Economy News

5.5.15

Mish's Global Economic Trend Analysis

European 10-Year Bond Yields Spike Higher; Contagion Already? Something Worse?
Chicago Board of Education to Default on Bonds? Rick Santelli and Mish Discuss on CNBC
JS-Kit / Echo Comments Defunct
First Quarter GDP Likely Negative as Trade Deficit Soars
Greece Talks on Hold; IMF Admits Haircuts Needed as Surplus Turns to Deficits
"Freedom philosophy vs. Empire of Lies": Authorized Documentary About Ron Paul's Career

European 10-Year Bond Yields Spike Higher; Contagion Already? Something Worse?

Posted: 05 May 2015 08:05 PM PDT

Those who claim there will be no Greece contagion need consider yields in other European bonds.

In spite of the fact the ECB is buying 60 billion euros of debt a month for 19 months, yields on many longer-dated bonds are rising.

Spain 10-Year Yield

Italy 10-Year Yield

Germany 10-Year Yield

Contagion Already?

Saxo Bank chief economist Steen Jakobsen sees contagion risk in bond yield breakouts.

Via email ...

A quick note as there has been a number of "break-outs" and risk warnings activated.

First, and most important.

I have long argued that Italian 2 yr vs. 10 yr is excellent predictor of contagion on Greece, and sure enough we have had massive spike!

2-10 if reflecting much higher short-end risk (higher yield) Italy because with France only countries who has done nothing to reign in fiscal deficit plus CLUB MED members.

Contagion or Something Else?

10-year bond yields are up. So are 2-10 spreads. And it isn't just Italy.

But is the reason contagion risk or erroneous belief that a eurozone recovery is underway? What about the chance the ECB has lost control?

ECB has lost control
Contagion
Recovery

Which is it?

Presuming this trend lasts, this will not be good for equities no matter the reason. But really look out if the reason is #1 or #2.

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

Chicago Board of Education to Default on Bonds? Rick Santelli and Mish Discuss on CNBC

Posted: 05 May 2015 12:29 PM PDT

I had a lot of fun this morning on CNBC.

Rick Santelli invited me on his show to discuss Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering and a few other recent posts of mine on the plight of Chicago.

If you have not read that post, please do so. Nuveen figures property taxes need to rise by 50% to bail out Chicago pensions in deep trouble. In the video below I explain why 50% will not be enough!

Link if video does not play: Chicago BOE to default?

Three minutes flies by fast. It's very difficult to get everything you intend to say in such a small time window. Actually, Rick went over by 20 seconds, telling the producer in advance he intended to do that.

In the video, Rick asked "How underfunded are Illinois pensions?"

My answer of $130 billion included Chicago and the main Illinois pensions. But it also assumed 7% returns that I am quite certain will not happen. Unfortunately, there was no time to get this all into the interview.

Mark Glennon at WirePoints says the number using new Government Accounting Standard Board (GASB) rules is closer to $220 billion. That number includes all Illinois pensions but also includes unfunded healthcare liabilities of about $57 billion.

I was invited back once a month to discuss the economy. Looking forward to that. This was a lot of fun.

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

JS-Kit / Echo Comments Defunct

Posted: 05 May 2015 12:21 PM PDT

The JS-Kit/Echo comment system I had on this blog is now defunct. The company recently dropped support across the board for everyone.

I am looking for a replacement comment system. In the meantime, thanks for your patience.

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

First Quarter GDP Likely Negative as Trade Deficit Soars

Posted: 05 May 2015 09:45 AM PDT

On April 29 in Real Q1 GDP 0.2% vs. Consensus 1.0%; Disaster in the Details I commented "The second estimate of Q1 GDP comes out on May 29. Any number of changes could send Q1 negative."

Here we are already. Imports subtract from GDP and March trade numbers were much worse than expected.

The Bloomberg Consensus trade estimate was -42.0 billion. The actual trade deficit was -51.4 billion. The deficit was outside the entire range of estimates of -45.0 billion to -37.8 billion.

First-quarter GDP, barely above zero at plus 0.2 percent, may move into the negative column on revision following a much higher-than-expected March trade deficit of $51.4 billion, the largest since October 2008. The unwinding of the port strike on the West Coast, which was resolved mid-month March, played a major role in the data especially evident in imports which surged $17.1 billion in the month as backlogs at the ports were cleared. Imports of consumer goods, especially cell phones, were especially heavy. Exports, led by aircraft, also rose but only $1.6 billion. The total goods gap in the month was $70.6 billion which is the highest since August 2008.

