Expect a Huge Jump in Layoffs in 2016; Eye on Initial Unemployment Claims: Have they Bottomed?

I have a watchful eye on initial unemployment claims. They have been trending higher (unexpectedly of course) since mid-October.

Initial Claims 2015



Econoday economists were surprised by the jump.

Initial jobless claims unexpectedly jumped 20,000 to 287,000 in the December 26 holiday week, the highest level since the July 4 holiday week. The Econoday consensus expected an increase of 3,000 to 270,000. The 4-week moving average was up 4,500 to 277,000 in the December 26 week, the highest since the July 18 week. The level of continuing claims increased 3,000 to 2.198 million in the December 19 week. The seasonally adjusted insured unemployment was unchanged at 1.6 percent in the December 19 week. It should be noted that readings in this report can be volatile during the holiday weeks.

Long-Term Perspective



A long-term chart shows the claims are still at historic lows dating all the way back to the 1970s. Does that imply there is little cause for concern?

Let's look at the chart another way.



That chart shows recessions sometimes start with year-over-year changes still negative and sometimes not. Moreover, there is a tremendous amount of noise as evidenced by huge swings that did not lead to recession.

Low claims in and of themselves are pretty inconclusive even though huge spikes tend to mark recessions.

Where to in 2016?

Jobs have been strong, but some of us believe part-time jobs and Obamacare artifacts have skewed the numbers. Regardless, jobs are a hugely lagging indicator, even if you believe the numbers.

Since there was a burst of seasonal hiring, it stands to reason there will be a burst of seasonal firing.

With corporate profits under pressure from rising wages, and with many big box retailers struggling, upcoming layoffs are likely to be huge.

Recent PMI reports provide clues as to where things are headed:

• December 19: Growth in Service PMI Shrinks Sharply
• December 26: Chicago PMI Crashes, New Orders and Backlogs Plunge to May 2009 Level; Service Economy Headed for a Slowdown?

Manufacturing is in an outright recession, and services are weakening.  It stands to reason, jobs will follow.

We will find out in the January jobs report, to be released Friday, February 5, 2016.

Mike "Mish" Shedlock

Chicago PMI Crashes, New Orders and Backlogs Plunge to May 2009 Level; Service Economy Headed for a Slowdown?

The Unexpected Strikes Chicago Again

It was another disastrous month for the Chicago PMI. Economists expected a bounce back from last month's unexpected dip into negative territory. Instead the numbers reflect what's best described as a two-month crash.

The Econoday Consensus Estimate was a guess of 50 in a range of 48 to 53. The actual reading of 42.9 was far below any economist's estimate.

The December Chicago PMI tumbled to a reading of just 42.9, down 5.8 points. The reading was a fresh 6-1/2 year low and the seventh contraction this year. It also was far below expectations of a breakeven reading of 50.

The biggest contributor to the decline was a 17.2 point plunge in order backlogs, to 29.4, marking their eleventh consecutive month in contraction. December's reading was the lowest since May 2009. The index also was depressed by ongoing weakness in new orders, which contracted at a faster pace, down 5.3 points to 38.8, the lowest level since May 2009. Both production and employment fell into contraction.

The only component to expand at a faster pace was supplier deliveries, although some companies noted that the rise was influenced more by logistics issues during the holiday season and in preparation for Chinese New Year on February 8. The PMI continued to feel the ill effects of general sluggish demand and lower energy prices, which have left their mark on Chicago area companies, along with the stronger U.S. dollar. Moreover, well above normal temperatures has impacted many businesses that rely on cold weather.

Ahead of the release this is what Econoday had to say:

The Chicago PMI is a one of a kind, a regional report that tracks the whole scope of the economy, at least for Chicago. Big swings are the norm but one isn't expected for December with the consensus calling for what would be a small 1.3 point gain for this index to dead even 50, which is about where this index has been trending.

Chicago PMI Index vs. ISM



It does not appear to me the index has been trending around 50 as Bloomberg suggests. The three jumps above 50 are counter-trend in a series that has been weakening for about a year.

Service Economy Headed for a Slowdown?

The Chicago PMI is a bit different because it contains a mix of both manufacturing and service companies. That makes matters worse given economists generally consider the service economy to be in good shape.

Last month when the PMI dipped for the 6th time in 10 months (now 7th time in 11 months), I asked the question Service Economy Headed for a Slowdown?

Here is the pertinent snip: 

Bloomberg proposes the volatility of the report should limit its impact on the month's outlook.

I suggest volatility is a sign of a trend change as well as underlying weakness. And the backlog of orders, one place where there has been consistent contraction for 10 months, does not bode well for future hiring needs.

All things considered, the Chicago PMI is a warning that the service economy may be on its last legs.

Reflections on the Weather

This month, Bloomberg relies on the old standby: the weather.

Damn that weather. It's always too hot, too cold, or too right. This month it was too pleasant.

Heading into the reports, it's pretty clear the economists did not know the Chicago weather was too good, otherwise they would have lowered their forecasts.

Economists only learned Chicago's weather was too good following the PMI release today. Amazingly, economists don't even know about massive snowstorms until economic reports come out weeks later.

Sorry State of Chicago

Weakening services coupled with the biggest property tax hike in history will not do wonders for the Chicago economy.

For more on the sorry state of affairs in Chicago and the state of Illinois as a whole, please see ...

• December 27: Death Watch Illinois: Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up 
• December 19: How Chicago "Works": Tax and Graft; Who Benefits?
• September 23: Chicago Tax Collector Hath Arrived With Massive Tax Hike: Emanuel Says "No Stone Unturned ... Not Done Yet"
• July 17: Emanuel Fiddles While Chicago Burns; Public Schools Over the Edge; 9% Cloud Tax on Data Streaming; Emanuel Eyes Property Tax Hikes 

Mike "Mish" Shedlock

NSA Spied on Israeli Prime Minister During US-Iran Nuclear Negotiations

In an unexpected confirmation of what every thinking person realized upfront, the Guardian reports US 'spied on Binyamin Netanyahu during Iran nuclear deal talks'

Despite Barack Obama’s promise to curtail eavesdropping on allies in the wake of the Edward Snowden revelations about the scale and scope of US activities, the National Security Agency’s (NSA) surveillance included phone conversations between top Israeli officials, US congressmen and American-Jewish groups, according to the Wall Street Journal.

The White House did not confirm or deny the report. Ned Price, spokesman for the National Security Council, said on Wednesday: “We are not going to comment on any specific alleged intelligence activities. As a general matter, and as we have said previously, we do not conduct any foreign intelligence surveillance activities unless there is a specific and validated national security purpose. This applies to ordinary citizens and world leaders alike.”

Relations between Obama and Netanyahu have often been described as strained. The NSA reports allowed Obama administration officials to peer inside Israeli efforts to turn Congress against the Iran deal, the Wall Street Journal said.

The surveillance allegedly revealed how Netanyahu and his advisers had leaked details of the US-Iran negotiations, which they learned through Israeli spying operations. Last March, Israel denied reports that its security forces spied on the negotiations between Tehran and major powers over Iran’s nuclear capacities.

Security Threats

Who constitutes a validated national security threat? The answer is anyone and everyone still breathing.

Mike "Mish" Shedlock

A "Mish Together" January 5, 2016

Chris Temple, a friend of mine, and author of the National Investor newsletter is passing my way (Crystal Lake, Illinois) on his annual snowbird trip from Wisconsin to Florida.

I know Chris as a fellow panelist at several Chicago Area Natural Resources conferences.

I invited him over for dinner, but after some discussion, we elected to open the invite to anyone who is in the area and wants to come for dinner, or just drinks and appetizers for those who prefer something light.

Date: Tuesday, January 5, 2016
Time: 7:00 PM
City: Crystal Lake, Illinois
Place: Village Squire Restaurant - 4818 Northwest Highway - Crystal Lake, Illinois

For those who want to come a bit earlier, Chris and I will be at the bar at 6:30 PM.

There are several Village Squire locations. Pick the one in Crystal Lake. Here's a Google Map.

If you can make it, please: Send an Email Confirmation.

After dinner, there is a nearby karaoke bar for those who want to sing or have further discussion over drinks.

It should be a fun evening. You can ask questions about anything that is on your mind.

Mike "Mish" Shedlock

Pending Home Sales Decline 0.9%, Well Below Lowest Estimate; About that "Know Before You Owe" Theory

Today the NAR released the Pending Home Sales Index, a measure of expected sales on existing homes. The Econoday Consensus Estimate was for a 0.5% rise in a range of 0.0 to 2.4%.

No economist got the sign correct. The index unexpectedly declined 0.9% month-over-month, well below even the lowest economist's estimate.

