MISH'S
Global Economic
Trend Analysis

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Saturday, January 31, 2015 2:14 PM


Canada in Recession, US Will Follow in 2015


On January 21 when the Canadian Central Bank unexpected slashed interest rates, I wrote Canadian Recession Coming Up.

Following the rate cut, the yield curve in Canada inverted out to three years. Inversion means near-term interest rates are higher than long-term rates.

I saw no other person mention the inversion at the time. An inverted yield curve generally portends recession.

Nine days later, the Canadian yield curve is still inverted. Let's compare what I posted about the curve on January 21 vs. January 30.

Canadian Yield Curve January 21

  • 30-year: 2.044% (Today's Low 1.998%)
  • 10-Year: 1.426% (Today's Low 1.366%)
  • 05-Year: 0.791% (Down 19 basis points, an 18% decline)
  • 03-Year: 0.590% (Down 27 basis points, a 31% decline)
  • 02-Year: 0.560% (Down 29 basis points, a 34% decline)
  • 01-Year: 0.580% (Down 34 basis points, a 37% decline)
  • 01-Month: 0.640% (Down 22 basis points, a 26% decline)

Canadian Yield Curve January 30

  • 30-year: 1.834% (Down 21.0 basis points)
  • 10-Year: 1.250% (Down 17.6 basis points)
  • 05-Year: 0.603% (Down 18.8 basis points)
  • 03-Year: 0.386% (Down 20.4 basis points)
  • 02-Year: 0.392% (Down 16.8 basis points)
  • 01-Year: 0.490% (Down 9.0 basis points)
  • 01-Month: 0.580% (Down 6.0 basis points)

Not only did yields plunge across the board since then, the yield curve is still inverted all the way out to three years.

Recession Has Arrived

There is no point in waiting for further data. The Canadian recession has already arrived.

On Friday, the Financial Post reported Canada GDP Shrinks on Biggest Factory Drop in Six Years.
The Canadian dollar plunged below 79 cents US today after data showed Canada’s gross domestic product contracted in November as manufacturing dropped the most since January 2009 and on declines in mining and oil and gas extraction.

Output shrank by 0.2%, the most in 11 months, to an annualized $1.65 trillion, Statistics Canada said Friday in Ottawa. The median forecast in a Bloomberg economist survey was for output to be little changed.

Manufacturing declined by 1.9% in November, with losses ranging from machinery and equipment to plastics and rubber.

The Bank of Canada unexpectedly lowered borrowing costs last week for the first time since 2009, saying the move was meant to provide insurance as the slump in crude oil, the nation’s biggest export, weighed on the economy.

"Insurance"

The Bank of Canada called the rate cut "insurance". Insurance from what? If they think it will halt a recession, it won't. The recession is here. There is no need to wait for another quarter of declining GDP to confirm. A Canadian recession is underway.

US Will Follow

I remain amused by all the pundits who think the US has "decoupled" from the global economy and will grow stronger in 2015.

Here's news: "It won't", just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time).

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

Friday, January 30, 2015 6:27 PM


Greece Will Not Accept Bailout Extension or Deal With "Rottenly Constructed" Troika; Mish's Game Theory Math


Greece Will No Longer Deal with ‘Troika’

It now strongly appears as if Greece, Germany, and the nannycrats in Brussels are all on one hell of a collision course. Both sides have dug in, and the war of words has escalated in all corners.

For example, please consider Greece Will No Longer Deal with ‘Troika’, Yanis Varoufakis Says

Greece will no longer co-operate with the “troika” of international lenders that has overseen its four-year bailout programme, the country’s finance minister said.

Yanis Varoufakis also said Greece would not accept an extension of its EU bailout, which expires at the end of February, and without which Greek banks could be shut off from European Central Bank funding.

“This position enabled us to win the trust of the Greek people,” Mr Varoufakis said during a joint news conference with Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, who was visiting Athens for the first time since a leftwing government came to power this week.

He also blasted the deeply unpopular bailout monitors from the European Commission, IMF and ECB, also known as “ the troika”, saying: “We are not going to co-operate with a rottenly constructed committee.”
Germany Prepared for Negotiation But Won't Negotiate

The position of Germany and Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, is equally one-sided.
Mr Dijsselbloem warned the new government against taking unilateral steps or ignoring arrangements with lenders, saying “the problems of the Greek economy have not disappeared overnight with the elections.”

