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Jeffrey P. Snider

Jeffrey P. Snider

As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base.

Articles by Jeffrey P. Snider

Labor Leverage

January 18, 2017

Earned income rates adjusted for inflation have been near zero growth for two months in a row. Real average weekly earnings were revised significantly lower in November 2016, turning a small 0.5% gain into just 0.2%. The latest figures for December estimate the same lack of growth to end the year. In seasonally-adjusted terms, weekly earnings did not keep pace with largely oil prices all throughout last year. Weekly earnings started out 2016 at $368.80 (constant 1982-84 dollars) and ended at just $366.95.
This is, of course, nothing new. It has been a constant feature the whole of what should have been recovery, where first and foremost the lack of income growth suggests “something” seriously wrong that no QE or “stimulus” policy can or will fix. The shift in real earnings in 2016 is due to both oil prices as well as the lack of nominal wage growth, with the latter far more important than the former. For an economy near or even at most economists’ definition of “full employment” for going into a third year, the lack of wage and income acceleration really is damning.

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The Monetary Surprise

January 18, 2017

In May 1999, Milton Friedman gave an interview to Forbes Magazine back when it was an actual magazine. It was an auspicious time, of course, and what he had to say then resonated, though as much in an unflattering way as that which might reflect well on him. But we are not commit the logical fallacy so often deployed to try to discredit an argument; being wrong about some things doesn’t make one wrong about everything.
As to the bad, during the interview Friedman thought there was no recession on the horizon, and maybe there wasn’t at that moment (the official dot-com recession was just less than two years ahead), but more so that he saw Japan moving toward full-blown recovery. It was somewhat related to the first prediction, as he said, “There’s nothing to prevent Japan, a year or two from now, from being in a boom.” That, Friedman worried, might end up having negative effects on the US as the Bank of Japan would surely be raising rates if that occurred.
The Japanese did, in fact, try to raise rates, only to just as quickly reverse course not just back to zero and ZIRP again but with an added component of the world’s first QE.

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More Slumping Durables In August—–The New Abnormal

September 28, 2016

Durable goods continue to suggest a weak economy that only seems to remain in that state. Year-over-year, unadjusted estimates for new orders rose slightly for the first time since May, while seasonally adjusted total orders (including the transportation sector) were fractionally lower at $226.9 billion. That amount was 2% less than January 2016 and 4.3% below August 2014. Once again we find that the seriousness of the slump is not defined by its depth but its length, especially since there aren’t any signs that it is letting up even though there is every mainstream reason to expect differently.
U.S. factories reported flat demand for big-ticket goods in August, suggesting the economy continues to be restrained by sluggish business spending.

The Commerce Department said Wednesday orders for durable goods—products such as cars, tractors and refrigerators designed to last longer than three years—were unchanged from a month earlier. When excluding the volatile categories of defense and transportation products, sales declined.
As is usual, the article tries to make this continued weakness out to be a case of “woes in the energy industry” but it is much more than that, an observation obscured by the ongoing contraction’s nonconformity to cyclical patterns.

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Good Job, Mario! NIRP Slams Commerzbank And 9,000 Jobs

September 27, 2016

On August 31, 2008, Germany’s Commerzbank announced that it was purchasing ailing rival Dresdner Bank from Allianz SE. As usual, however, the deal wasn’t described in those terms as nothing ever is so honest in public. Then-Allianz CEO Michael Diekmann said at the time of the announcement:
As a strong bank, the new company can safeguard jobs in the long term. With a stake of nearly 30 percent Allianz will be the largest shareholder of the new bank and will gain access to a powerful distribution network for its insurance products. The move will also secure the further success of its bancassurance strategy.
Just four months later, Commerzbank was becoming partially nationalized due to the “strong bank.” By taking in €10 billion from SOFFIN, Germany’s bank bailout vehicle, at the outset of 2009 the merger could proceed. Without the “capital”, Commerzbank would have walked and left Dresdner (and Allianz) likely to be wholly nationalized (because failure is not an option anymore). As one “insider” was quoted as saying, “the government just couldn’t afford to let this deal fail.”
For its part, Commerzbank spent years recovering from not just Dresdner but its own wholesale realities. The total rescue would total about €18 billion before it was all over, and that was a heavy burden on the bank.