Pending home sales in November declined for the third time in four months as buyers continue to battle both rising home prices and limited homes available for sale. The pending home sales index was down 0.9 percent but up 2.7 percent from a year ago. Modest gains in the Midwest and South were offset by larger declines in the Northeast and West.

November's dip continued the modestly slowing trend seen ever since pending sales peaked to an over nine year high back in May. NAR said that home prices rose too sharply in several markets, there were mixed signs of an economy losing momentum and waning supply levels all contributed to headwinds in recent months despite low mortgage rates and solid job gains.

The Northeast decreased 3.0 percent but is still 4.3 percent above a year ago. In the Midwest the index rose 1.0 percent and and is now 4.1 percent above November 2014. Pending home sales in the South increased 1.3 percent and are 0.5 percent higher than last November. The index in the West declined 5.5 percent but remains 4.5 percent above a year ago.

Recent History Of This Indicator

Pending home sales are expected to rise a solid 0.5 percent in November vs. a softer 0.2 percent rise in October. The expected gain would point to a badly [needed?] increase for final sales of existing homes which were depressed in November by new disclosure rules and related time delays.

About that "Know Before You Owe" Theory

Ahead of the release, Bloomberg parroted the NAR line that disclosure rules affected November existing home sales.

I wrote about the rule changes on December 22, in Existing Home Sales Plunge 10.5%, NAR Blames "Know Before You Owe"; What's the Excuse for Last Month?

The rule change, dubbed "Know Before You Owe", was a simplification of disclosure rules. It became effective on October 3. I failed to see how a decline in November was related to simplification of rules that actually took effect the previous month.

Bear in mind, that the NAR called a dip in October "disturbing" but in November placed the entire blame on the "Know Before You Owe" rules.

If the rule change theory was correct, delays in November would have pushed into expected closings in December. The Econoday economist guessing a rise of 2.4% probably believed that theory. Instead, we see a plunge.

Of course the index itself could be wrong, so we have to wait for the actual December numbers. But as it sits, the most likely thing is blaming "Know Before You Owe" was simply a bad call.

Today, the NAR blames "home prices that rose too sharply in several markets".  I find that a much better theory, especially if we replace the word "several" with the word "most".

What about the NAR's perpetual "never a better time to buy" thesis? Is the NAR willing to toss that theory on the ash heap of history?

Don't hold your breath.

Mike "Mish" Shedlock

Drastic Action

In Misguided Plans to Fix the Fed Part 1: Bernie Sanders I proposed abolishing the Fed. That's something I have stated many times over the past decade.

Nonetheless, reader Harold wonders is that action would be a bit drastic. Harold writes ...

Hello Mish:

Don't you think totally abolishing the Fed is a bit drastic.  Theoretically if they could be stripped of any political influence and let the free market set interest rates their endless bubble production would be muted. I think their function of providing liquidity as a lender of last resort serves a useful function. Wasn't this the original purpose for creating the fed in 1913? I think their function has been bastardized by politicians and they have evolved into a tool of the government and the financiers. Free market capitalism can run the economy otherwise. 

I hope you have a healthy happy New Year.  Thanks for the great commentary.

Harold

Hello Harold. No I don't believe my solution to end the Fed is drastic.

Look at things this way: How can anyone determine the precise amount of steel, of oranges, of oil that the economy should produce?

If you do not think that is possible, then please tell me how a set of jackasses (or geniuses if you prefer) can possibly know where interest rates or the money supply should be?

In practice, the Fed has never once spotted a bubble or bust in advance. Nor does the Fed have any foresight in predicting economic growth. The Fed is perpetually overoptimistic as are economists in general.

Setting the price of orange juice would be far simpler than setting interest rates.

The Fed may have an alleged "function" but the result has been boom-bust cycles of increasing amplitude over time.

Mike "Mish" Shedlock

Checking Back In Regarding a "Sure Thing"

Several readers sent emails prior to the Fed hike on December 16 that the stock market would collapse immediately following a rate hike.

I commented on that sentiment in Knowing the Unknowable; Reflections on the Fed Hike. Here's a snip.

"Epocalypse" Now

The first person, an economic blogger, tells me a global economic collapse of biblical proportion is coming. He labels the collapse an "epocalypse" and offered a guest-post article that I passed on.

I responded "No one knows the precise timing of a collapse. There might not even be one.
Stocks could do a slow decline like Japan for years."

You can start a countdown, because yesterday he pinged back "Check in with me at the end of the week."

Checking Back In

I gave "Epocalypse" more than the few days he asked. The end of the week would have been the 18th. It's now the 29th.

This is what I see.



Curiously, the market is right where the market closed on the day of the hike. Anyone who bought short-term CALLs or PUTs expecting high volatility lost money.

The rate hike was the most telegraphed Fed move in history. No one had any advantage in knowing the Fed would hike.

I can list up with more reasons than most as to why the markets are over-valued and pension plans extremely vulnerable. For example ...

1. Stocks More Overvalued Now Than 2000 and 2007 No Matter How You Look at Things
2. Bubble Debate; Equity Allocations vs. Shiller PE; Simple World
3. Death Watch Illinois: Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up
4. Apocalypse Illinois: IOUs Projected to Hit $10.5 Billion, $163 Billion Total Accumulated Liabilities

Nothing above is a timing indicator. And as we have seen, a rate hike is not a precise timing indicator either.

Had a serious decline started on the day of the Fed hike, "Epocalypse" would have been nothing more than lucky, but he likely would have thought he was a genius who "knew" something.

Can an "Epocalypse" start tomorrow?

Sure, why not? But it could also start a month from now or six months from now. We could also see a slow drift down for years like Japan. We could even see stocks do nothing for years while valuations catch up to smoothed earnings.

The one thing we do know is history suggests stocks are hugely over-valued. But I don't know when valuations matter. No one does.

Mike "Mish" Shedlock

Get Your Money Out of Italian Banks Now! Austerity and Bail-Ins Fan Populist Flames; Italy's 5-Star Movement to Challenge Renzi

Austerity and Bail-Ins Fan Populist Flames

The Italian economy is growing, albeit barely. But Italy is still saddled with massive amounts of debt.

Citizens are upset about a recovery that has passed most of them by. For example, youth unemployment is a whopping 39.8%.

That's a lot of potential voters rightfully upset about things. For them, promises are many, and gains are nonexistent.

Topping off the discontent, Italy Bank Rescues Spark Bail-In Debate as Anger at Renzi Grows.

In 2013, Sergio Picinotti, a 63-year-old unemployed man living with his elderly mother, invested much of their nest egg of €40,000 in a bond issued by Banca Etruria, their local bank based in the medieval Tuscan city of Arezzo.

“They said ‘what are you doing keeping that in your checking account? Put it here, you’ll earn 4 per cent flat,” Mr Picinotti recalls. “A friend at the bank told me: ‘Trust me, it will take the third world war to shut down Banca Etruria’.”

Today, Mr Picinotti has lost all that money, but Banca Etruria never closed: in fact it was saved from collapse last month along with three other small banks in a dramatic rescue operation engineered by the centre-left Italian government led by Matteo Renzi.

The trouble is there was a price to pay: under the terms of the deal, several thousand subordinated bondholders such as Mr Picinotti were wiped out along with Banca Etruria shareholders, while holders of senior debt and depositors were spared.

“They stole it all, I’m living on the edge,” says Mr Picinotti.

But the reverberations of the bank rescue have also been felt far beyond Tuscany: as Europe prepares to institute new rules from next year which would force losses on bank creditors and big depositors, the saga of Banca Etruria serves as a cautionary tale to politicians and policymakers about the public backlash that could follow any future “bail-ins”.

On a national level, anger has been mounting towards Mr Renzi for his handling of the affair. It has created an unlikely hotbed of discontent with the 40-year-old prime minister and former mayor of nearby Florence in a region that is traditionally sympathetic to his own political party at a time when he is already battling declining polling numbers.

The Banca Etruria case has also revived worries about the health of the Italian banking sector, which remains saddled by more than €200bn of non-performing loans (NPLs) and has barely started to increase lending again after the end of a bruising triple-dip recession. It has also raised questions about the effectiveness of regulators at the Bank of Italy and Consob, the stock market regulator. Italian officials have defended the solidity of their banks and the work of their regulators, and pointed to new reforms of small bank governance. But Francesco Galietti, an analyst at Policy Sonar in Rome, said: “If there was such a kerfuffle with four regional banks, what will a large resolution look like?”

Italy's 5-Star Movement to Challenge Renzi

With the above bailout and unemployment backdrop, it should not be surprising to see the eurosceptic Five Star Movement on the Rise.

When the populist Five Star Movement burst into Italian politics in 2009 during the financial crisis, it was defined by uncompromising protests and the burly, sardonic figure of its leader, the comedian Beppe Grillo.