Wolfgang Schäuble, German finance minister, warned Athens on Friday against trying to “blackmail” Germany with its financial demands.

Mr Schäuble said Germany was ready to co-operate but only on the basis of current agreements. “We’re prepared for any discussions at any time but the basis can’t be changed,” he said. “Beyond that, it is hard to blackmail us.” 

Martin Jäger, the German finance ministry spokesman, said any request for an extension of the existing financing programme would only be acceptable when it was “tied with a clear readiness of Greece to implement the agreed reforms”.
Gaming Theory

Everyone is willing to negotiate, but only on their terms. Realistically, no one is willing to negotiate. Moreover, the Troika has its hands full with Yanis Varoufakis, an expert who wrote a Book on Game Theory.

I suspect prime minister Alexis Tsipras picked Varoufakis precisely because of his skills at game theory.

New Game to Play

Please consider a few snips from Yanis Varoufakis: From Accidental Economist to Finance Minister by  Tony Aspromourgos, Professor at University of Sydney.
Varoufakis was a gifted and popular university teacher in Sydney. I know because I taught side-by-side with him for a number of years. He was also a thoughtful and productive researcher.

His research was first focused primarily upon game theory. But he also developed an expansive intellectual reach across what may be called “political economy” in the generic sense, particularly focused on the evolution of capitalism as a global system.

Hesitant politician

Varoufakis has described himself as an “accidental economist”. He is perhaps even more an accidental finance minister.

There is no reason to doubt the sincerity of his earlier expressed ambivalence about entering politics and the party-political fray. It is the vacuum created by the failure of the mainstream parties of the centre-left and centre-right that calls forth this participation.

The media’s referring to the new Greek government as “far left” or “radical left” is just an intellectually lazy acquiescence in the language of the European political and policy establishment.

In truth, the position of Syriza is not so way out. Syriza is merely left-wing, whereas the mainstream European parties supposedly of the centre-left are no longer left-wing at all.

New Game to Play

I mentioned above that Varoufakis’s earliest academic research was concerned with game theory, albeit from a rather critical standpoint. He has already broken down the realities of one Greek election using game analogies.

Game theory as a method of research in the social sciences is first and foremost about the logic of strategic interaction between players. The situation that is being played out now, between Greece (as well as others of the “south”) and the political establishment in Europe, is without doubt a strategic situation. It is a game of high-stakes policy poker with the players on both sides, perhaps engaged in an element of bluff.

It is interesting that a game theory expert should find himself, now, at the centre of this situation. There is a great deal at stake, for the welfare of the people of Greece, the other high-debt States and Europe as a whole, as well as for the viability of the European Union and the euro.
Nobody's Right If Everybody's Wrong

What if they are all wrong?

While pondering that philosophical question I offer another musical tribute.



link if video does not play: Buffalo Springfield - For What It's Worth 1967

There's battle lines being drawn
Nobody's right if everybody's wrong
Young people speakin' their minds
A gettin' so much resistance from behind
Time we stop, hey, what's that sound?
Everybody look what's going down

Olive Branch Smashed

Greece's refusal of a bailout extension puts a time limit on matters. The existing bailout agreement expires late-February, less than a month from now.

Interesting, the refusal to accept an extension comes on this olive branch just a few hours ago: Europe Hints at Greek Bailout Extension.

Grexit in the Cards?

Unless cooler heads prevail, Grexit is in the cards.

Right now it appears as if neither side will back down. Calling the Troika "Rottenly Constructed" surely sets the tone for Greece.

"We’re prepared for any discussions at any time but the basis can’t be changed" sets the tone for Germany.

I wonder if the Greek position is on purpose.

Tsipras' claim that he wants Greece to stay on the euro. That helped get him elected. Is that how he really feels?

If not, then unless he gets nearly everything he wants, Grexit is all but assured. And if no agreement is reached, Tsipras has an easy fallback plan: Blame it on Germany and the much hated Troika.

Mish's Game Theory Math

  • Greece will be severely disadvantaged in the short term if it exits. But it will also recover faster.
  • If Greece stays in the eurozone, on Germany's terms, it will bleed to death for another decade or more.
  • Germany and the Eurozone have more to lose than Greece.
  • If Greece exits, the entire eurozone will blow sky high simply because of "exit math"

Exit Math

I wrote about exit math twice recently.


If Germany and the eurozone does not bend significantly, Greece may very well come to the conclusion it has little to lose and everything to gain in the long haul by telling the Troika to go to hell.

