Mish's Global Economic Trend Analysis

Is the Bull Market Super-Cycle Nearly Over? Bill Gross Thinks So, But Here's a Common Sense Approach
Robots About to Take Away 18 Million German Jobs, 59 Percent of Germany's Work Force?
Factory Orders Positive First Time in 8 Months, Remain Weak
Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering

Is the Bull Market Super-Cycle Nearly Over? Bill Gross Thinks So, But Here's a Common Sense Approach

Posted: 04 May 2015 07:56 PM PDT

Using a Prechteresque term, Bill Gross Says the "Bull Market Super-Cycle is Nearing End".

The attempt by global central banks to cure a debt crisis with more debt doesn't have much further to run, which will end a rally that's lasted three and a half decades, the 71-year-old manager wrote in an investment outlook for Janus Capital Group Inc. Investors should stop focusing on price appreciation and instead look to "mildly levered income," such as his recommendation to short German government debt, he said.

"Credit-based oxygen is running out," Gross wrote in the outlook, titled "A Sense of an Ending," in which he compared the final stages of the market cycle with his own mortality. "I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang."

Gross, the manager of the $1.5 billion Janus Global Unconstrained Bond Fund, acknowledged that his calls for the end of the bond rally in both February and April of 2013 were too early. This time around, he noted that he's in prominent company, as investors including Stanley Druckenmiller, George Soros, Ray Dalio and Jeremy Grantham have cautioned that financial markets may be overpriced or bubbly, potentially setting the stage for lower returns.

Gross, who referenced Julian Barnes' novel "The Sense of an Ending" in his outlook, said he continues to see a subdued interest rate environment for a prolonged span. He advised investors last month to leverage returns in an environment of persistently low interest rates and inflated asset prices.

Elliot Wave

Curiously, the article fails to mention the Elliot Wave Grand Supercycle Principle originally formulated by Ralph Nelson Elliott but whose main proponent is Robert Prechter.

Modern application of Elliott Wave Theory posits that a Grand Supercycle wave five is completing in the 21st century and should be followed by a corrective price pattern of decline that will represent the largest economic recession since the 1700s.

In technical analysis, Grand Supercycles and Supercycles are often compared to the Kondratiev wave, which is a cycle of 50 to 60 years, but these are in detail distinct concepts.

Some Elliott Wave analysts believe that a Grand Super Cycle bear market in US and European stocks started in 1987 When that was proven incorrect it was later revised to be 2000 and then 2006. Others view the 2000-2002 bear market in US stocks and 2000-2003 bear market in European stocks as being of lesser degree, such as Primary, Cycle, or Supercycle.

Grand Supercycle?

So is this the "grand bull market supercycle". I don't know. Nor does Gross or anyone else.

I am a general believer in Kondratiev waves, but they get longer over time because people live longer. Such theories aside, it's perfectly obvious that stocks are horrendously overpriced.

Common Sense

What matters now is common sense. And common sense is the same now as it was for technology stocks in 2000, housing in 2006, and stocks in 1929. From a practical standpoint that's all you really need to know. It matters not if this is a K-Wave or a supercycle.

The supercycle issue is theoretically interesting, but meaningless in practical terms.

By the way, these cycles and supercycles differ from country to country.

Take a look at Japanese equities. It should be crystal clear that Japan is not on the same path as the rest of the world. Australia, Russia, and Brazil may not be either.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Robots About to Take Away 18 Million German Jobs, 59 Percent of Germany's Work Force?

Posted: 04 May 2015 12:47 PM PDT

I have seen many grim predictions regarding robots taking away human jobs, but one of the most dire predictions comes from a study commissioned by ING-Diba.

The study claims that 59 percent of Germany's work force could be replaced by machines and software in the coming decades.

The Local asks Robots About to Take Away 18 Million Jobs?

The results of the [ING-Diba] study paint an almost doomsday-esque scenario for Germany.

Almost two thirds of its workforce will be unemployed. Of the 30.9 million people currently in full or part-time employment in Germany, 18 million will be made redundant by improved technology, the report claims.

Although the study looked into the effect that advancing technology will have on the work place in several European countries including Finland and the Netherlands, it was Germany that came out the worst.

This, argues the report, is the price Germany will pay for its strong industrial sector. Factory workers and the administrative army behind global giants such as Volkswagen and BMW will soon become superfluous as advanced algorithms and sophisticated machinery are developed which can do their jobs faster and more efficiently.

Administrative workers such as secretaries are set to have their positions almost entirely taken over by computer algorithms. Eighty-six percent of them could lose their jobs to advancing technology, the study suggests.

The news is almost as bad for mechanics, machine drivers and mechanical technicians, over two thirds of whom are set to have their jobs taken are from them.

For the educated classes the story is quite different.

Doctors are particularly irreplaceable. In the academic classes, of the almost 4 million currently in employment, less than half a million need fear a certified robot taking over their practice.

The story is similar for business leaders. Of the 1.4 million people who occupy this elite sector, only 160,000 would be threatened with redundancy.