The gap in petroleum trade, at $7.7 billion vs February's $8.2 billion, wasn't a major factor in the March data as the drop in prices was offset by a rise in volumes. By country, the gap with China widened to $31.2 vs $22.5 billion in February and to $7.1 billion vs $4.2 billion for Japan. The OPEC gap widened slightly to $1.2 billion vs $0.7 billion.

Today's report offers stark evidence of how much the port strike really did impact the economy and was likely one of the major "transitory" factors, as the Fed puts it, that slowed down first-quarter growth. These effects are likely to unwind in the second quarter and become a footnote for first-quarter data.

Transitory Nonsense

Economists still cling to the notion this is transitory.

For my take, please see Fed Cites Weather, "Transitory" Factors in FOMC Statement; No Hat Tricks; What About Consumer Sentiment?

GDP Now

In light of the today's trade report the Atlanta Fed lowered its GDPNow Estimate for second quarter GDP to 0.8%.

Note how economists still cling to optimism no matter how bad the economic numbers.

If the Atlanta Fed still modeled 1st quarter, I would now expect it to be negative.

On April 17, I commented Déjà Vu Weather? No, It's a Recession!

There's no need to change that forecast no matter what fantasies the blue-chip economists have for 3.5% growth.

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

Greece Talks on Hold; IMF Admits Haircuts Needed as Surplus Turns to Deficits

Posted: 05 May 2015 09:07 AM PDT

Greece Talks on Hold

Pierre Moscovici, the European commissioner for economic affairs, warns Debt Talks on Hold Until Greece Agrees Reforms.

Greece's eurozone creditors will not discuss how to get the country's sovereign debt back on a sustainable path until Athens agrees to a new economic reform programme that would release €7.2bn in desperately needed bailout funds, the EU's economic chief said on Tuesday.

Pierre Moscovici, the European commissioner for economic affairs, said debt issues "can only be discussed after we have agreed a reform programme". His statement reflects resistance in eurozone capitals to any form of "haircut" on Greek sovereign debt, which is now mostly held by EU governments and institutions.

Without a return to sustainable debt levels — or a larger bailout from the eurozone to ensure Athens can continue to pay its bills — the IMF may be forced under its rules to withhold its share of the current bailout tranche, which amounts to about half of the €7.2bn being negotiated.

Under a November 2012 agreement between Athens and its international creditors, Greece is scheduled to cut its debt levels to 120 per cent of gross domestic product by 2020 and "substantially lower" than 110 per cent by 2022. Debt relief was agreed as a possible way to reach the targets if Greece was able to run a primary budget surplus.

In February, Brussels forecast Greek debt would fall from 176.2 per cent of GDP in 2014 to 170.2 per cent this year; the new forecasts predict it will rise to 180.2 per cent this year.

Greece Debt Forecast

Surplus Turns to Deficits

Please consider IMF Takes Hard Line on Aid as Greek Surplus Turns to Deficit

Greece is so far off course on its €172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens' eurozone creditors.

The warning, delivered to eurozone finance ministers by Poul Thomsen, head of the IMF's European department, raises the prospect that it may hold back its portion of a €7.2bn tranche of bailout aid that Greece is desperately attempting to secure to avoid bankruptcy.

Half of the €7.2bn, which is the subject of intense negotiations between Athens and its creditors in Brussels-based talks that resumed on Monday, is due to come from the IMF. Without the funds, Greece is expected to run out of cash this month.

Eurozone creditors, who hold the vast bulk of Greek debt, are adamantly opposed to debt relief. But IMF support is crucial both for its funds and to sustain political backing for the Greece bailout, particularly in Germany.

According to two officials present at a contentious meeting of eurozone finance ministers in Riga last month, Mr Thomsen said initial data the IMF had received from Greek authorities showed Athens was on track to run a primary budget deficit of as much as 1.5 per cent of gross domestic product this year.

Under existing bailout targets, Athens was supposed to run a primary surplus — government receipts net of spending, excluding interest payments on sovereign debt — of 3 per cent of GDP in 2015.

A stand-off between the IMF and eurozone creditors over Greece is not unprecedented. Three years ago, the IMF refused to disburse its portion of the aid tranche because of similar fears Greek debt was not falling fast enough.