And that is a position I endorse even though I disagree with many of the overall policies of SYRIZA.

In the end, my analysis says the eurozone has far more to lose than Greece if a Grexit occurs. However, I highly doubt Germany realizes that.

Even if Germany does, it takes unanimous agreement from all 19 eurozone countries to revise the agreement. That's part of the math.

Place your bets.

In the meantime I once again repeat my warning to Greek citizens: Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold

Addendum:

In regards to "rottenly constructed", reader Lefteris emailed ... The minute I heard Varoufakis say “σαθρή”, I figured it would be badly translated. It’s not a very common word. In context, this word correctly translates as “weak”, “not cohesive”. A more negative translation is “flimsy”, but that’s not what Vafourakis meant.

I made a correction above, changing the word "ruined" to "severely damaged" in this sentence:  Greece will be severely disadvantaged in the short term if it exits. But it will also recover faster. That said, hyperinflation is a possibility, and if that happens, the currency would indeed be ruined. The country itself wouldn't.

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

2:33 PM


Financial Blogger Profile of "Mish" on Equities.Com


Daniel Banas at Equities.Com interviewed me last week via phone for their profile series on "the most distinct and noteworthy voices in the world of financial blogging."

The interview transcript follows. First a few words ...

I am honored to be on that list.

The interview kicked off with a question on how I got started. I have commented on this before, but the short story is I was out of work, hanging around stock message boards, and Bill McBride (Calculated Risk) created the first template to my blog. Bill had just started his own blog and within a few years we became two of the top three economic blogs in the US.   

Somewhere along the line Barry Rithotz at the Big Picture Blog discovered me, frequently linking back to my blog. I like to mention those who have helped me out, even if we have recent differences of opinion on various issues.

Of the three top bloggers (not counting syndicates like Paul Krugman, or multiperson sites), Calculated Risk or Ritholtz typically held the top spot, but on a few occasions, I did.

Tweet From Barry

Today, Barry was nice enough to tweet "Nice Profile of Mike Shedlock (@MishGEA) at Equities.com Global Financial Community shar.es/1omVEm".

Thanks Barry. Appreciated. Here is a link to Mish Profile on Equities.Com.

Interview with Daniel Banas

EQ: What inspired you to start Mish’s Global Economic Trend Analysis?

Mish: Actually, my first speech at Google was on that exact subject. My background is in Civil Engineering. I got a degree from the University of Illinois in ’76 and worked for two years as an engineer. I couldn’t stand it, so I started working for banks, on the computer programming side.

As an Assistant Vice President of Harris Bank, I’ve been through more bank mergers than anyone could imagine. I was at Chase when Chase and Chemical merged. I was at Harris Bank when the Bank of Montreal locked them out. I didn’t like the culture change when BMO came in. I left, went out on my own, and became a consultant.

But anyway, I lost my job after 9/11. Computer consulting contracts started really drying up after Y2K. There were just no jobs. If you had a job in banking, you kept it. But if you were a contractor, you couldn’t get one. At the time the economy was booming, and I was out of work for three years. All year round, I’d stalk message boards, and Silicon Investor happened to be one of them. I had the most popular message boards on Motley Fool and Silicon Investor, and one day, a guy named Calculated Risk, who was a poster on my board on Silicon Investor, contacted me.

EQ: Bill McBride at Calculate Risk?

Mish: Exactly. He said, “Hey, look at this. This is pretty cool. Google’s got these things out there called blogs. We can post our thoughts on them.” He actually created the first template for my blog, and a few years later, Calculated Risk and I were the #1 and #3 bloggers in the entire country. When he sent that email, he said, “Google has these things called blogs, and best of all, they’re free!”

When you’re out of work for three years, “free” is not a nicety, “free” is a requirement. That’s how it all started, and then things really took off for me with a series of extremely good calls that I made about the housing bust in 2005, 2006 and 2007.

Then, when oil hit $140/barrel, everyone thought interest rates were going to go to the freaking moon. They assumed we had this massive wave of inflation coming, but I said: Expect record low interest rates across the entire U.S. treasury yield curve. People thought I was out of my mind.

EQ: Wow. Was that a profitable call for you?