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It’s Not Really About Deutsche Bank

September 26, 2016

It is never a good thing when official sources either named or unnamed are quoted in the media as denying bailout discussions. For any bank such rumors and denials are harmful because, obviously, they are a reflection of common perception. Furthermore, most people know all-too-well the true nature of any denials, thus reinforcing only that much more the troubling perceptions in the first place.
For Deutsche Bank to be the institution in question is altogether different. When Germany’s Commerzbank, for example, was forced to request a capital injection from the state’s bailout fund SOFFIN in November 2008 that was a sign of the times. It was just another bad sign in an ocean of them. Should Deutsche Bank even get connected to something like that is perhaps a sign of renewal of those times.
Deutsche Bank is not Commerzbank; in many ways Deutsche is the last remaining remnant of what is left of the reigning wholesale, eurodollar system. Where other banks long ago saw this depression for what it was (all risk, no reward), DB was siding with central bankers and deploying “capital” into EM’s and junk bonds. The bank was reticent to reject its derivatives book, once a source of nearly all its power and strength. And it was dreams of reclaiming lost grandeur that drove the bank into its currently perilous state.

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Monetary Insanity: When It Doesn’t Work——Just Promise To Keep Doing It Until It Does

September 21, 2016

On July 14, 2006, the Bank of Japan raised its benchmark overnight rate off zero for the first time since introducing the world to ZIRP in 1999. In doing so, the BoJ noted that the Japanese economy in its view continued to “expand moderately” and that risks inside the economy were “balanced.” The central bank also sought to reassure, further commenting that despite one 25 bps rate hike “an accommodative monetary environment ensuing from very low interest rates will probably be maintained for some time.”
These words, all of them, should sound frighteningly familiar, as they are being redeployed in nearly exactly the same phrasing by the Federal Reserve. Whether or not the FOMC votes for a second rate hike today still remains to be seen, as before that “news” there is first the BoJ once more admitting that its prior efforts didn’t actually work. For the record, Japanese officials actually carried out two hikes, a second coming in February 2007 just in time for the open minded to finally see what really had been going on in the global economy.
In other words, the Japanese policymakers made the same mistakes as are being made today. They assumed absence of further contraction was the same as recovery.

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Memo To Kuroda: It Doesn’t Work!

September 21, 2016

What good is a target or even an emphatic commitment to it if you have already proven you can’t achieve it?
So far the only “market” that really counts isn’t buying the new promises, either. We’ll see if that is just a knee-jerk reaction or if it re-ignites the contrary “dollar” trend that had so plagued Abenomics going back to last summer.

As of Bank of Japan’s end of period balance for July, the combination of QQE and whatever odds and ends of minor “extraordinary” policies implemented along the way leaves the Japanese banking system with ¥271.37 trillion in bank reserves. That is an increase of ¥218.76 trillion (418%) since the start of QQE. The CPI in July was recently updated to show a second straight month of -0.48% “inflation.” Excluding fresh food, the CPI fell to the same -0.48%, joining the total index in proving yet again there is no money in monetary policy.
It is, in fact, proof and it doesn’t need any regression to fulfill the requirement (though you can easily use one, as I have done in the past, if you, like an economist, actually need the math to arrive at such an obvious conclusion).

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China’s Red Ponzi Was Built On The Biggest Dollar Short Ever

September 20, 2016

As if we needed more evidence, the Chinese liquidity system is stuck. As much as authorities in China might complain about the global credit-based reserve currency system, as PBOC Governor Zhou Xiaochuan put it in March 2009, and quietly seek out its replacement, they not only allowed it to happen they quite eagerly participated in it so long as it appeared to fuel their economic “miracle.” The monetary system in China is not Chinese; it is at most translated into RMB as its basis is derived elsewhere. And in the world of the late 20th century and especially the first decade of the 21st that means primarily “dollars.”
It is perhaps one of the biggest shocks to traditional thinking where you can very easily observe the eurodollar system’s decay by looking at nothing more than the People’s Bank of China’s assets. While the 2008 panic is notably absent for various reasons (only somewhat related to this specific examination), its aftermath is the most prominent feature.