But the Five Star Movement is now attempting to change its face from that of one of Europe’s most eccentric — even clownish — political parties. The transformation aims to achieve what seemed like a fantasy only a year ago: to govern the country and challenge the centre-left government led by prime minister Matteo Renzi.

Mr Grillo, 67, has removed his name from the party logo, signalling that he may soon step aside. His most likely heir is Luigi Di Maio, a 29-year-old smooth-talking Neapolitan with polished looks, tight-fitting dark suits and moderate tones.

“The perception of the movement has changed,” Mr Di Maio tells the Financial Times. “At the beginning there was the idea that this was a protest movement . . . But we crashed through that wall. We want to govern.”

The odds of that happening are increasing. The Five Star Movement is now Italy’s second party. After trailing Mr Renzi’s Democratic party by nearly 20 percentage points a year ago, recent polls suggest the margin has shrunk to about 5 percentage points — 32 per cent to 27 per cent.

The Five Star Movement has won a few municipal races — clinching control of small cities such as Parma, Livorno and Ragusa. The results have been mixed. The mayor of Livorno, for example, has faced harsh criticism after a scandal over uncollected rubbish broke out in the Tuscan port city.

A bigger test of the Five Star Movement’s strength is to come next year, when local elections will be held in some of Italy’s largest cities. The big prize is Rome, the scandal-ridden capital where Five Star has been riding high in the polls after the resignation of Democratic party mayor Ignazio Marino in October.

The Five Star Movement’s platform has been based on a few key pillars that have drawn supporters from both the right and the left: opposition to corruption, environmentalism, and a referendum on euro membership, which Mr Di Maio blames for many of Italy’s economic woes.

“The real failure of monetary union is to think that countries in the south should travel at the same speed as the ones in the north,” he says.

Lately, his party has been lashing out at Italy’s rescue of four small banks, which wiped out thousands of retail investors holding junior debt.

“Their goal was to save the bankers, not the citizens,” Mr Di Maio wrote on his Facebook page last week. There are some signs he has tried to moderate Mr Grillo’s sharper edges. Mr Di Maio recently helped broker a deal with Mr Renzi’s PD for the appointment of three constitutional judges.

And he is keen to distance himself from another populist party shaking Europe’s establishment, France’s far-right National Front. Its rise reflects a “climate of general indignation”, says Mr Di Maio. Yet the Five Star Movement, he insists, is not a populist toxin but its antidote: “We’re the natural spokesman of citizens. We are a barrier against hatred and extremism”.

Get Your Money Out of Italian Banks Now!

The goal is always to bail out the banks at any expense, especially that of taxpayers. The bail-ins in December are a huge warning shot at what's highly likely in 2016.

If you have money in weak banks after this mess, you are crazy. Cyprus, Greece, and Italy have all provided warning shots. I have been warning about these setups for years. And in 2016, banks can go right after depositors if necessary.

It will be very interesting to watch target2 imbalances (a measure of capital flight) following this bail-in debacle. The political scene looks interesting as well. Renzi's days may well be numbered.

If the Renzi government falls, it's highly likely it will be to a eurosceptic party. In this regard, Greece was a sideshow. Italy is the real deal.

Mike "Mish" Shedlock

Misguided Plans to Fix the Fed Part 1: Bernie Sanders

Starting with a recent op-ed in the New York Times by Bernie Sanders, let's take a look at various proposals floating around to fix the Fed and other central banks.

Bernie Sanders says To Rein In Wall Street, Fix the Fed

Sanders: Wall Street is still out of control. Seven years ago, the Federal Reserve and the Treasury Department bailed out the largest financial institutions in this country because they were considered too big to fail. But almost every one is bigger today than it was before the bailout. If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

To rein in Wall Street, we should begin by reforming the Federal Reserve, which oversees financial institutions and which uses monetary policy to maintain price stability and full employment. Unfortunately, an institution that was created to serve all Americans has been hijacked by the very bankers it regulates.

Mish: That type of populist proposal will appeal to those who believe Wall Street is the problem. It will also appeal to those who understand the Fed is indeed in bed with Wall Street. But we must analyze Sanders' specific recommendations one-by-one.

Sanders: The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort — not to fight phantom inflation.

Mish: Sanders ignores the dotcom bubble, the housing bubble, and the bubbles now in both stocks and bonds. Those bubbles all have their roots in a Fed that kept rates too low, too long. The idea that rates should be tied to a single measure like unemployment is ludicrous. And at 4% unemployment rates, the Fed would seldom if ever hiked. The Fed does not know where interest rates should be, and neither does Sanders. 

Sanders: What went wrong at the Fed? The chief executives of some of the largest banks in America are allowed to serve on its boards. During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs. These are clear conflicts of interest, the kind that would not be allowed at other agencies. We would not tolerate the head of Exxon Mobil running the Environmental Protection Agency. We don’t allow the Federal Communications Commission to be dominated by Verizon executives. And we should not allow big bank executives to serve on the boards of the main agency in charge of regulating financial institutions.

Mish: The conflicts of interest are indeed obvious. The solution is to get rid of the Fed.

Sanders: The Fed must also make sure that financial institutions are investing in the productive economy by providing affordable loans to small businesses and consumers that create good jobs. How? First, we should prohibit commercial banks from gambling with the bank deposits of the American people. Second, the Fed must stop providing incentives for banks to keep money out of the economy. Since 2008, the Fed has been paying financial institutions interest on excess reserves parked at the central bank — reserves that have grown to an unprecedented $2.4 trillion. That is insane. Instead of paying banks interest on these reserves, the Fed should charge them a fee that would be used to provide direct loans to small businesses.

Mish: I agree the Fed should prohibit commercial banks from gambling with the bank deposits of the American people. The way to do that is end fractional reserve lending. Lending deposits that are supposed to be available on demand is fraudulent. Paying interest on excess reserves the Fed creates out of thin air is also fraudulent. However, the notion the Fed should charge interest on reserves to spur lending is ridiculous. Mathematically, every dollar the Fed prints has to be held by someone. When banks lend, the money eventually ends up as a deposit somewhere else. Moreover, efforts to force banks to make more loans will just encourage bad lending decisions and subsequent writeoffs.

Sanders: As a condition of receiving financial assistance from the Fed, large banks must commit to increasing lending to creditworthy small businesses and consumers, reducing credit card interest rates and fees, and providing help to underwater and struggling homeowners.

Mish: Banks should not be bailed out or given assistance ever. To do so creates a moral hazard.

Sanders: We also need transparency. Too much of the Fed’s business is conducted in secret, known only to the bankers on its various boards and committees. Full and unredacted transcripts of the Federal Open Market Committee must be released to the public within six months, not five years, which is the custom now. If we had made this reform in 2004, the American people would have learned about the housing bubble well in advance of the financial crisis.

Mish: The housing bubble was obvious to every thinking person. Yet, the idea minutes would prove the Fed knew are highly unlikely. The Fed has never spotted a bubble. And neither the Fed nor Sanders sees the bubbles we are in now. That said, I fully support transparency and the release of full and unredacted transcripts.

Sanders has some things right, but as many things wrong.

We should audit the Fed and end it, not attempt to fix it with absurd rules about where interest rates should be, coupled with preposterous efforts to force banks to lend.

Mike "Mish" Shedlock

More Abenomics Failures: Retail Sales and Factory Output Contract, Businesses Reject Wage Hike Plea; Fine-Tuning à la Buiter

Complete Failure of Abenomics

Abenomics is back in the spotlight tonight. Results show a complete failure on three fronts: retail sales are down, factory output is back in contraction, and the most humiliating of all, Japanese firms have outright rejected Prime Minister Shinzo Abe's plea for higher wages.

Retail Sales Decline, Factory Output Contracts

Please consider Japan output, retail sales slump, dampen recovery prospects.

Japan's factory output fell for the first time in three months in November and retail sales slumped, suggesting that a clear recovery in the world's third-largest economy will be delayed until early in 2016.

While manufacturers expect to increase output in coming months, the weak data casts doubt on the Bank of Japan's view that an expected pick-up in exports and consumption will help jump-start growth and accelerate inflation toward its 2 percent target.

Industrial output fell 1.0 percent in November from the previous month, more than a median market forecast for a 0.6 percent decline, data by the trade ministry showed on Monday.

Separate data showed that retail sales fell 1.0 percent in November from a year earlier, more than a median forecast for a 0.6 percent drop, as warm weather hurt sales of winter clothing.

Wary of soft growth, the government plans nearly $800 billion in record spending in the budget for the fiscal year that will begin on April 1.

The BOJ has signalled readiness to expand stimulus if risks threaten Japan's recovery prospects. The central bank fine-tuned its stimulus programme on Dec. 18 to ensure it can keep up or even accelerate its money-printing.