"The takeover has already begun," Carsten Brzeski, head of economics at ING-Diba, who co-authored the report, told Die Welt.

"There are already some industrial sectors which have been completely taken over by robots."

In Asia for example, progress on robot technologies is particularly advanced.

Toshiba have already developed human-looking secretarial robots which went to work in April in Tokyo, welcoming customers at an information desk at the Nihonbashi Mitsukoshi main store.

Machine becomes master

It is not all bad news, though. The take over of machines will create new jobs, the report authors claim, as humans will be needed to maintain the machines and to make sure that they work in an optimal environment.

"Technological progression will create room for the development of new tasks and activities for humans," Inga Burk, co-author of the report, told Die Welt.

Not All Bad News

18 million jobs vanish but it's not all bad news because "machines will create new jobs". OK, how many new jobs will be created?

The answer cannot be many because the study claims "Almost two thirds of Germany's workforce will be unemployed".

Does Technology Create Jobs? Let's make an optimistic assumption that over time technology creates jobs, simply because it always has. To assume otherwise is to assume "It's different this times."

The sewing machine, the reaper, the cotton gin, the assembly line, radio, the phone, PC, mobile phones, and the internet all created jobs.

Those technologies had one thing in common: they were price deflationary.

Role of the Central Bank

Today we live in a world where central banks insist prices rise. That is the real source of the problem, not the technology itself.

The sorry state of affairs right now is central bank inflationary policies have accelerated the trend to robots while crushing everyone on a fixed income and everyone priced out of a job.

It may come down to this grim question: Which comes first, technology that creates another wave of jobs or a huge global war over resources, prices, and wages?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Factory Orders Positive First Time in 8 Months, Remain Weak

Posted: 04 May 2015 11:38 AM PDT

Last month I noted Factory Orders Unexpectedly Rise Snapping String of 6 Straight Declines. They didn't. Last month's orders were revised to the negative column in today's report.

Factory Orders Rise but Soft

Today, the Bloomberg Economic Consensus on factory orders was correct, but soft.

Boosted by aircraft and also by motor vehicles, factory orders rose an as-expected 2.1 percent in March. March's gain ends what were 7 straight declines as February, which was initially at plus 0.2 percent, is revised now to minus 0.1 percent. The 7 straight declines are the most striking evidence of how hard the manufacturing sector has been hit, by the strong dollar that weakens exports and also specific trouble in the energy sector due to the downturn in oil.

But in March, the sector got a big boost from civilian aircraft, an industry where big monthly swings are normal, but also from motor vehicle & parts where orders rose 6.0 percent in what is one of the very strongest gains of the recovery. Excluding transportation, however, orders were unchanged compared to only a 0.1 percent gain in February, with the latter revised down sharply from an initial reading of plus 0.8 percent.

Energy equipment rebounded 4.8 percent in the month but following a long streak of declines including an 18.5 percent drop in February. Industrial machinery was also down on the month. Other industries on the plus side include computers and defense capital goods.

Orders for capital goods in general were mixed, up only 0.1 percent on the core, which excludes aircraft, and extending their downward slope.

Other readings include a sizable 0.5 percent rise in shipments. Another plus is a small rise in unfilled orders which have been especially weak. Inventories held steady relative to sales, with the inventory-to-sales rate unchanged at 1.35.

The pop in March ends the first quarter on a positive note but the early indications on the second quarter, despite expectations of an outsized weather boost, have all been soft.

New Orders and Shipments Percent Change From Year Ago

Census Report

Diving into the Census Report, for March (seasonally adjusted) we find new orders look like this:

All Manufacturing: +2.1%
....Excluding Transportation: +0.0%
....Excluding Defense: +1.3%
....With unfilled orders +4.9%

Durable Goods +4.4%
....Transportation +13.5%
........Motor Vehicles, Bodies, Parts +3.4%
........Nondefense Aircraft +30.6%
........Defense Aircraft and Parts +103.0%

Nondurable Goods -0.3%

As noted before, aircraft orders have a long lead time and are more subject to cancellation than other orders. For the second month in a row, the string of declines finally ends. This time, I think the rise will stick. Hooray! Otherwise, this looks like another questionable month. Excluding transportation, there was no increase in factory orders.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering

Posted: 04 May 2015 01:03 AM PDT

Live in Chicago? A report by Nuveen shows a pension payment spike looms in 2016, and the potential tax hike to fix it is staggering.

Please consider Chicago's Fiscal Stress: New Term, Same Problems.

Pension Payments Are A Growing Portion of the Budget

Years of poor funding exacerbated Chicago's pension obligations so that it may be infeasible to keep them solvent without modifying benefits. Chicago's four pension plans have a combined $20.1 billion unfunded liability and funded ratios ranging from just 24% to 57%.

click on any chart for sharper image

A Pension Payment Spike Looms in 2016

A state law enacted in 2010 requires Chicago to begin making actuarially-based annual contributions to its policemen's and firemen's pension funds in 2016, resulting in a payment increase of approximately $540 million. Due to the lag between when taxes are levied and collected, paying the required pension payments in 2016 would mean any property tax would have to be levied in 2015. However, the administration was reluctant to pass a budget with higher property taxes prior to the mayoral election. Based on state law and recent actuarial valuations, Chicago is required to contribute $839 million to its policemen's and firemen's pensions in 2016 (levy year 2015). But the city has only budgeted for a pension levy of $290.4 million.