By pegging the yuan to the dollar for so long, the central bank essentially obtained any free “dollars” from its exploding merchandise surplus – as well as a great deal unrelated to pure trade (financial).

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More Data For The ‘Data Dependent’ Fed To Ignore

September 16, 2016

The University of Michigan released its September update for their surveys of consumers. The overall index of consumer “sentiment” was unchanged from August at 89.8, and up just 3% from last September. This “confidence” index peaked in January 2015 at 98.1 and has been sideways to lower ever since. Most of the internals were practically unchanged throughout, leading Chief Economist Richard Curtin to note:
…modest gains in the outlook for the national economy have been offset by small declines in income prospects as well as buying plans
Not everything in the surveys was so uninteresting. Inflation expectations dropped yet again, as both short-term and intermediate consumer projections for the rate of prices changes continue to sink. The surveyed result for the inflation rate next year fell to 2.3%, the lowest since September 2010 just prior to the start of QE2. Straight away, it would appear that consumers are no longer so convinced that “money printing” actually accomplishes what money printing is supposed to.

Since the data is made up of surveys of American consumers we are really talking about perceptions, and thus this reduction in expected inflation has been shaped by recent (money, not monetary policy) events. The peak outlook, the one most faithful to the myth of “money printing”, was reached not surprisingly in early 2011.

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When The ‘Risk-Free’ Rate Is Risk…

September 14, 2016

Treasury bill rates have been trading notably higher of late, with the 3-month bill equivalent yield as much as 37 bps this week. Though it was the highest rate since November 2008, a true reading of bill history shows that it is not a matter of Fedearl Reserve policy “normalization.” Trading in bills, especially the 3-month, makes indications of risk somewhat more obscured. For example, though “dollar” liquidity was clearly problematic and getting worse from mid-July 2015 all the way through the liquidations late in August, the TED spread was actually falling during that time. The reason was not that interbank markets were being restored and acting robustly, rather it was the curious nature of T-bill trading leading up to what was a Chinese-led “dollar” event.

It happened again to start this year, where through almost the whole month of January the TED spread fell back sharply. From about 45 bps to end 2015, by January 28 the spread had shrunk to just 26.5 bps. As August, this occurred as the worst liquidations since 2011 were taking place wherever the “dollar” connected (which is almost everywhere).
In both of those instances, the responsible party narrowing the TED spread was the T-bill part.

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More Bad Economic News From The Oil Patch

September 13, 2016

At the end of August, the US Energy Information Administration reported that it had been overstating domestic demand for oil and energy products to a considerable degree. Using imprecise and lagging data, the calculations for the amount of product being exported overseas was understated by an average of 16%. That meant more output was being used elsewhere, thus less product being used here. While that is a positive for US producers being able to ship wherever they can, it was a more savage reflection on the economy especially this year.
In other words, nothing terribly surprising in oil unless you are expecting dramatic improvement for the US economy through something like a “full employment” liftoff. Instead, viewing oil as a primary intersection between finance and economy, the “rising dollar” part of the eurodollar decay unsurprisingly remains as an ongoing process – not a cycle to be moved into and then quickly out of. All the same mechanisms that were shocking economists in late 2014 and early 2015 are still visible here in the summer of 2016. It’s not going to just go away; like oil and gas inventory, it only gets worse a little more each time in these uneven waves.
Today it was the influential International Energy Agency’s (IEA) turn to deliver more such bad news.

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The JOLTS Phantom: Hires or Job Openings?

September 9, 2016

In all honesty, I could start almost any piece I write with the phrase “economists are stumped.” It has become something of a baseline where there is some element or condition of the global economy that doesn’t make sense to them. The latest update in JOLTS for July continues to be faithful to the seeming contradiction. By view of the Job Openings portion of the report, the labor market is beyond robust, hitting a new record high and perhaps suggesting the economy is not damaged by the “rising dollar.” The pace of hiring activity, however, leaves a much different impression.
One of the labor market’s biggest mysteries just got deeper: The number of job openings available at the end of July climbed to a new record of 5.9 million. Yet the number of people actually being hired into one of those jobs was 5.2 million for the second month in a row.