Fine-Tuning

Damn that weather. It's always too hot, too cold, or too perfect for retail sales.

The only possible conclusion is central banks need to fine-tune the weather to get predictable outcomes.

Not to worry, there's the tried-and-failed method of more government spending as a fallback mechanism.

Businesses Reject Abe's Plea to Hike Wages

As if weather-related fine-tuning was not problematic enough, the Japan business lobby head won't commit to higher wages

The head of an influential Japanese business lobby won't pass on the government's requests to its members to raise salaries next year, a worrying sign that real wages may not increase fast enough to boost consumption in the country.

"The government is hoping for higher wages, but the Keizai Doyukai, as an organization that corporate executives personally belong to, is not going to tell its members what to do," said Yoshimitsu Kobayashi, chairman of the Keizai Doyukai, which regularly participates in the government's corporate policy panels and is one of Japan's top three business lobbies.

"Companies that don't have money obviously won't raise wages."

Higher wages are crucial to policymakers' efforts to break a decades-long cycle of weak growth and deflation. Prime Minister Shinzo Abe has won modest wage gains from the largest firms, but this has been slow to filter through the economy.

Around 65 percent of people work at small and medium-sized enterprises, many of which are losing money and are therefore unlikely to raise salaries or spend extra money on training employees

More Fine Tuning Needed

What's with these damn corporations? Why do they insist on making a profit anyway? Clearly this misguided and very unpatriotic behavior must be fixed at all costs.

And I have just the solution. As part of the fine-tuning effort, all Abe needs to do is guarantee minimum corporate profits.

Should that fail, there's always the last resort of free helicopter-drop money for everyone. Lord knows how important it is to slay the deflation dragon once and for all.

Don't take my word for it. Instead, listen to Willem Buiter, Citibank's Chief Economist.

He knows precisely how damaging deflation is. For details, please see Helicopter Drop, What Else?

Mike "Mish" Shedlock

Death Watch Illinois: Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up

Illinois Pension Problems Mount

Illinois' unfunded liabilities have risen ten out of the last eleven years. The only exception was 2011. This was despite massive rallies in financial markets every year since 2009.

One out of every five tax dollars goes to pensions, but that's nowhere close to enough to stem the tide.



Illinois has the worst funded pension plans in the nation. Those plans are a mere 42% funded in aggregate.

That bleak estimate understates the problem because it assumes 8% annualized returns going forward. Those returns are not going to happen.

I expect 0-2% returns at best, and most likely negative real returns for seven to ten years.

Still No Budget

In October, Moody's cut Illinois debt to one step above junk, specifically citing pensions as the "greatest challenge".  Lower ratings have driven up borrowing costs. In turn, rising borrowing costs mean less money to spend elsewhere.

The new year is less than a week away, but Illinois still does not have a budget.

Bloomberg reports Illinois Record Budget Impasse Makes It Worse for the State's Pension Disaster.

As 2015 draws to a close, Illinois marks half a year without a budget. No spending plan has driven up borrowing costs, sunk its credit rating, and perhaps worst of all, exacerbated the state’s biggest problem: its underfunded pensions.

Home to the least-funded state retirement system in the nation, Illinois has $111 billion of pension debt, which breaks down to more than $8,000 per resident. Partisan gridlock has produced the longest budget impasse in Illinois history. The stalemate has not only weakened state finances, it has kept lawmakers from finding a fix for those mounting liabilities.

It’s been seven months since the Illinois Supreme Court rejected the state’s solution. Justices threw out the 2013 restructuring that took six attempts over 16 months to pass, despite one-party rule at the time. The measure was projected to save $145 billion over 30 years by limiting cost-of-living adjustments and raising the retirement age.

Illinois enters 2016 snarled in partisan bickering as Governor Bruce Rauner, the state’s first Republican chief executive in 12 years, and the Democrat-controlled legislature can’t agree on annual appropriations, much less an overhaul of a retirement system that must withstand an inevitable legal challenge. The state constitution bans reducing worker retirement benefits.

In July, Rauner laid out a plan to create a tiered system to cut retirement liabilities. At the time, he said it would save taxpayers billions of dollars. The proposal, which included a measure to allow municipalities to file for bankruptcy protection, was never introduced, according to Catherine Kelly, his spokeswoman.

Illinois hasn’t sold bonds since April 2014, a record borrowing drought. The spread on its existing debt has widened. Investors demand 1.8 percentage points of extra yield to own 30-year Illinois bonds, the most among the 20 states tracked by Bloomberg. When the spread climbs, that’s reflecting that investors think the problem is getting worse, said Richard Ciccarone, Chicago-based chief executive officer of Merritt Research Services.

“What’s the root cause of why we’re in the problem we’re in?” Ciccarone said. “It’s down to the pensions.”

Illinois is like a patient in the emergency room, said Paul Mansour at Conning, which oversees $11 billion of munis, including Illinois securities.

Death Watch Illinois

Illinois is terminal. Pension cancer is too deep and has spread too far to save the patient. The state is bankrupt morally, politically, and monetarily.

However, there is no provision for state bankruptcy (something US Congress needs to address). Regardless, what cannot be paid won't.

Illinois cancer is not just at the state level. The cancer permeates cities far and wide.

The Chicago Board of Education is already dead whether the coroner or Mayor Rahm Emmanuel makes the announcement or not.

Tax hikes won't help the dead or dying. Instead they will cause the healthy and able to flee.

Many Illinois cities lie in a bankruptcy coffin, but the current law will not let the coroner make that announcement.

The best way to ease municipality pain is to pass a law allowing municipal bankruptcies. Such a bill would let terminal cities and taxing bodies move to hospice to die in peace. That's something the Illinois legislature can and should address.

Illinois Republicans, I have a question: Where the heck is that bill?

Fresh Start

Corrupt politicians in bed with union officials have hollowed out the state beyond repair. Let's not pretend otherwise.

Illinois needs a fresh start:

1. Bankruptcies at the municipal level
2. A new constitution that allows pension cuts at the state level
3. Right to work laws
4. End of collective bargaining of government employees
5. End of prevailing wage laws
6. Tax reform, especially property tax reform
7. Workers' compensation reform
8. Unemployment insurance reform

Until we see those changes, the state will lay on the death-bed slowly bleeding workers and businesses in a fate worse than death by bankruptcy or default.

Sobering Pension Assessment

As noted above Illinois pension plans are 42% funded, and that's with projected returns of 8%. If returns average 2% or even 5%, liabilities and under-fundings will soar.

Unfortunately, history suggests 0% is more likely. Here's further discussion of what to expect and why.

1. Stocks More Overvalued Now Than 2000 and 2007 No Matter How You Look at Things
2. Bubble Debate; Equity Allocations vs. Shiller PE; Simple World
3. Apocalypse Illinois: IOUs Projected to Hit $10.5 Billion, $163 Billion Total Accumulated Liabilities

Mike "Mish" Shedlock

Economic Illusions vs. Reality; Helicopter Drop, What Else?

Without providing a link, ZeroHedge posted some comments today regarding "Helicopter Drop Theory" by Willem Buiter, Citibank's Chief Economist.

Willem Buiter on Failure of Monetary Policy

We believe that a common factor in the relatively low response of real economic activity to changes in asset prices and yields is probably the fact that the euro area remains highly leveraged. The total debt of households, non-financial enterprises and the general government sector as a share of GDP is higher now than it was at the beginning of the GFC.

The wealth effect of higher stock prices appears to do little to boost private consumer expenditure.

To the extent that monetary policy has had an effect on real activity, and will have some incremental effect on activity, it may not be entirely sustainable. This is because part of the effect has been by bringing forward demand from the future, such as major purchases, including for cars or construction. That suggests that monetary policy, even if and when it has been effective in stimulating activity, will run into diminishing returns even in sustaining the levels of activity it helped to boost.

Economic Illusions vs. Reality

I wholeheartedly agree with every point made above by Buiter. Actually, things are far worse than he stated. The problem is not just in Europe, but everywhere.

With their deflation-fighting tactics, central banks have accomplished five things, none of them any good.

1. Brought demand forward at the expense of future GDP
2. Encouraged more leverage
3. Increased speculation in financial assets
4. Created bubbles in equities and bonds
5. Mistook economic activity for what much of it really is: malinvestment

The solution is not more craziness, but rather an admission that central banks are themselves the source of the problem.

Of course Keynesian fools would never admit such a thing. Instead they promote more and more of what common sense and history proves cannot work.

Willem Buiter Proposes Helicopter Drop

"Helicopter money drops (what else?)"

Our conclusion is that, in a financially-challenged economy like the Eurozone, with policy rates close to the ELB, and with excessive leverage in both the public and private sectors, balance sheet expansion by the central bank alone may not be sufficient to boost aggregate demand by enough to achieve the inflation target in a sustained manner.