The IMF only signed off after eurozone ministers agreed to consider, but never implemented, writing down their bailout loans to reduce Greece's debt to "substantially lower" than 110 per cent of GDP by 2022. It currently stands at 176 per cent.

The forecast of a rising Greek deficit after achieving a 1.7 per cent surplus last year — and overly optimistic projections of similar surpluses into the future — would also increase the size of a third Greek bailout, which most officials believe is necessary once the €7.2bn left in the current programme is paid out. Senior officials have initially projected a new programme at €30bn-€50bn, but rising deficits could change that calculation.

IMF Takes Hard Line

That was a curious title. Before I read the article, I expected the headline to mean IMF takes hard line towards Greece. Having now read the article, the phrase seems more applicable to the creditors.

So here we are. The creditors insist no more haircuts, but the IMF will not approve its half of the next bailout tranche without them.

Looking ahead, the fact that Greece's primary account surplus vanished means a third bailout program will be larger than previously discussed. And Greece refuses to take another bailout.

For further discussion please see Third Greek Bailout? Another €53.8 Billion Needed? Primary Account Surplus Revisited.

However big the third bailout was expected to be, it's now larger.

I fail to see how this can all be resolved.

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

"Freedom philosophy vs. Empire of Lies": Authorized Documentary About Ron Paul's Career

Posted: 05 May 2015 06:46 AM PDT

Many producers have approached Ron Paul about doing a documentary regarding Paul's philosophical views.

Until now, Ron Paul has turned down all such overtures.

Empire of Lies

I am pleased to report that Ron Paul just now authorized a long-time friend, Charles Goyette, to make that documentary. Goyette asked me to break the news.

The Ron Paul Documentary project is underway today with the launch of a Kickstarter crowd-funding campaign.

"I feel flattered to be an important part of this," said Paul. "I think some big things are happening. Libertarianism and freedom – as bad as things look on the surface - I believe the rumblings are just wonderful there and in my relationship with young people."

"I felt it was absolutely essential to fund this film at the grassroots level," said Goyette. "The integrity of the project demands that it be independent."

Goyette helped raise contributions in the 2008 and 2012 Ron Paul Presidential Money Bomb fundraisers that set new records for political fundraising.

Goyette is the New York Times bestselling author of The Dollar Meltdown. See my review The Dollar Meltdown: Book Review.

His latest book is Red and Blue and Broke All Over - Restoring America's Free Economy.

Goyette is an award-winning radio personality. He has often been called upon to share his views with national televisions audiences on Fox News, CNN, MSNBC, PBS, CNBC and Fox Business Channel.

In 2013 – 2014 Goyette arranged the national syndication of twice-daily radio commentaries by Ron Paul, which he also produced and co-hosted. Ron Paul's America was broadcast on 125 radio stations across the nation.

Goyette also joined with Ron Paul for the sponsored program Ron Paul and Charles Goyette – The Weekly Podcast, long-form conversations about news and political philosophy. The Weekly Podcast is available on iTunes.

The Ron Paul Documentary will be released in the first half of 2016.

Empire of Lies Video Clip

Link if video does not play: Empire of Lies

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

4.5.15

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

3.5.15

Mish's Global Economic Trend Analysis

China Manufacturing PMI in Contraction: New Orders and Operating Conditions Decline at Strongest Rate in a Year

Posted: 03 May 2015 10:18 PM PDT

More signs of a global slowdown surface in the latest China Manufacturing PMI where operating conditions and new orders decline at fastest pace in a year.

Chinese manufacturers saw a further deterioration in operating conditions in April, with total new orders declining at the strongest pace for a year while production levels stagnated. Data suggested that relatively weak domestic demand was the main driver of reduced new business, as new export work picked up in April (albeit marginally). Consequently, employment in the sector continued to decline, while purchasing activity fell at the quickest rate in 13 months. Meanwhile, deflationary pressures intensified in April, with both input and output costs falling at accelerated rates.

