG School of Management (Lille and Paris France) regarding the imbalances in Italy.

Eric Dor Writes ...
Hello Mish

Since August 2014 the target2 liabilities of the bank of Italia to the Eurosystem are again on an upward trend. They have increased by € 105.3 billion since July 2014.



This increase contrasts with the downward trend that had been observed from September 2012 to July 2014 following the announcement of the OMT by ECB that had discouraged speculation and considerably dampened the capital flight out of the periphery of the euro area.



Italy has a relatively stable current account surplus, increasing Tarhet2 liabilities reflect a surge of financial outflows in the balance of payments.

It is therefore useful to examine the balance of payments of Italy to find out the exact cause of the recent surge of the Target2 liabilities of the Bank of Italia. Data of the balance of Payments have been published until August 2015. Over the 12 months from September 2014 to August 2015, the target2 liabilities of the Bank of Italia have been consistently increasing. It is therefore useful to compute the cumulated flows of the balance of payments of the country over this period.

Over this 12 months period domestic investors have bought foreign securities for an amount of €149 billion! This huge acquisition of portfolio investment foreign assets that was such a large financial outflow that it exceeded the net inflows of the current account surplus, the capital account surplus, and many other items of the financial account.

Huge financial outflows to buy foreign securities are thus the explanation of the recent increase of the liabilities of the bank of Italia to the Eurosystem. This observation can be confirmed by examining the flows of the balance of payments over the 12 months period from August 2013 to July 2014, during which the target2 liabilities of the bank of Italia consistently decreased.

When domestic investors sell government bonds, the proceeds increase their deposits on their bank accounts. In counterpart the reserves of domestic banks increase on the liability side of the balance sheet of the local central bank.

It is thus clear that Italian investors, having sold Italian bonds to the Bank of Italia, partially used the money they received to purchase foreign bonds. But it only accounts for part of the huge purchases of foreign securities by Italian investors since August 2015. The increase of net purchases of foreign securities by domestic investors started well before the beginning of the implementation of the QE policy.



It is interesting to observe that the Eurosystem has recently purchased government bonds issued by Italy to other domestic investors than the banks of the country, in the context of the QE. Indeed Italian banks have increased their holdings of national government bonds during the period starting from August 2014 Banks keep their government bonds because they are useful collateral to obtain funding from the Eurosystem if needed, and because of regulation incentives.
Capital Flight

The above synopsis was a condensed version of a detailed and much appreciated email from Eric Dor.

The issue is an important one. Target2 imbalances represent capital flight.

Despite enormous QE measures by ECB president Mario Draghi, capital flight from the periphery to Germany is high and rising.

For more details and discussion, please see:


Mike "Mish" Shedlock

Will Ben Carson's Admitted Lie Regarding a West Point Scholarship Mark the End of His Presidential Campaign?

Posted: 06 Nov 2015 01:29 PM PST

Telling self-congratulatory lies is never a bright idea.

Telling easily verifiable self-congratulatory lies and bragging about them in a book is downright stupid. But that's precisely what presidential candidate Ben Carson did.

Please consider US Presidential Hopeful Ben Carson Admits to West Point Offer Lie.
In his autobiography, Gifted Hands, Mr Carson tells an inspirational rags-to-riches story about his rise from a Detroit ghetto to becoming the youngest head of paediatric neurosurgery at Johns Hopkins Hospital. In the book, he claims to have been offered a full scholarship to West Point, but wrote that he turned down the offer to pursue his dream of becoming a doctor. On Friday, his campaign admitted that he had not even applied to the college.

Donald Trump, the real estate mogul who is neck and neck with Mr Carson at the top of the polls, quickly seized on the scandal which was first reported by Politico, retweeting several critical tweets including one that read: "WOW, one of many lies by Ben Carson! Big story."

According to an average of recent polls compiled by Real Clear Politics, Mr Carson is supported by 24.8 per cent of Republicans, just fractionally more than Mr Trump who has 24.6 per cent. While Mr Carson has risen without much fanfare, he is now starting to attract a lot more scrutiny of his record.

In the book, Mr Carson, an African-American who joined the Reserve Officers Training Corps in secondary school, describes having dinner with General William Westmoreland, the commander of US forces in Vietnam, and later being "offered a full scholarship to West Point".