This is more than an academic curiosity. Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990. The balance sheet expansion of the Bank of Japan since the crisis has been remarkable but ineffective as regards the achievement of sustained positive inflation and, since 2000, the inflation target. The balance sheet of the Swiss National Bank has expanded even more impressively, again with no discernable impact on the inflation rate.

The case for helicopter money is therefore partly to ensure the euro area (and some other advanced economies) reflate powerfully enough to escape the liquidity trap, rather than settle in a lasting rut of low-flation and low growth, with “emergency” levels of asset purchases and interest rates becoming the norm.

If, as seems possible, the ECB will increase, in H1 2016, the scale of its monthly asset purchases from €60bn to, say, €75bn, and if these additional purchases are concentrated on public debt, the euro area will benefit from a ‘backdoor’ helicopter money drop –something long overdue.

Myth of the Deflation Monster 

Buiter wants to slay an imaginary monster, deflation.

He moans "Japan has failed to achieve a sustained positive rate of inflation since its great financial crash in 1990."

Other than the absolute mess Japan has gotten into as a direct result of decades of deflation fighting madness, what problem has a lack of sustained positive rate of inflation caused Japan?

The answer is: None.

The bank of Japan is now the entire market for Japanese debt. What positive result stems from that?

The answer once again is: None.

Nonetheless Buiter wants the ECB to pursue the same inane path.

There will be no benefit. Leverage will rise, not sink. And to top it off, debt purchases of the nature he wants are likely illegal under the Maastricht treaty.

Buiter has learned nothing from history. He ought to look in a mirror, admit he sees failure, and resign.

But economic illiterates don't resign, they just keep promoting policies that both common sense and history show can never work.

Challenge to Keynesians

The simple fact of the matter is "Inflation Benefits the Wealthy" (At the Expense of Everyone Else) .

If Buiter disagrees, he can respond to my Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit"

Mike "Mish" Shedlock

Evolution of Shipping: Amazon Starts Own Air Cargo and Trucking Services

Evolution of Shipping

After announcing Amazon Prime, free Two-Day Shipping for eligible purchases, Amazon followed up Air Prime, a future delivery system from Amazon designed to safely get packages to customers in 30 minutes or less using drones.

The next logical step is for Amazon to cut out as many air delivery middlemen as it possibly can.

Thus, it cannot be much of a surprise to learn Amazon Starting its Own Air Cargo Operation.

Cargo Facts reported today [December 18] that Amazon is building its own cargo operation and is in talks with Boeing to acquire up to 20 767-freighter jets to help deliver packages to customers around the U.S.

The Seattle Times also reported about Amazon’s plans on Thursday, but noted that the company is looking to lease jets, not purchase them, because it does not have an Air Operator’s Certificate, among other reasons.

When asked for comment, Amazon.com provided this statement to GeekWire: “We have a longstanding practice of not commenting on rumors and speculation.”

An article last month [“A Mysterious Air Cargo Operation, Amazon.com?”] noted that a mysterious company, presumably Amazon, was flying four cargo flights per day out of Ohio’s Wilmington Air Park, which previously served as a facility for DHL until 2008.

The mystery company used four contracted Boeing 767s that fly to and from four U.S. airports - Allentown, Ontario (CA), Tampa, Oakland - that all have nearby Amazon distribution centers.

Having more control of the entire end-to-end customer experience would also help Amazon avoid issues it has had with third-party delivery companies like UPS during its busy holiday season.

Amazon Branded Trucks

On December 4, Amazon announced Branded Truck Trailers for Inventory Management.

for Amazon, the initiative is the latest sign of the e-commerce giant’s increasing interest in taking transportation of its merchandise into its own hands.

The company still relies on traditional mail to deliver most packages, but Amazon has been experimenting with its own methods, including bicycle couriers, Amazon Fresh delivery trucks, drones and an Uber-like crowdsourced delivery system.

The release notes the company has begun rolling out thousands of trailers to “increase capacity for package delivery from fulfillment centers to sort centers.”

In other words, the trailers won’t be delivering packages to customers’ doors.

Amazon Planes



Amazon Trucks



Amazon Drones



Mike "Mish" Shedlock

Fed a Creature of Financial Markets; The Draghi PUT; Global Crisis Coming Up

Creature of Financial Markets

Stephen Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, blasts the Greenspan Fed, the Bernanke Fed, and the Yellen Fed in his latest post The Perils of Fed Gradualism.

After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization. It has now taken the first step toward returning its benchmark policy interest rate – the federal funds rate – to a level that imparts neither stimulus nor restraint to the US economy.

A majority of financial market participants applaud this strategy. In fact, it is a dangerous mistake. The Fed is borrowing a page from the script of its last normalization campaign – the incremental rate hikes of 2004-2006 that followed the extraordinary accommodation of 2001-2003. Just as that earlier gradualism set the stage for a devastating financial crisis and a horrific recession in 2008-2009, there is mounting risk of yet another accident on what promises to be an even longer road to normalization.

The problem arises because the Fed, like other major central banks, has now become a creature of financial markets rather than a steward of the real economy. This transformation has been under way since the late 1980s, when monetary discipline broke the back of inflation and the Fed was faced with new challenges.

The challenges of the post-inflation era came to a head during Alan Greenspan’s 18-and-a-half-year tenure as Fed Chair. The stock-market crash of October 19, 1987 – occurring only 69 days after Greenspan had been sworn in – provided a hint of what was to come. In response to a one-day 23% plunge in US equity prices, the Fed moved aggressively to support the brokerage system and purchase government securities.

In retrospect, this was the template for what became known as the “Greenspan put” – massive Fed liquidity injections aimed at stemming financial-market disruptions in the aftermath of a crisis. As the markets were battered repeatedly in the years to follow – from the savings-and-loan crisis (late 1980s) and the Gulf War (1990-1991) to the Asian Financial Crisis (1997-1998) and terrorist attacks (September 11, 2001) – the Greenspan put became an essential element of the Fed’s market-driven tactics.

The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy.

Largely for that reason, and fearful of “Japan Syndrome” in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period.

Over time, the Fed’s dilemma has become increasingly intractable. The crisis and recession of 2008-2009 was far worse than its predecessors, and the aftershocks were far more wrenching. Yet, because the US central bank had repeatedly upped the ante in providing support to the Asset Economy, taking its policy rate to zero, it had run out of traditional ammunition.

Today’s Fed inherits the deeply entrenched moral hazard of the Asset Economy. In carefully crafted, highly conditional language, it is signaling much greater gradualism relative to its normalization strategy of a decade ago. The debate in the markets is whether there will be two or three rate hikes of 25 basis points per year – suggesting that it could take as long as four years to return the federal funds rate to a 3% norm.

But, as the experience of 2004-2007 revealed, the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents. With prospects for a much longer normalization, those risks are all the more worrisome.

Only by shortening the normalization timeline can the Fed hope to reduce the build-up of systemic risks. The sooner the Fed takes on the markets, the less likely the markets will be to take on the economy. Yes, a steeper normalization path would produce an outcry. But that would be far preferable to another devastating crisis.

Beholden to Financial Markets

Roach provides a nice historical perspective but he misses the boat in regards to risks.

Not only is the Fed a creature of the Financial markets, it is beholden to the markets. For some treasury durations, the Fed became the market.

Unfortunately, it's not just the Fed.

Global Crisis Coming Up

Global imbalances have never been worse.

The Bank of Japan is the only market for Japanese government debt. And in Europe, government debt trades at preposterously low and sometimes negative yields. The "Draghi PUT" is at least as big as any PUT by Greenspan.

The risk is not that the Fed (central banks in general) will spawn more asset bubbles. It's far too late to raise that concern. Massive bubbles in equities and bonds have already been blown.

Banks that were "too big to fail" are far bigger now than ever before.

Beggar-thy-neighbor competitive currency debasement is the order of the day in China, Europe, and Japan.

Let's not pretend we have a choice that will prevent another devastating financial crisis. We don't. Only the timing is in question.

Mike "Mish" Shedlock

Merry Christmas!

Economic reports will commence in just a bit. First things first. Merry Christmas!



Mike "Mish" Shedlock

Google, Ford Enter Partnership on Self-Driving Cars

Self-driving cars are the wave of the future, sooner, not later. The trend is now impossible to deny. The only question that remains pertains to the speed of the rollout.

2020 is no longer a pipe dream as many thought. 2030 is far too distant.

The breathtaking speed of possibilities can be seen in a non-exclusive announcement Google Partners with Ford on Self-Driving Vehicles.

Citing sources familiar with the matter, Yahoo Autos reports the partnership is equally beneficial for both parties, with Ford getting a boost in self-driving software development and Google gaining access to invaluable automobile manufacturing expertise.