Adjusted for seasonal factors, the HSBC Purchasing Managers' Index™ (PMI™) – a composite indicator designed to provide a single - figure snapshot of operating conditions in the manufacturing economy – remained below the neutral 50.0 value at 48.9 in April, down from 49.6 in March. This signalled a deterioration in the health of the sector for the second successive month. Moreover, the pace of deterioration was the strongest seen in a year. Total new business placed at Chinese manufacturers declined for the second month in a row in April. Furthermore, the rate of contraction quickened since March to the strongest in a year

Weaker demand conditions led companies to become more cautious with regard to their production schedules, with firms leaving their output unchanged in April. This contrasted with increased output in the opening three months of the year. Purchasing activity meanwhile declined for the first time since January. Though moderate, the rate of reduction was the quickest since March 2014, with a number of respondents attributing the fall to fewer new orders.

On the price front, average cost burdens faced by Chinese goods producers fell for the ninth successive month. Moreover, the rate of deflation accelerated to a sharp pace. In line with the trend for input costs, companies cut their selling prices again in April and at a solid rate.

China Manufacturing PMI

If you are looking for a silver lining in the details, there isn't one.

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

Venezuela to Nationalize All Food Distribution, Increase Public Wages 30%

Posted: 03 May 2015 08:06 AM PDT

To combat food shortages caused by socialist policies including nationalization of half the nation's food supply, Venezuela to Nationalize All Food Distribution.

Venezuelan President Nicolas Maduro has promised to nationalise food distribution in the South American nation beset with record shortages of basic goods, runaway inflation and an escalating economic crisis.

During a rally on Friday, on International Workers' Day, the socialist leader allowed a union activist to ask for the nationalisation of food and essential-item distribution.

Various estimates suggest the government already controls about half of the country's food distribution, but that hasn't stopped record shortages in shops and markets.

Venezuela is struggling with a recession, 68.5% annual inflation and severe shortages of the basic goods that it relies on oil money to import.

On any given day, people in Venezuela can wait hours to get some subsidised milk, cooking oil, milk or flour, if they can be found at all.

Maduro's government is strapped for cash in the face of a global supply glut that caused oil prices to collapse by more than 50 percent between June and January.

Nonetheless, Maduro also announced a 30% increase in public wages on Friday.

Way to a New Venezuela Home

In other news, Woman Who Threw mango at Maduro Rewarded With New Home.

A woman who bashed President Nicolas Maduro on the head with a mango has been promised a new house for her troubles in a surreal tropical tale that has gone viral in Venezuela.

The 52-year-old president was driving a bus through a crowd last weekend in the central state of Aragua when someone in the crowd tossed the fruit at him.

"It says: 'If you can, call me'," the former bus driver said later during the week, as he displayed the fruit with a name and phone number scrawled on it on television.

"Marleny Olivo had a problem with her house. [Officials] called her. She was scared. She couldn't believe it was true. ... I've approved an apartment for you, Marleny, as part of the 'Grand Venezuelan Housing Mission'," he added, vowing to eat the mango.

"If for for a mango they give you apartments, then you know what to do: throw him a pineapple!" quipped Dolar Today, a website that quotes the black market for dollars and is hated by Maduro.

Apparently the way to combat inflation is to grant a 30% increase in wages. The way to a new house is to throw fruit with your name on it at the president.

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

2.5.15

Mish's Global Economic Trend Analysis

French Unemployment At New Record Highs: Whom Do They Blame?

Posted: 02 May 2015 07:28 PM PDT

While ECB president Mario Draghi brags his economic policy of negative interest rates is working, I ask for whom?

On April 23, 2015 I noted Spain's Unemployment Rate Increases to 23.7%; 114,300 Jobs Vanish in First Quarter, Public Sector Jobs Rise.

Let's now turn our attention to France.

December 24, 2014 BBC: French jobless total at new record high
January 28, 2015 France24: French unemployment hits new record high in December
March 6, 2014 UPI: Unemployment in France hits 16-year-high; still rising

France Unemployment Rate

Flashback January 27, 2014 Mish: France Unemployment Hits New Record High; Hollande's November Pledge Reviewed

In November, French president Francois Hollande announced he had met his electoral pledge to halt the rise in joblessness by the end of 2013.

No one with any economic sense believed it.

Today in the face of a new record high unemployment rate, Hollande says unemployment has "stabilised".

Whom Do The French Blame?

Via translation from Les Echos, May 2, 2015: Poll shows 75% of French Do Not Expect Improvement in Unemployment until 2017.

Recent unemployment figures reached a new record in March with 3.51 million of job seekers in mainland France without activity. Three quarters of respondents think that unemployment will not decrease by the end of the five year term of Francois Hollande, according to a poll for Odoxa iTELE and Le Parisien published on Friday.