The number of unemployed workers per job opening has fallen to 1.3, the lowest since 2001. What would normally sound like good news—abundant jobs—is tempered by the fact that people simply aren’t being hired into the positions at rates like in the past. About 300,000 fewer people are being hired each month compared with the pace reached in February. And during the entire economic recovery, the U.S. has yet to notch a month of hiring that matches the pace seen at the heights of the middle of last decade or the early 2000s.

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July Factory Orders Didn’t Rebound Strongly—-More Misleading Spin

September 7, 2016

Factory orders rose in July in seasonally-adjusted terms from a downward revised June level. As has been the case with a number of economic data points this summer, that was a drastically different result than the unadjusted comparison. Since only the narrowest monthly interpretation makes it into most commentary about the economy, let alone manufacturing, the headlines leave a lot to be desired; sowing only further confusion as to how the economy could be getting worse when every uptick in factory orders or whatever else is trumpeted as the latest in an unending string of optimistic outcomes that never seem to get anywhere.
New orders for U.S. factory goods recorded their largest increase in nine months in July as demand increased broadly, in a hopeful sign for the embattled manufacturing sector.
Even in adjusted terms, that is entirely misleading. Since June’s estimate was revised lower to just $446.3 billion, only $2 billion more than February’s “cyclical” low, the increase in July just left factory orders equivalent to May (or January, for that matter). In other words, at best factories remain at a standstill since orders advanced 1.89% month-over-month in July after falling 1.80% in June.

By any reasonable standard, it is clear that “something” is very wrong in the manufacturing sector.

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More Indications of Labor Slowing—-Yellen’s Favorite Index Hits The Skids

September 7, 2016

The Federal Reserve’s Labor Market Conditions Index (LMCI) fell to contraction again in August. After rebounding in July for the first positive reading of 2016, the LMCI dropped to -0.7 in the latest update. As usual, revisions have reshaped the levels of indicated problems throughout the past two years, but overall the trend remains. From this view of the labor market, the economy is surely slowing even if taking two years to suggest by how much.

As I wrote earlier today, I believe that is the natural tension between an economy that “wants” to grow but can’t due to monetary suppression. This is nothing to do with quantitative easing or “stimulus” in broad terms, except that it further shows that no form of central bank policies has had the effect of increasing the money supply to the real economy.
What Friedman actually meant, and what we can observe now, is that low interest rates indicate tight monetary conditions for the real economy. On that score there is no mystery about “tightness” so much that even labor statistics and the seemingly impenetrable services economy are now openly displaying it. You look at the TED spread and see that “something” changed in August last year; you look at the ISM Non-manufacturing PMI and sure enough, same thing.

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The Real Economy: What The Interest Rate Fallacy Truly Means

September 6, 2016

Just a little over a year ago, the Institute for Supply Management (ISM) released its purchasing manager index for the services sector for August 2015. Though the level was down slightly from July, coming amidst the immediate aftermath of the “shocking” financial quakes starting in China and spreading to markets all over the world, the 59.0 non-manufacturing PMI was welcome relief. In the mainstream narrative where the unemployment rate was meaningful, any positive indication about the services economy allowed economists and policymakers to assert that any weakness was either temporary or isolated.
When oil prices first dropped starting in late 2014, the narrative was far more the former (“transitory”). By August last year, when financial markets far beyond WTI were drawn inward into the “unexpected” maelstrom, the narrative changed to admit that weakness might be a problem but only for manufacturing. In writing about the ISM Non-manufacturing PMI for August 2015 the Wall Street Journal assured us:
The U.S. service sector expanded at a slower pace in August but continues to grow at a solid rate, a sign of strength for the domestic economy…

An ISM report on manufacturing, released earlier this week, showed that sector is growing at its slowest pace in more than two years. But manufacturing accounts for only about 12% of U.S. economic output.