Ford just this month announced plans to begin field tests of prototype self-driving vehicles in California. Google, on the other hand, has a fleet of 53 cars that have together clocked more than a million miles on public roads in San Francisco and Austin, Texas.

Google’s tie-up with Ford is not exclusive, the report notes, meaning deals with other car makers could be in the works.

The world’s largest and most profitable tech company, Apple, is also rumored to be working on its own automobile project in secret. Dubbed Project Titan, AppleInsider sources indicate Apple’s skunkworks initiative is currently operating out of a secret lab near the company’s Cupertino, Calif., headquarters.

While Apple has yet to comment on Titan - CEO Tim Cook actively dodged questions in a “60 Minutes interview” - the company has made numerous hires from the auto industry, including former Tesla engineers and software developers working on autonomous technologies.

The big splash will not be personal vehicles, but rather the loss of millions of long-haul truck jobs and short-haul taxi jobs to automation.

Those jobs will vanish by 2025 at the latest. Something between 2020 and 2022 seems more likely, and even 2020 would not be much of a surprise given the speed of announcements.

Mike "Mish" Shedlock

UPS Delivers 36 Million Packages Tuesday, Double Normal; Sign of Huge Holiday Sales?

Double Normal

Christmas is just over a day away. Package delivery is at record volumes. Does that portend a huge Christmas shopping season?

Before addressing that question please consider the Supply Chain article UPS Delivers 36 Million Packages - Double Normal.

UPS expected to deliver 36 million packages yesterday, double its normal volume, as online retail sales continue to grow during the Christmas season.

The parcel service has hired an extra 95,000 seasonal workers to help with the expected onslaught of packages, said Fortune magazine.

The company said it expects to deliver some 630 million packages between Thanksgiving and the end of December, up 10.3 percent from 2014.

Sign of Huge Holiday Sales?

A huge surge in overall sales remains to be seen.

The Supply Chain headline "UPS Delivers 36 Million Packages - Double Normal" sounds exciting, but that is for a single day, not the entire season. The hype is not apparent until one dives into the details.

Overall package delivery is up a very healthy 10.3% but is that at the expense of in-store sales?

To be sure, there was a splurge of last minute shopping, including some by me.

I can point out some gross inefficiencies at the micro-level.

I ordered four items a few days ago, of the exact same undisclosed nature (because my wife might be reading this and the presents are for her), all from the same store, and all in the same online order. I received not one package, but four packages, in four different deliveries (morning and afternoon over two days). The deliveries were all rushed, with no delivery charge.

Somewhere in this supply chain, there appears to be some gross inefficiencies.

Personal anecdotes aside, until we see actual retail sales reports, I am sticking with my forecast that increased online sales will not hugely overpower an otherwise lackluster holiday shopping season.

Mike "Mish" Shedlock

Positive Side of Negativity

Being the persistent optimist, I try to look on the bright side of things. Today, lets investigate the "positive side of negativity" as pertains to Spain.

In the wake of fragmented Spanish elections that left no political party or coalition with an outright majority, the Socialists Rejected a Deal with Spanish PM.

The arduous task of assembling a new government for Spain got off to a bad start on Wednesday after the leader of the Socialist party flatly ruled out any deal with the Popular party of prime minister Mariano Rajoy.

[Mish: Facing reality is a positive, not negative event. If new elections are coming, as seem likely, it's best to admit that now, rather than give false hope to something that cannot possibly work. In this light, rejection of something that cannot work is a good thing.]

Pedro Sánchez, the leader of the Socialists, held a brief meeting with Mr Rajoy in the prime ministerial compound outside Madrid — but apparently only to reiterate his opposition to any accord.

“We will vote against the Popular party and against Mariano Rajoy as prime minister. Voters have asked for change,” he told a news conference after the meeting.

[Mish: Change is good. Voters asked for a change. So why shouldn't they get change?]

Officials close to Mr Rajoy signalled their disappointment with the Socialists’ stance but declined to read the rejection as final. “It was not the best of starts but it was the start of the process, not the end,” Fernando Martinez Maíllo, one of the PP’s deputy leaders, said.

[Mish: Note the denial by Rajoy. That's a bad thing. It's best to get rid of bad things. I am optimistic that Rajoy won't last.]

Rajoy accused Mr Sánchez of arriving at the meeting “carrying a No in front of him” and for “not having a positive attitude”. Echoing earlier statements by Mr Rajoy himself, Mr Martínez Maíllo urged the centre-left to commit to a stable government for Spain and to show “responsibility”.

[Mish: Sánchez remains absolutely positive he will not work with Rajoy. I see positives in this outcome except from the self-serving point of view of a corrupt politician hoping to cling to power.]

Mr Rajoy and his Socialist counterpart are not known to have a good personal relationship. The two clashed bitterly in a televised debate shortly before the elections, with Mr Sánchez describing his opponent as “indecent” and Mr Rajoy castigating his opponent as “mean” and “miserable”.

[Mish: Please look on the bright side. The mudslinging from both sides was likely accurate each way. Moreover, it provided much-needed entertainment value just as Donald Trump provides in the US.]

But the PSOE has little chance of leading a government alliance itself, especially since it is unlikely it could win over Podemos for such a deal. An early election is also undesirable, given the apparent resurgence of its upstart competitor on the left.

[Mish: The Financial Times is looking on the dark side of things. An early election could also lead to a stable outcome instead of an impossibly fragmented coalition that cannot last. Why assume the worst?]

At the same time, there is growing clamour from Spain’s business and media establishment for some kind of three-way alliance between the PP, the PSOE and Ciudadanos.

Albert Rivera, the leader of Ciudadanos, also threw his weight behind such a link-up on Wednesday, pointing in particular to the risk posed by the Catalan independence movement. Spain, he said, needed a pact between the three parties “to guarantee the unity of Spain”.

Mr Rajoy has invited Mr Rivera as well as Pablo Iglesias, the Podemos leader, for talks next Monday.

[Mish: Should the talks fail, accentuate the positives.]

Accentuate the Positives

1. Rajoy will be gone. 72% of voters wanted someone else!
2. A splintered coalition would have failed anyway.
3. Catalonia deserves the chance to self-govern if it so desires.
4. Talk of Spanish exit from the eurozone will be back in play.

Of course, if PP were to win the next election, Rajoy would be back in office, with points 1-4 negated. Some would view that as positive, others negative.

Positivity is in the eyes of the beholder.

Mike "Mish" Shedlock

4th Quarter GDPNow Forecast Plunges to 1.3% Following Housing and Other Data; What's Next?

In the wake of recent data, the 4th quarter GDPNow Forecast dipped to 1.3% from 1.9% on December 16.



From the Atlanta Fed: "After yesterday's third-quarter GDP revision and this morning's personal income and outlays release, both from the U.S. Bureau of Economic Analysis, the nowcast for fourth-quarter real consumer spending growth fell from 2.6 percent to 2.1 percent. The nowcast for real residential investment growth fell from 8.0 percent to 0.9 percent after yesterday's existing-home sales release from the National Association of Realtors."

I took one look at recent housing data and concluded GDP would take a big hit vs. prior expectations. And that's precisely what transpired given the oversized plunge in residential growth from 8% to 0.9%.

But sometimes things do not turn out as appears intuitively obvious.

Such was the case following strong a construction report on December 1 in which the GDPNow model forecast took a dive only to recover on other data later, then plunge as we have seen today.

For an explanation as to how this happens, please see Why Does GDPNow Model Sometimes Move Counter to Economic Releases?

If Christmas sales are weak, 4th quarter GDP will be flirting with zero.

Mike "Mish" Shedlock

New Home Sales Rise Less Than Expected From Revised Sharply Lower October

November new home sales came at a seasonally adjusted annualized rate (SAAR) of 490,000 vs. an economic consensus of 503,000. Worse yet, October's big gain was revised sharply lower from 495,000 to 470,000.

This is going to take a bite out of GDP estimates. Nonetheless Bloomberg manages to spin this as a big positive.

Rising construction is bringing supply into the housing sector and helping to lift new home sales, which rose 4.3 percent in November to what is still however a lower-than-expected annualized rate of 490,000. The month-to-month gain follows a very strong 6.3 percent rise in October which, however, has been revised sharply lower to 470,000 from an initial 495,000. Houses for sale rose 5,000 in the month to 232,000 which is up from 210,000 in November last year. At the current sales rate, supply is at 5.7 months which, because of the rise in sales, is down slightly from October. Still, rising permit data point to more homes coming into the market.

Price data are also constructive, up 6.3 percent in the month to a median $305,000 with the year-on-year, which had been negative, up 0.8 percent. Still, this is a modest year-on-year rate and, relative to the very strong 9.1 percent year-on-year sales gain, points to discounting. Prices in this report appear to have room to move higher.