As for the main cause of unemployment, 34% of the French blame "companies that prefer to increase their profits rather than hiring" while 31% blame "government inefficiency". 21% blame "blockages in French society" and 14% "unfavorable economic conditions".

Question for Draghi

I have a question for Mario Draghi: Is this what it means to have your negative interest rate policies "work"?

One cannot blame the ECB for French nonsense. Yet, one can blame the ECB for stupidity in attempting to solve via economic policy, something that cannot possibly be solved that way.

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

Miracle Twinkies Comeback

Posted: 02 May 2015 10:50 AM PDT

I have written about Twinkies three times before.

Recall that in November of 2012, Hostess, the owner of Twinkies, Ding Dongs, Ho-Ho's and other sweet treats gave an ultimatum to 15,000 union workers to accept pay cuts or get fired and lose their pensions as well.

Flashback November 15, 2012: Hostess to Liquidate if Bakers' Strike Continues Through Thursday; End of Twinkies Hours Away?

It's do or die for 18,000 Hostess workers including 5,000 in the bakers' union.

Only fools would voluntarily vote for liquidation, but with the clock ticking down to mere hours to come to agreement, it appears the fools will win the day.

The bakers' union would rather have no job than reduced wages. Lovely. Good luck finding another job in this environment.

I have little sympathy for those who voluntarily walk away from their jobs in these trying times.

However, this is probably not the end of Twinkies, Ding-Dongs, or Ho-Ho's.

Not that anyone needs to be eating such non-nutritional junk food, but those names and recipes will likely be sold and produced elsewhere, probably at a lower cost to consumers, especially if the buyer does not have to deal with the bakers' union.

Flashback November 18, 2012: Chris Christie Provides Perfect Setup for Saturday Night Live

At a recent news conference, Christie was asked a question about Twinkies. He responded ...

"Really, seriously, you're not asking me about Hostess Twinkies are ya? What's the next question? I'm on Saturday Night Live enough. You think you're getting me behind this microphone having me talk about Twinkies? This is a setup man, I know it."

The bottom line is the union would not give into demands and the company filed a motion last Friday to liquidate. Shutting down the company will mean the loss of 18,500 jobs (less any jobs picked up by buyers of brands Twinkies, Ding-Dongs, Wonder Bread, Ho-Ho's etc.)

There is plenty of blame to go around, including untenable wages and benefits, leveraged debt, untenable management salaries etc.

Flashback November 22, 2012: Hostess Fires 15,000 Workers in Liquidation; Twinkies Silliness From Readers

The first step in liquidation will be the firing of 15,000 workers including the closure of 33 bakeries, 565 distribution centers, approximately 5,500 delivery routes and 570 bakery outlet stores.

At least a dozen readers sent emails in response to my previous two posts on Twinkies.

One misguided soul from the Netherlands wrote "Your article on the bankruptcy of Hostess is so extremely biased. I am NOT surprised because you're ALWAYS bashing the unions."

Miracle Comeback

Now that we have the backdrop out of the way, please consider Twinkie's Miracle Comeback: The Untold, Inside Story of a $2 Billion Feast

Walk in the door of Hostess Brands' flagship bakery in Emporia, Kansas and your first thought is: What a dump. The former front office for the bakery that pumps out classic American treats like golden Twinkies and swirl-topped Cup Cakes is a series of dank, near-empty rooms with scuffed, oatmeal-color linoleum floors, water-stained ceiling panels and a jumble of mismatched office furniture that looks like it was picked up off the curb.

This grim wing of the Hostess plant is a leftover from the old Hostess–the one that debt, pension costs and mismanagement shuttered in 2012. But throw on a hairnet and pass on to the newly rehabilitated factory floor, and it makes sense why billionaire C. Dean Metropoulos, Apollo Global senior partner Andy Jhawar and Kansas Governor Sam Brownback are standing here, breathing in the sticky sweet air on a foggy April morning.

The new factory is bright and clean. Tight rows of Twinkies m arch along the $20 million Auto Bake system with the precision of Soviet soldiers in a May Day parade. Yellow robotic arms, which look like they should be welding Teslas rather than boxing Twinkies, stack snacks with hypnotic rhythm. This 500-person plant produces more than 1 million Twinkies a day, 400 million a year. That's 80% of Hostess' total output–output that under the old regime required 14 plants and 9,000 employees. And it's about to get more efficient: Metropoulos and Jhawar just installed a second Auto–Bake system, this one for Cup Cakes, and the governor is here to cut the ribbon.