"I didn't refuse the scholarship outright, but I let them know that a military career wasn't where I saw myself going," he writes.

Since surging in the polls this summer, Mr Carson has come under scrutiny for eyebrow-raising remarks, such as suggesting that a Muslim should not be US president, and describing Obamacare, the administration's signature healthcare policy, as "the worst thing to happen in this nation since slavery".

In other comments, Mr Carson has alleged that the theory of evolution has been "encouraged" by the devil and that homosexuality is a choice.

"My own personal theory is that Joseph built the pyramids to store grain," Mr Carson says in the taped remarks. "Now all the archeologists think that they were made for the pharaohs' graves. But, you know, it would have to be something awfully big if you stop and think about it." This week, Mr Carson said he still subscribed to this theory.

In his book, Mr Carson also describes how he was once consumed with "pathological anger" that resulted in him trying to hit his mother and stab a close friend. "That day when I tried to stab that young man was (my) last outburst of temper . . . I prayed to God for insight for deliverance," he wrote.

Mr Trump tweeted on Friday: "With Ben Carson wanting to hit his mother on head with a hammer, stab a friend and Pyramids built for grain storage — don't people get it?"
Ben Carson is clearly a nut case. Hopefully this marks the end of his presidential campaign.

Mike "Mish" shedlock

US Dollar Surges, December Rate Hike Odds Soar Following Strong Jobs Report

Posted: 06 Nov 2015 09:17 AM PST

Following today's jobs report the odds of a December rate hike approached 70% and the US dollar index surged.

December Rate Hike Odds



According to CME Fedwatch Stats, and based on futures quotes, the odds of a December hike surged to 69.8% today, from 58.1% yesterday, and a mere 4.6% a month ago following last month's dismal jobs report.

US Dollar Index 15-Minute Chart



US Dollar Index Monthly Chart



The last monthly close above 100 was in 2003.

The reason for the rate hike and dollar surge can be found in today's jobs report. For details, please see Strong Payroll Bounce +271,000; December Rate Hike Likely.

Mike "Mish" Shedlock

Strong Payroll Bounce +271,000; December Rate Hike Likely

Posted: 06 Nov 2015 07:38 AM PST

Initial Reaction

Following last month's downside shock, comes this month's big surprise to the upside. The Bloomberg Consensus estimate was 190,000 jobs and the headline total was 271,000. The unemployment rate declined to 5.0%, the lowest since April 2008. A rate hike in December is likely.

BLS Jobs Statistics at a Glance

  • Nonfarm Payroll: +271,000 - Establishment Survey
  • Employment: +320,000 - Household Survey
  • Unemployment: -7,000 - Household Survey
  • Involuntary Part-Time Work: -235,000 - Household Survey
  • Voluntary Part-Time Work: +198,000 - Household Survey
  • Baseline Unemployment Rate: -0.1 at 5.0% - Household Survey
  • U-6 unemployment: -0.2 to 9.8% - Household Survey
  • Civilian Non-institutional Population: +216,000
  • Civilian Labor Force: +313,000 - Household Survey
  • Not in Labor Force: -97,000 - Household Survey
  • Participation Rate: Unchanged at 62.4 - Household Survey (a 40-year low)

October 2015 Employment Report

Please consider the Bureau of Labor Statistics (BLS) Current Employment Report.

Total nonfarm payroll employment increased by 271,000 in October, and the unemployment rate was essentially unchanged at 5.0 percent. Job gains occurred in professional and business services, health care, retail trade, food services and drinking places, and construction.

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment



Click on Any Chart in this Report to See a Sharper Image

Nonfarm Employment Change from Previous Month by Job Type



Hours and Wages

Average weekly hours of all private employees was unchanged at 34.5 hours. Average weekly hours of all private service-providing employees was unchanged at 33.4 hours.

Average hourly earnings of private workers rose $0.09 to $21.18. Average hourly earnings of private service-providing employees rose $0.08 to $20.98.

For discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January 2014, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will add the charts back.

Table 15 BLS Alternate Measures of Unemployment



click on chart for sharper image

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 5.0%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 9.8%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job.


Mike "Mish" Shedlock

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