Mish: Actually, I didn’t make a cent off that call, because I still had a little money coming in as a result of being out of work for three years. Then, the housing bust hit and the next thing you know, Bernanke was slashing interest rates like mad. One could have bought hugely out of the money calls on interest rate futures, and made a million on a $10,000 bet. I didn’t even profit from my call, other than to gain notoriety. So, that was my start right there. I certainly have not gotten everything right with the stock market, but I think I’ve called the global economy better than anyone since 2005.

My proudest accolade in those regards – every year in December, The New York Times comes out with their top ten ideas of the year. It can be ten ideas on anything about healthcare, industry, education, finance, anything medical. Their #1 idea for 2010, called “Do-It-Yourself Macroeconomics” was about bloggers that called the global economy better than any economist did. They mentioned three people in the article: Calculated Risk, me, and Barry Ritholtz.

See New York Times 10th Annual Year in Ideas; #1 Idea: Do-It-Yourself Macroeconomics.

EQ: That’s rarefied air. When you called the housing bubble, and you called oil, what were you drawing upon to make those calls?

Mish: First off, I could see the housing crash. This was pretty easy. We had a bubble in housing, and then a crash. So I could see Bernanke lowering interest rates. To me, oil going up to $140 was just more icing on the cake.

We were shedding jobs like mad and the price of gas was going through the roof. Where was it going? To me, it was real simple. I was also one of the few that called deflation. Deflation is still my model, although I define it a little bit differently than other people. I had so many people mocking me, and now deflation is all everyone is talking about.

Yet, I’m still mocked for the call. All the hyperinflationists out there still think I’m a fool, but I don’t care. I called it right. One thing that I’ve gotten wrong – and it’s important to admit your mistakes – I absolutely thought there was close to no chance that the US stock market would get as high as it has in the last two years. I failed to see how much QE would benefit the US stock market, even if it didn’t in Europe and other places. That was my miss, but that’s actually more of a stock market miss than an economic miss. Regardless, my record is certainly far from perfect.

EQ: Where do you think the US stock market is heading now?

Mish: (laughs) I’ve been wrong for two years, but I’ll be happy to answer. I think we’re seeing the beginning of the end. One of the things I said was that the idea that Central Banks are in control is wildly wrong. I don’t think they’re in control of anything. The reaction from the European Central Bank is going to be interesting to watch. Everyone’s expecting this massive bazooka. Even if they deliver and actually shock the market with some announcement—which I don’t even think they’re going to do – it wouldn’t surprise me to see a knee-jerk reaction higher, and an immediate sell off all day once people realize the emperor has no clothes.

EQ: So you don’t think the ECB is going to do enough to pull Europe out of their funk?

Mish: No. Look at the market reaction when the Swiss National Bank removed the peg to everyone’s surprise. We saw it again with the action from the Bank of Canada. Europe is slowing – Germany’s going to go into recession and take all of Europe with it. Spain is sort of recovering, but Italy and France aren’t, so where is Europe headed once Germany goes down?

China is clearly slowing as well. That’s another thing that I got right. I picked up a lot of that from Michael Pettis. Some of the things I got right were just from reading – all these views are out there, and deciding who makes the most sense.

The Australian dollar collapsed. I’ve gotten that right, iron ore right, and the Canadian dollar right, all for the right reason (China was slowing far more than most thought). Still, sitting on the sidelines didn’t translate to any gains in the stock market. We lost clients, as did others like John Hussman, by trying to do the prudent thing.

EQ: What’s the lesson we can take away from all the contraction?

Mish: People are willing to forgive you when you lose money – when the stock markets are going down – but heaven forbid, don’t ever miss a rally! Of course, that philosophy encourages more speculation.

Here’s the key question: Do you not speculate and lose clients when overvalued markets soar for no fundamental reason, or do you speculate with the herds and lose on the way down? That’s the moral dilemma for investment managers. We saw that dilemma in 2000, in 2007, and again now. The problem compounds over time because the size of the bubbles (and the busts) have increased over time.

In a way, the central banks won. Bernanke won, for now. The cover of Time declared “We Saved the World,” but watch what happens when the U.S. stock market goes down again.

In regards to the strength of the economy, every economist that Bloomberg surveyed said US interest rates would rise in 2014. I said they’d fall, and so did Lacy Hunt at Van Hoisington, manager of a $4 billion dollar US treasury fund. We both got the economic call correctly, but stocks soared anyway.

A lot of what I do is just to sort through all the news and try to figure out “Who is it that I want to believe and who is it I don’t?”