Regional sales data have the West up more than 20 percent in the month with the year-on-year rate at plus 4.7 percent. Sales in the South, which is by far the largest region, rose 4.5 percent in the month for an outstanding year-on-year gain of 19.4 percent. The Midwest and Northeast both show monthly and yearly declines.

Sales of existing homes have been limping along but sales of new home sales, despite all the monthly volatility which is routine for this report, are solid and look to remain solid.

Synopsis

October's gains were revised to+6.3% from an initial reported gain of 10.7%. That would sound good except for the 12.9% plunge in September.

Bloomberg claims "new home sales are solid and look to remain solid" but that puts a bright coat of paint on a rather dull-looking reality.
  
New Home Sales



Volatility makes it hard to precisely determine the trend, but I took a stab in purple.

From May 2014 through February of 2015 home sales were generally strengthening. As with manufacturing, the trend has been generally weakening since then.

New One Family Homes Sold



Does that "look to remain solid"? Is that "solid" in the first place?

Mike "Mish" Shedlock

Merkel-Enhanced Migration Problem: Million Refugees Hit Europe, 80% Through Greece by Boat; Turkish Mafia, Banks Pave the Way

Over a million refugees have made their way to Europe this year. Every country is complaining now, even Germany. So why isn't anything concrete being done?

Why the Problem Is Not Fixed

If Turkey, Greece, or Germany really wanted to solve the migration problem, the problem would be solved.

However, there's too much ignorance in Germany and too much graft money in Turkey. Greece does not have the resources or the willpower to do the right thing: send them back.

Million Refugees Hit Europe, Primarily Through Greece by Boat

The Financial Times reports More than 1 Million Refugees Arrive in Europe.

The International Organisation for Migration reported on Tuesday that the number of migrants had hit 1,005,504. That is almost five times greater than the total last year, and was the highest migration flow since the second world war.

The vast majority of the migrants — 821,008 — arrived in Greece. Almost all of them came by boat, according to the IOM, a Geneva-based intergovernmental organization.

Italy received the second biggest total: 150,317. Bulgaria was third, with 29,959 arrivals.

Merkel-Made Migration Problem

German Chancellor Angela Merkel is too damn stupid or too damn arrogant to do anything about the problem.

Besides, there's simply too much money to be made by the Turkish mafia and Turkish banks for anyone in Turkey too give a hoot.

Turkish Mafia, Banks Pave the Way

As is typically the case, when there's money to be made, heads look the other way. Such is the case right now with Turkish profits fueling the "Merkel-made" problem.

In a scathing explanation (that Merkel will ignore and Western media won't report on), please consider How the Turkish mafia organizes the trafficking of refugees .

His name is Osman. Or, that's how he introduced himself. He is one of the top members of the Turkish mafia doing business upon migrants and refugees in Turkey. He is not hiding ... “If the Turkish government didn't want us to do the job we do, we couldn't pass to Greece not even a fly” says disarmingly.

Stratis Balaskas for the Athens News Agency

He has a store in İzmir selling food stuff. It is a big store in Basmane, the district of Greeks and Jews before 1922, which was saved from the fire. The Turks in the district call him "Damascus". As they say "there are more Syrians here than in Syria". However, the picture of the area is not as it was last summer. There are no Syrians in the streets. The municipality authorities re-planted the grass in parks, there is not even a single Syrian.

Yet ... there are!

Osman explains to us that now “they stay in houses which have been rented especially for this purpose. They cannot move freely, their transportation is done through private cars which take them from their houses and leave them on starting points. From there they are being transferred to the departure spots.”

They are being transferred through many ways that show the size and the ruthlessness of the network.

So, migrants and refugees have been transported by Osman in areas at the Turkish side, located across Lesvos and Chios, through buses carried by trucks for roadside assistance. Through school buses during the hours that are not being used for the transportation of the kids. Through convoys of private vehicles, which means that even if a car would be stopped by the police, the others could continue to their destination. But there is also ... VIP transportation, like of rich Arabs with Russian escorts, even through ... hearses! The latest, as Osman says, are expensive services and being paid nearly as much as the trip to islands.

But let's go back to İzmir where we find the base of the network. Under the fear of the measures that allegedly will be taken by the Turkish authorities, after the European pressure, the network has the following plan schedule.

On the top stand the members of the mafia. Most of them do this job for more than 20 years. The old times were doing it for a nice daily wage. Now, and especially the latest year, there is too much money in the business and it is worth someone to risk.

On the other side of the network stand some locals. They possess some spaces from where the boats can start their journey safely. They are responsible to keep the passage safe and clean. They are also responsible for the training of someone among the passengers on how should handle the boat. Or, they should pay someone, say 100 euros each time, to transfer the boat with the passengers to the islands and return to the base.

In the middle of these groups, there are mainly two categories of people involved. The "dealers", which are those who find "customers" and pass them to the top members of the mafia. They are doing it through Facebook pages, or, phone numbers that are distributed among the "customers". They "fill" the boat with passengers every time that the top members have one ready for departure.

Close to them stand the "bankers" of the network who are responsible for receiving the payments. Anyone who wants to be transported pays them through any way he/she can. With money or services. Jewelry, valuable stones, or even archaeological pieces! From the moment of the payment, he/she has three days to pass to Europe. After the end of the journey, every migrant and refugee calls a phone number and gives a code number which has been provided when he/she paid. Then, the payments are "released" and the "banker" has to pay everyone involved. About 15-20% is being paid to all who are involved to the transportation and the rest goes to the top member of the network, in our case, Osman.

“Why do you take most of the money?”, we ask him. He explains that he has too much expenses. He pays for the plastic boats which, depending on their size and the quality of the engine, cost between 800 and 20,000 euro! These are being bought legally. Therefore, the police can't do anything, even if they stop him while carrying the boats.

He also pays the "bankers". They take between 20 and 100 euro for every payment. They also keep all the money from those who do not call to confirm that they arrived at the destination, either because they have been drowned, or have been arrested by the coast guard and have been sent back to camps in South-East Turkey.

“I don't want blood money” [!], Osman says with audacity. But frequently claims that there are “rules of morality” in his job. Because, as he says, the top members “are moral”! They do not let people pass under stormy sea. They do not fill with more than 50 people every big boat, or 20, every small one. They transport people only in plastic boats. Other locals and Arabs are responsible for the wooden boats. Those Arabs “we had as mediators because of the language, but they opened their own businesses and sent people to be drowned. These are usually being caught by the Turkish coast guard, or they risk transporting people with big boats resulting in accidents like the one that happened in Lesvos in 28th October.”

Osman is completely informed about the situation in Lesvos. He knows about the accidents, the dead people, the hot spots, and all the problems in the islands. He knows of course very well what happens also in Turkey. For example, he said that during a weekend last month, no one passed to Lesvos because of the presence of Erdogan in the area for the celebration of olive collection. "We should not provoke" says laughing.

He says goodbye “because he has work to do”. We ask him if he worries for telling these things to us. He's not afraid. “I told you again” he says. “If the Turkish government didn't want us to do the job we do, we couldn't pass to Greece not even a fly”! Besides, he made a lot of money. “I don't have to work. Neither my children and my grandchildren. Today, if someone tells me to stop, I'll do it. But no one tells me ...” he says as we leave!

A tip of the hat to "The Failed Revolution" for the above translation from the original Greek article that Google translates as Greek Refugee Trafficker Confesses.

Amazingly, Merkel's solution was to get in bed with Turkish prime minister Recep Tayyip Erdoğan, offering Erdoğan three billion euros to stem the tide.

Her proposed "solution" is absurd enough, but Merkel also held out a carrot to speed the way in granting 75 million Turks passport-free access to the EU.

Even if Turkey does temporarily pen in the refugees, they will be released in a massive flood once Turkey is a member of the passport-free Schengen zone.

Mike "Mish" Shedlock

Afghanistan: Another Broken Obama Promise; Taliban Poised to Retake Sangin; Money Trail Shows Billions of Fraud; Mish 5-Point Solution

A resurgence of the Taliban in Afghanistan highlights another miserable failure of the Obama administration as well as another broken promise.

Taliban Poised to Retake Sangin

The Financial Times reports Taliban Poised to Retake Sangin from Afghan Army.

Afghanistan’s Taliban rebels appear poised to retake the strategically vital town of Sangin raising fears the Islamist militants could control the important poppy-growing areas of Helmand province.

Members of Afghanistan’s poorly trained armed forces on Tuesday were reportedly struggling to hold on in the face of a determined rebel push that saw them seize the town’s police headquarters.

Security analysts said Taliban forces were determined to regain control of Helmand, a region with which many Taliban leaders have close ties, and where they enjoy considerable popular support.