Potential Tax Increase Is Staggering

We note that the state law requiring full funding of annual pension payments beginning in 2016 applies not only to Chicago but to a number of overlapping taxing districts such as Chicago Public Schools, Cook County and a handful of other governmental entities. Without reforms, fully funding pension contributions for Chicago and its overlying taxing districts would require substantial revenue increases and/or expenditure cuts.

To get a sense of the magnitude of the property tax increases necessary to move to full funding of annual pension payments, Nuveen Asset Management analyzed the 2013 property tax levies, pension payments and Annual Pension Costs (APC) for Chicago and its overlapping taxing districts as reported in their respective audited financial statements. We analyzed the tax bill of a theoretical $400,000 home in Chicago under current tax requirements and a scenario under which the city and its overlapping taxing districts all make full annual pension payments. The analysis does not include the impact of any specialized property tax exemptions like the homeowner's exemption or the senior freeze exemption. All tax figures are from each entity's 2013 fiscal year – the most recent fiscal year in common for all issuers.

Based on our review of each government's fiscal 2013 audited financial statements, the owner of a $400,000 home would have paid approximately $6,873 in property taxes. As was the case for Chicago, most of these government entities didn't fully fund their pension payments, therefore maintaining property taxes at levels below where they otherwise should be. Chicago would need to increase its portion of the property tax levy 155.6% to make a full pension contribution and Cook County would need to increase its portion of the levy by 60.8%.

Altogether, the owner of a $400,000 home in Chicago would need to pay $3,355 in additional property taxes to support full annual pension contributions – increasing the tax bill to $10,228 for a single year jump of nearly 49%. While home rule entities in Illinois, including the City of Chicago, are not subject to state imposed property tax caps, some overlapping tax districts such as Chicago Public Schools are limited to an increase of the lesser of 5% or the change in inflation.

Shockingly Bad Fiscal Health of Chicago

On April 1, I noted the Shockingly Bad Fiscal Health of Chicago (and the Financial Engineering Chicago Uses to Hide that Fact).

That bad fiscal health was just related to Chicago schools. I knew the pension funds were in dire straits as well. Although I then did not have current numbers, on March 3, I was comfortable saying Chicago's Only Possible Salvation: Bankruptcy - a Name That Cannot be Spoke.

On April 21, a $295.7 million bond offering by the beleaguered Chicago Board of Education hit the market. The Yield Hit 5.63%. That is 285 basis points higher than Municipal Market Data's benchmark triple-A scale. For more details, please see Yield on Chicago School Bond Offering Hits 5.63%; Debate Over Risk; Miracles Not Coming; Bankruptcy the Sensible Option.

Rauner pledged "The taxpayers of Illinois are not going to bail out the city of Chicago, that ain't happenin. But there are things we can do to help them restructure and get their government and their schools turned around, and I'd like to help them."

What About the Rest of Illinois?

Note the above woes are for Chicago only. Illinois has other massive funding problems. On March 2, I noted some of the problems in Illinois Pension Plans 39% Funded; Taxpayers On the Hook for $105 Billion in Liabilities; It Will Get Worse!.

Illinois State Budget Deficit

According to Crain's Chicago Business, Illinois Budget Deficit is $9 billion.

"Illinois' fiscal woes are significantly deeper and more serious than generally realized, with the state facing a $9 billion operating deficit in the fiscal year that begins July 1."

When Nuveen came up with 50% property tax hike, it did not include tax hikes to bail out other Illinois pension plans. Nor did it address the $9billion budget deficit for the state.

Lost Cause

Not a penny of taxpayer money should go to fund these lost causes. I find it hard to believe that Emanuel himself does not know the school system is truly bankrupt.

To spare the citizens of Illinois massive tax hikes, the only reasonable course of actions are as follows:

Halt defined benefit pension plans for new employees
Eliminate collective bargaining of public unions
Scrap Davis Bacon and all prevailing wage laws so that cities do not have to overpay for services
Enact right-to-work legislation
Pass bankruptcy legislation allowing cities, municipalities, and other taxing bodies the right to declare bankruptcy

Had options 1-4 been done a decade ago, Illinois would not be as bad off as it is today. Now, even those measures cannot and will not fix the problems.

Moody's Announcement "Chicago's Pension Pressures Will Grow For Years"

On May 1, Moody's made this announcement: Regardless of legal and political outcomes, Chicago's pension pressures will grow for years.

Illinois desperately needs bankruptcy legislation. 50% tax hikes are not only amazingly unfair, they will drive both corporations and individuals out of the state.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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