Sometimes I disagree with all of them. I have a disagreement right now with Michael Pettis on the global glut savings thesis, although I agree with him on nearly everything else. At some point, you’ve got to be your own person.

EQ: With so many differing opinions, what differentiates Mish’s Global Economic Trend Analysis from other financial blogs out there?

Mish: That’s easy – unlike Zero Hedge, my blog is just me. One advantage of just being me, and not taking a lot of guest posts, is that I provide a consistent point-of-view. That doesn’t mean I’m incapable of changing my mind – sometimes I do, but not that often.

I don’t post a lot of conspiracy theories – I don’t believe in them. That would be something that Zero Hedge might do. One day he might be talking hyperinflation, and the next day deflation. Some of the opinions are his and some are guest posts, so you start trying to be everything to everyone and throwing conspiracy theories on top of all of it – there’s no consistent point-of-view.

Calculated Risk does provide a consistent point-of-view. But his focus is mainly on the U.S. and housing. I go far more into Europe and Asia than most do. I also exchange emails all the time with a number of globally prominent economists, so I would say that’s a differentiation.

EQ: What general theses can visitors to your blog expect to read about these days?

Mish: Readers can expect commentary on the slowing global economy, global interest rates, the potential breakup of the Eurozone and what that may mean, and valuations of equities and various bonds.

I like gold. I like the miners. I’ve been on the wrong side of that trade actually for a few years, although I really, really like the recent action. I like Japanese equities, but hedged for a plunge in the yen. I think that trade has tremendous potential. Unlike the US, there’s a very decent chance that Japan goes into hyperinflation.

If that happens, that long Japanese equities but short the yen could literally be the trade of the century. Whether it plays out that way or not, and what timeframe, I don’t know. It all depends on how insane Abenomics in Japan gets.

EQ: Where do you stand on gold?

Mish: In regards to gold, it’s the same way. Most people don’t realize this, but gold traditionally does poorly in periods of disinflation. It does very well in periods of credit stress. It does well in periods of stagflation. It does very well in periods of deflation.

What I sense happening now is the global economy is shifting from disinflation to a deflationary bias.

People think that gold is some kind of inflation hedge, but it’s really not. Gold fell from $800 in 1980 to $250 in 2000 with inflation every step of the way. What happened in that period? The answer is falling interest rates, all along the way. That’s an environment in which gold does pretty badly.

In 2001 we started to see gold react to Fed deflation fighting moves. Gold soared along with everything else. Then, starting in 2011 or so, with ECB president Mario Draghi’s “Whatever it takes” statement we had this renewed and unfounded faith in central banks. Gold plunged as it normally does, when people have great faith in central banks.

Since early November, the thesis that central banks are in control is coming into question once again. Gold has been rising in every major currency, including the dollar, and especially the Euro.

When Jim Grant was once asked 'how should one value gold?', he proposed that the value of gold probably is '1/N', with 'N' standing for the faith people have in the monetary authority. The more this faith declines, the higher the price of gold will go.

My prediction for this year was that gold would rise with the U.S. dollar in the beginning of the year, and then soar in the latter half of this year, when all of these bets that the U.S. will hike because of a strengthening US economy go down the drain. Perhaps they get in a hike or two, then what?

EQ: That would go against common wisdom, but it does seem to make sense. Do you have one specific, overarching philosophy to investing?

Mish: Here’s some general advice: Don’t leverage. Be prepared to lose your job. Have six months, preferably a year’s worth, of money in cash in case you do lose your job. Once again everyone thinks “cash is trash”. When everyone or nearly everyone takes that view, look out below. 

Wait for better investment opportunities. It’s far easier to make up for lost opportunities than to recover from huge stock market losses. And finally, consider having 10 to 25% of your assets in gold (but no more than you can sleep with). Some people have higher tolerances than others.

That’s my whole thesis here right now. People don’t have to like shorts. They don’t need to do short. Even if they think the market’s going to go down, a lot of times, bears lose in bear markets. Sometimes the winner is he who loses least, so take some chips off the table and reduce your risk.

End Interview

Thanks to Bill McBride, Barry Ritholtz, Minyanville, Heinz Blasnik (the person who taught me Austrian economics), Michael Pettis (who taught me everything I know about trade), Steve Keen (for debt deflation theories), Daniel Banas, and everyone else who helped me along the way.

If you think I missed your name, I probably did. Apologies offered and mentally add you to the list cited.

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

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