Now, just two years after buying the shuttered company, they sit atop what will likely be a $2 billion win. "They've worked magic with their business concept and have made Hostess one of the most efficient and effective companies in the entire food industry," says Joseph Gatto, a partner at Perella Weinberg, who brokered the sale to Metropoulos and Apollo.

"People walk up and thank me for bringing back Twinkies," says Metropoulos, who has previously rebuilt brands like Bumble Bee Tuna, Chef Boyardee and Pabst Blue Ribbon. "No one ever thanked me for saving Vlasic pickles."

The problem should now be pretty clear to everyone: mismanagement coupled with inane union work rules and benefits. I thought the problem was clear in November 2012.

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

1.5.15

Mish's Global Economic Trend Analysis

Weekend Diversion - Golf Trick Shots
ISM Disappoints, Led by Decline in Employment
Construction Spending "Once Again Defies Expectations" Much Weaker Than Expected; Four Reasons Economists Perplexed
Investigating the GDP Deflator: Wildly Differing Results Depending on Your Choice

Weekend Diversion - Golf Trick Shots

Posted: 01 May 2015 07:04 PM PDT

It is amazing how good people can get at things. I would be hard pressed to even think about setting up some of these shots.

Even if you are not a golfer you may appreciate this video.

Link if video does not play: Bryan Brothers Golf Trick Shots.

I like to golf. Breaking 90 is an excellent game for me.

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

ISM Disappoints, Led by Decline in Employment

Posted: 01 May 2015 01:03 PM PDT

In addition to construction estimates missing by a mile today, ISM also disappointed, albeit not by much.

The Bloomberg Consensus estimate for ISM was 52.0 but the report was a slightly weaker 51.5. It's the details that are interesting.

There's a new unwanted wrinkle in the ISM report and that's weakness in employment, holding down the headline index to 51.5 in April, unchanged from March. Employment has been holding strong in other reports -- but not in the ISM report where the index is down nearly 2 points to a sub-50 level of 48.3 to indicate month-to-month contraction. This is the first time this reading is in contraction since May 2013 and it's the lowest reading since all the way back in September 2009.

Other indications, however, are positive. New orders actually rose in the month, up 1.7 points to 53.5, and export orders are above 50 for the first time this year, at 51.5 for a 4.0 point gain. Production, at 56.0, is especially strong as are import orders at 54.0 for a 1.5 point gain. Prices, as in other reports, remain in contraction, little changed at 40.5.

And there's solid breadth in the report with 15 of 18 industries showing composite growth in the month with strength in the auto industry specifically cited. This report is mixed though the decline in employment won't be raising expectations for next week's employment report for April.

Note on Diffusion Indices

I commented on employment in Richmond Fed Manufacturing Index Negative Second Month.

It's important to note that a single firm hiring one person will counterbalance another firm firing 50. It's entirely possible employment is not as strong as it looks (not that 7 is a particularly strong number in the first place).

Some of these subcomponents are mostly noise. The overall trend of all the reports in general is not noise. The baseline for zero growth in the ISM is 50, for the regional Fed reports it is 0.

ISM Details

Let's investigate all the details of today's report straight from the Institute for Supply Management Manufacturing ISM® Report On Business® released this morning.

Index	Apr	Mar	PP Change	Direction	Rate of Change	Trend in Months
PMI®	51.5	5.1.5	0	Growing	Same	28
New Orders	53.5	51.8	1.7	Growing	Faster	29
Production	56.0	53.8	2.2	Growing	Faster	32
Employment	48.3	50	-1.7	Contracting	From Unchanged	19
Supplier Deliveries	50.1	50.5	-0.4	Slowing	Slower	23
Inventories	49.5	51.5	-2.0	Contracting	From Growing	1
Customers' Inventories	44.0	45.5	-1.5	Too Low	Faster	5
Prices	40.5	39.0	1.5	Decreasing	Slower	6
Backlog of Orders	49.5	49.5	0	Contracting	Same	2
Exports	51.5	47.5	4.0	Growing	From Contracting	1
Imports	54.0	52.6	1.5	Growing	Faster	27

All in all the report was about as expected. The details conflict with Richmond Fed and Dallas Fed. The former above. For the latter see 6th Straight Negative New Orders Reading for Dallas Fed Manufacturing Survey.