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Below The August Jobs Headline—-Even More Weakness

September 4, 2016

In the technical notes for the Employment Situation Report, the payroll numbers that everyone obsesses over in fine detail, the BLS still shows a 90% confidence interval at 1.6 standard deviations that works out to +/- 115k. That means that whatever number gets splashed onto every headline and worked into every major commentary piece isn’t really the number of payroll changes. It is a statistical estimate that only anchors that confidence interval.
What the BLS actually reported for August was that if they gathered all the data again and again100 times, it is expected that in ninety of those the payroll gain would fall in a range of +266k at the upper end of the confidence interval and +36k at the lower end. That changes the interpretation dramatically from the certainty that is reported about how there was a “disappointing” 151k jobs created in August 2016. In fact, given that confidence interval, it could be that the true amount of job gains was something like 266k and consistent with the mainstream interpretation of the past two months that made everyone forget all the economic problems, or closer to +36k and the disaster that so unnerved everyone in the May report (and anything in between those extremes).
There is entirely too much focus and deference to the individual monthly figures; they tell us very little in the end.

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Economic Slowing—– Jobs Now, Autos Next

September 4, 2016

If the labor market were slowing as the wider perspective of the payroll reports suggest, then it would make sense to find increasing difficulties even among the few bright spots in this otherwise anemic economy. Yesterday and earlier it was reported increasing signs of slowing in real estate, both construction and resales of homes (particularly dwindling inventory). In the past few months, that possible consumer strain was also observed in auto sales, the one part of the manufacturing economy that had appeared immune from depressionary forces plaguing much of the rest.
The word “plateau” has been used recently in describing predictions for consumer spending on autos the rest of this year, given to us by Ford officials who remain in their position that sideways is the worst we can expect – at least for now. August auto sales further raise the possible that the plateau may instead be the best case.
U.S. auto sales fell 4.2 percent in August as some major automakers said a long-expected decline due to softer consumer demand had begun, possibly sparking a shift to juicer customer incentives and slower production.
Still, Ford’s management manages to use that word:
“We think sales have reached a plateau, and at that plateau we’ll see some month-to-month volatility,” Ford senior economist Bryan Bezold said.

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Slowing And Even Contracting——Hours And Earnings

September 4, 2016

The primary symptom of the economic malaise or depression that has developed since the Great Recession (which wasn’t a recession) is an economy that works less and thus earns less. Such a condition would suggest a shrunken system or at least vastly diminished potential. That much is well-established even in the orthodox literature though it isn’t ever talked about publicly. What happens, however, when an economy that is already working and earning less starts to reduce even further?

I don’t know if anyone knows the answer to that question since in many ways it is unprecedented; though I suspect we are about to find out. The process of deceleration from such low growth after shrinking has taken so far about two years, an arduously shallow decent that has caused enormous difficulty in interpretation as much as economy. Because of that slope it was easily dismissed in the beginning as an “aberration” or “transitory.” Instead, however, the negative pressures have only increased if still very slowly. The next stage of this kind of spreading weakness was always going to be jobs and labor, it was really more a question of when.
Labor utilization is usually the final act in the recessionary cycle process, but again this is not (necessarily) recession; it is in every way much, much worse.

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ISM Summer

September 2, 2016

Because of the linearity that is presumed a fact of cyclicality, economists and the media continue to be shocked that what seemed like improvement one month doesn’t mean much for the economy in the coming months. And so time and again we find where conditions appear to progress and are thus extrapolated into the long sought after rebound from “transitory” weakness. That improvement, however, properly understood was nothing more than the economic unevenness that permeates every corner of the global “dollar” economy.
This stunning lack of awareness across these parameters is exposed by the ease in which the unstable nature is seen. It has become a visible seasonal pattern that the economy appears better in spring when compared to winter – but then worse in summer as compared to spring. That relative association should not be confused for a change in overall condition, but it is and has been consistently under the mainstream paradigm of linearity.
The latest “unexpected” retrenchment was today’s “shocking” level for the ISM Manufacturing PMI. Economists were expecting a mild deceleration from August’s 52.6 to 52.0. Instead, the ISM reports an overall number of 49.4 and once again on the wrong side of the assumed growth/contraction divide. New orders fell sharply, from 56.9 last month to just 49.1, while employment fell further below 50 to 48.3 from 49.4.