“Helmand is a base area for many of the Taliban leaders,” said Ahmed Rashid, the author of several books on Afghanistan, Pakistan and central Asia. “It is dear and important to them.”

He also said the Taliban was likely to try to declare an alternative governing council once they gained full control over Helmand, which would be a further blow to the Afghan government in Kabul.

The central government in Kabul is facing instability across the region, with a Taliban suicide bombing near Bagram in the east of the country killing six US soldiers on Monday in one of the deadliest attacks on foreign forces in Afghanistan this year.

Although Nato’s combat role in Afghanistan ended in 2014, the battle for Sangin highlights how stretched the Afghan security forces have become in holding back the Taliban advance.

Defence analysts say they are badly stretched trying to hold back the Taliban advance on multiple fronts, with fears the militants will capture further swathes of territory.

At the height of the international military intervention in Afghanistan, tens of thousands of educated Afghans were employed in service jobs, supporting the international forces, but most of these jobs disappeared with the drawdown of foreign troops, with nothing to take their place.

Afghans fleeing their country’s grim situation have been a significant component of the wave of migrants that have sought refuge in Europe this year.

Another Badly Broken Obama Promise

The Washington Post reports Hope fades on Obama’s vow to bring troops home before presidency ends.

In meeting after meeting this spring and summer, President Obama insisted that the last American troops in Afghanistan would return home by the end of his presidency, definitively ending the longest war in American history.

Afghanistan has been the one constant that spans his two terms in office. As an inexperienced president, Obama decided to send more than 50,000 American troops into Afghanistan in an attempt to blunt the Taliban’s momentum, bolster the Afghan army and improve the prospects for reconciliation in a country that had experienced three decades of civil war.

Nearly seven years later, the leaders of Afghanistan’s new unity government were still feuding, Afghan security forces were losing ground to insurgents, and the prospects for reconciliation with the Taliban seemed bleak.

In early October, Obama summed up one of the biggest lessons he’s taken from America’s interventions in these fractured societies. “What we’ve learned over the last 10, 12, 13 years is that unless we can get the parties on the ground to agree to live together in some fashion, then no amount of U.S. military engagement will solve the problem,” he said at a news conference.

Did Obama Learn Anything?

Why did it take 13 years to "learn" the intuitively obvious? Did Obama really learn anything or did he parrot a statement?

If indeed the president has learned something, then what the hell is he doing with that information? Has he changed tactics? Withdrawn the troops?

Well, not exactly.

Obama Flips On Afghanistan Withdrawal Plan

On October 15, the Huffington Post reported Obama Flips On Afghanistan Withdrawal Plan.

President Barack Obama will keep 5,500 U.S. troops in Afghanistan when he leaves office in 2017, according to senior administration officials, casting aside his promise to end the war on his watch and instead ensuring he hands the conflict off to his successor.

Obama had originally planned to pull out all but a small, embassy-based U.S. military presence by the end of next year, a timeline coinciding with the final weeks of his presidency. But military leaders argued for months that the Afghans needed additional assistance and support from the U.S. to beat back a resurgent Taliban and hold onto gains made over the last 14 years of American bloodshed and billions of dollars in aid.

Money Trail: Where Did Billions in Aid Go?

Inquiring minds just may be wondering: "Where the hell did billions of dollars of aid money go?"

That's a damn good question, too. For the answer, please consider "Money Trail".

This week, the Special Inspector General for Afghanistan Reconstruction (SIGAR) released a report that outlined how the Pentagon spent nearly $43 million on building a gas station in the Afghan provincial town of Sheberghan. Though comparable stations in Pakistan cost only $500,000, the report cited Pentagon claims that it could provide no explanation for the enormous cost of the project.

John Sopko is a lawyer and a veteran investigator for Congress and government, appointed to the job in 2012. He heads a team of 200 investigators and support staff, more than a quarter of them in Afghanistan. When he visits the country, he moves with a large security detail, since he is considered a high-value target—though not necessarily by the Taliban.

Where did the one hundred and something billion dollars go?

One hundred and ten billion I think is where our best guesstimate is. It may even be higher now. The [cost of] the total conflict there is over a trillion dollars. The actual fighting of the war over the last thirteen to fourteen years cost a lot more than reconstruction. War fighting is more expensive. Reconstruction is relatively cheap if it’s done right. A lot of it was lost, fraud, waste, and abuse. I don’t know what percentage. We just don’t have the time or the ability to calculate the loss, but a significant amount of that number is lost.

When you go there, do you see 110 billion dollars worth of reconstruction? Could you put a price on what you do see?

No, I can’t. We keep finding horror stories all the time. A lot of it was just stolen.

When you get into a war it’s like you’re on steroids, everything is just crazy, people are shooting at you. When you’re on steroids, when you’re in Afghanistan, you’re spending more on AID [the Agency for International Development] than the next four countries combined. But the head of AID only visited Afghanistan twice. He rarely focused on it. He was more interested in something else, other issues were more important to him. It wasn’t a priority.

The way we reward people in the government is not based on saving money. If you’re a procurement officer your reward is on how much money you procure, how much money you put on contract. If you have a reward system in place, if you have a human resources system that rotates people out every six months, what do you expect is going to happen? Welcome to my world. It was a disaster ready to happen, and it happened.

See this airplane here? [Gesturing toward a plastic model of a twin-engine transport plane sitting on his office windowsill] That’s a model of the G222. It was an airplane we purchased out of an Italian boneyard for . . . They were almost scrap. We purchased it for 400–500 million dollars. We sent twenty of them over to Afghanistan. They were the wrong plane for the country, the altitude, the weather. They were basically referred to as death traps. They couldn’t fly over there. The Afghans couldn’t be trained on them. When I first saw them, they were sitting outside the airport in Kabul just rusting with trees growing through them. They were eventually turned into—when we started the investigation—scrap. We got three cents on the dollar. That’s a 400–500-million-dollar investment. We don’t know the exact figure. No one has been fired for purchasing that airplane.

How much of the money never left here [the US]?

Quite a bit. I don’t have the percentage, but quite a bit ended up in the coffers of consultants, firms here, and it never got to Afghanistan, and that is a true complaint about our assistance program, high overhead costs. Again, nobody is minding the store. We also get instances where we do financial audits and we can’t find any records to support the costs to the U.S. government. We just had one for 130–135 million dollars.

What was that for?

It was for Afghan National Security Forces training in the eastern part of the country. [The contract was with Jorge Scientific, recipients of $1 billion in contracts.]

They just didn’t have any records, so for 130-some million dollars they couldn’t support where the money went.

We’ve had instances where we’ve questioned costs and they said, “Oh, a flood or a fire,” or, you know, “Somebody lost the records.” Our concern is, when you can’t support the record, can’t support a cost, that it could just be fraudulent.

We just issued a report on what we call the 64K. The sixty-four-thousand-square-foot building in Camp Leatherneck where three generals on the ground said, “We don’t need it, we don’t want it, we’re not going to use it, don’t build it.” They were overruled by a general sitting back in a comfortable office, not in the fog of war, back in Kuwait or Qatar or wherever he was, and he said, “Well, since it was supplemental appropriations it would be unwise or imprudent to ignore the wishes of Congress.” So we spent 36 million dollars on a building that was totally built, never used, and has been turned over to the Afghans. As far as we know, it’s empty.

Another example I like to cite for just how we don’t understand Afghanistan: somebody came up with a brilliant idea in the Department of Agriculture that Afghans really should eat more soy. So they spent 36 million dollars on creating a soy program. The Afghans don’t grow soy, they don’t eat soy, they don’t like the taste of soy. But we spent 36 million dollars doing this. We were kind of putting our value system, you know, you should have a low carb diet, onto the Afghans. It was a total disaster from the beginning to the end.

Nobody has gotten fired in Afghanistan for all of the problems I’ve exposed.

No one?

Nope. Call up DOD, call up State, see if anybody has gotten fired. I bet you no one has lost a promotion. I bet you no one has lost a bonus.

Holding on to the Gains

Despite what Obama claims to have learned, what he really has learned is we need to keep troops in Afghanistan and we need to keep spending billions of dollars to hold onto "gains".

Might I ask, what gains are those, and how many more troops will it take to hold those gains? What will it cost to hold on to those gains?

What about those 13 years of knowledge gains? What happened to those?

Far be it for me to offer only criticism without an alternative plan. I happen to have the very face-saving plan the president needs.

Mish 5-Point Proposed Solution

1. Label the Taliban as "Moderates".
2. Declare the war won with the Taliban's help..
3. Leave immediately.
4. Brag about the reduction in spending.
5. Brag about honoring promises to bring the troops home.

Mike "Mish" Shedlock