As with the Richmond Fed, the Dallas Fed reported a slight increase in employment. Many of the individual numbers are likely noise.

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

Construction Spending "Once Again Defies Expectations" Much Weaker Than Expected; Four Reasons Economists Perplexed

Posted: 01 May 2015 10:58 AM PDT

Economists have been overly optimistic on the majority of economic reports for going on six months.

Today the Bloomberg Consensus estimate for construction spending was for a 0.4% gain. The actual result was a decline of 0.6%.

Construction spending once again defied expectations. March construction spending dropped 0.6 percent against expectations of an increase of 0.4 percent. On the year, construction spending was up 2.0 percent, down from February's annual increase of 2.7 percent. Both residential and public building declined. While weather can still be blamed for some of the decline, a basic weakness in the building sector was apparent.

Private residential spending dropped 1.6 percent on the month with both single family and multi-family homes declined. In addition, residential construction excluding new homes, which captures home remodeling, also declined after gains in the previous two months. Nonresidential private construction provided a ray of sunshine -- it advanced 1.0 percent on gains in the office, manufacturing, and health care sectors.

Public construction was down for a third straight month to its lowest level since February 2014. State and local government spending, the much larger portion of public construction, dropped in both February and March while Federal Government construction retreated after an 8.6 percent surge in the previous month.

Construction Spending

Construction Spending Percent Change From Year Ago

Four Key Reasons Economists are Perplexed

Weakness is "transitory" as the Fed explained on Wednesday. For discussion, please see Fed Cites Weather, "Transitory" Factors in FOMC Statement; No Hat Tricks; What About Consumer Sentiment?
Clearly the economy could use more Walmarts and McDonald's as there is not yet one on every corner. Forget about the fact that wages are going up and that will damper earnings and reduce the desire to open marginal stores. See Employment Compensation Costs (Wages and Benefits) Jump in First Quarter.
Millennials working multiple part-time jobs will soon buy a new home thanks to rise in hourly wage to $12.
We certainly need to build more public schools as retiring boomers will be going back to 8th grade en masse.

Those key points undoubtedly explain why economists are so perplexed with all this weakness.

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

Investigating the GDP Deflator: Wildly Differing Results Depending on Your Choice

Posted: 01 May 2015 12:46 AM PDT

As noted in Real Q1 GDP 0.2% vs. Consensus 1.0%; Disaster in the Details I got the first quarter GDP forecast details correct.

However, a bit of self-assessment with differing GDP deflators shows my prediction of close to zero growth could easily have looked rather silly.

I asked Doug Short at Advisor Perspectives what the GDP would have looked like using various deflators:

GDP (Implicit GDP Deflator)
PCE (Personal Consumption Expenditures)
CPI (Consumer Price Index)
Shadowstats (Williams' Alternate CPI)

Charts are shown below.

Both Doug and I consider Shadowstats absurd, but we include it because many follow the number. For a recent critique of the measure please see Deconstructing and Debunking Shadowstats.

clock on any chart for sharper image

GDP Implicit Deflator (Official GDP)

GDP with PCE as Deflator

GDP with CPI as Deflator

GDP with Shadowstats CPI as Deflator

Results

GDP (Implicit GDP Deflator): 0.2%
PCE (Personal Consumption Expenditures): 2.2%
CPI (Consumer Price Index): 3.3%
Shadostats (Williams' Alternate CPI): -1.2%

Defending on your price deflator, GDP was between -1.2% and +3.3%. If you toss out Shadowstats, then the range is 0.2% to 3.3%.

That's still a damn wide range. People accuse the BEA all the time of manipulating the deflator to make things look good, but if they easily could have done that this month for far better results.

Over time, GDP is highest with the PCE and GDP implicit deflators. At least the BEA is consistent.

Mean GDP

GDP (Implicit GDP Deflator): 3.26%
PCE (Personal Consumption Expenditures): 3.32%
CPI (Consumer Price Index): 2.93%
Shadostats (Williams' Alternate CPI): 0.79%

Next quarter, because of rising energy prices, deflating GDP by the CPI will likely yield worse results than the GDP deflator. Some people will criticize the BEA because of it, while remaining silent about this quarter.

As it stands, rising energy prices and the strong dollar will place downward pressure on second quarter GDP no matter which deflator one uses.

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