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Weak Construction As Another Data Point For The Shaken Consumers of Global Turmoil

September 2, 2016

Total construction spending was essentially flat year-over-year in July 2016. Public construction at both the state and local and also the federal government levels declined more than 3% Y/Y. Excluding the public sector, private construction spending (NSA) was up just 3.9% in July for the second month in a row. That was the lowest increase since the housing rebound started in the summer of 2011.
While total private construction includes both residential and non-residential activity, it has been the residential side that is responsible for the dramatic slowdown this year. Year-over-year growth (NSA) was almost 21% in July 2015, but just 1.7% in July 2016, following a revised 1.8% in June. Like overall construction, those were the lowest gains by far during this housing rebound.

In seasonally-adjusted terms, construction of and on (spending includes remodeling activity) single-family homes declined for the fifth straight month in July, matching the pattern observed in forward real estate construction estimates (permits and starts). Multi-family construction spending was down 1.7% year-over-year in July.

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RIP: Oil ‘Supply Glut’

September 1, 2016

The most remarkable aspect of the WTI crude oil futures curve this month has been its amazing ability to maintain its shape no matter which direction or by how much. Previously, as “dollar” pressures either built or ebbed, the futures curve would either steepen at the front (liquidation pressure) or flatten toward more normal backwardation (easing of the “dollar” difficulties). That was the case since June 8 when the WTI curve was at its flattest in well over a year; but as funding pressures built primarily, I believe, via Japan (increasingly negative and record negative cross currency basis swaps) the curve morphed from nearly flat to once more highly angular contango in the tell-tale sign of the “dollar.”
In short, the Japanese end of the Asian “dollar” had become distressingly disruptive through June and July, but much less so once BoJ singled out the “dollar” in its actual policy changes. Thus, from around June 8 until about August 2, the Japanese-connected “dollar” pressure was increasingly acute and globally disruptive (stock markets obviously notwithstanding because of their own liquidity supply and buying interests, largely myths about what central banks can’t do). Since August 2, much less so; leaving oil once again as a function of “dollars” this time in relatively better shape.

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From Euphoria To Despair And Getting Nowhere

September 1, 2016

For October 2014, the ISM estimated that its Chicago Business Barometer was a blistering 66.2. Encompassing much of the Midwest and a good deal of auto and parts production, that level seemed to make sense. As any economist would say then, the US economy was on the verge of a breakout and according to the labor statistics maybe even one of unusually good strength and duration. Two months later, however, the Chicago BB was down almost eight points to 58.3; just two months after that, for February 2015, the PMI was shockingly below 50 and quite far below at 45.8.
Since then, the index has been all over the place. It almost counts more as entertainment than actual meaningful interpretation from month to month, but there is, I think, something useful to the overall sawtooth of the past two years. It is emblematic of the unevenness of this economy as it swings from very real recession fears to almost pure elation of seeming to skate by; only to see such jubilation ruined in short order all over again. There is information in the schizophrenia.

After falling below 50 again in summer 2015, the PMI was above 54 in July and August, only to drop to 48.7 in September in the aftermath of “global turmoil” – and then rebound to 56.2 by October as the FOMC assured the world there was nothing lasting about it. Of course, the Chicago BB instead fell to a “cycle” low of 42.

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The Monetary Wildfires In Canada

August 31, 2016

The massive wildfires in Alberta earlier this year had a tremendously negative effect upon not just the oil sector but all of Canada. Not surprisingly, Canadian GDP released today was abysmal. Falling 1.6% in Q2, that was the worst quarter since 2009. Fortunately for the Bank of Canada who had been “stimulating” again since last July when it cut the overnight rate by 25 bps to 0.50%, the wildfires give its policies some cover to explain what would have been otherwise already dismal.
Pre-report estimates showed that the wildfires were expected to contribute about 1% to 1.1% of the GDP decline. Thus, even without the hellish conflagration across a huge chunk of Alberta’s oil production fields Canadian GDP would still have contracted in Q2. After such an atrocious and devastating year last year, as “transitory” oil prices crashed the Canadian economic margins, 2016 was supposed to be the year to forget all that.
Instead, what we find in Canadian GDP is what we find almost everywhere else – unstable growth. From the start of 2015, GDP has contracted in half of the six quarters since; and of the other three, one, Q4 2015, was near zero, leaving just two quarters as significantly positive where even the best was just 2.5%.

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Between The Lines Of Yellen’s Speech—–Do You Really Need Us?

August 29, 2016

In case you need any assistance in trying to figure out when Janet Yellen spoke, or at least when the text of her speech was released from embargo, here is a hint:

It seems her stream of consciousness was somewhat consistent with the old Greenspan idea of “fedspeak.” People and investors appear to have taken from it what they wished, with some commentary talking about its apparent “hawkishness” before being overwhelmed by others claiming its clear “dovishness.” I don’t think either of those terms apply, and certainly not in the fashion with which they are leveled by the continued conventions of mainstream perspective about monetary policy.
What I found in the speech is some good indication for what I wrote yesterday, though you as the reader should be equally suspicious about whether I am falling into that same fedspeak trap (as I so very much look forward to the day when nobody cares one bit what any Fed official or central banker has to say, and that day is coming).
Yellen’s speech, in my estimation, contained perhaps a bit more softening in terms of the certainty with which so much has been taken for granted for so many years. It isn’t a whole lot, nor should we expect the Fed or any of its officials to radically alter their public views in condensed fashion. Reading between enough lines, the questioning is palpable.

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The Reckoning—–The Central Bankers Really Don’t Know What They Are Doing

August 25, 2016

As I have written many, many times, the “unexpected” events of January and February were a dramatic wake-up call for central banks. Last August’s global liquidation they could at least try to ignore because it could possibly fit within the paradigm of “transitory”, a one-off aberration that was some mysterious Chinese viral contagion and thus of not any great, lingering importance. The recurrence in the first part of 2016, though, destroyed those assertions and a lot of people noticed; and you can bet the Fed noticed that a lot of people noticed.
What is happening this year is astounding. After saying year after year after year that the recovery is coming, and even doing so to the point of condescension, the admissions of wrongfulness are starting to roll in, if only softly at first. How ludicrous does “transitory” look now? Though that word remains attached to official policy statements, official policymakers themselves have begun to act otherwise.
There was the brief flirtation with NIRP even in the United States, though fortunately disabused by clear Japanese example of the utter harm such monetary “stimulus” actually offers. Of late, economists are railing about raising the inflation target, but they have yet to offer an explanation as to why that might be needed (even before they try to argue why it might work in a way the current one doesn’t).

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The Product of NIRP: Exposing Psuedo-Science

August 25, 2016

It wasn’t the introduction of statistics that led to the dire state of “science”, rather it was the jettison of common sense in favor of, and the total deference to, statistics. This was not a single event or a clean break, of course, as it happened slowly over decades. But in the 21st century what is often talked about and written up as science is almost exclusively some form of statistical study.
The true measure of science is repeated observation leading to prediction that can be replicated by anyone anywhere. While a gold standard for scientific inquiry, it just doesn’t apply so readily in the softer sciences of the humanities. Quantum physics has made a significant contribution to our daily lives from nothing more than statistics, even over the objections of luminaries such as Einstein, because the math works; repeatedly. In economics, there is nothing but a sea of variables increasingly disconnected from the world common sense still inhabits.
The August 28, 2015, edition of Science magazine, Volume 349, Issue 6251, featured a study of studies in psychology. Selecting 100 published experiments from three “high-ranking” psychology journals, authors sought to replicate the findings in each but ran into great difficulty in doing so. In fact, in only one-third to one-half of them could they obtain the same results at near the same levels of significance.

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The Inequality of Logic Behind The Increasingly Emphasized Magic Numbers

August 22, 2016

It is a basic element of logic that if A = B and B = C, then A must also equal C. In terms of action, if I do a thing and that thing always leads to a predictable outcome, not seeing that outcome causes one to question whether or not one actually did that thing. In other words, A must not have equaled B.
Central bankers all over the world are stumped. Nothing they have done has led to what was expected when one does such things. In very basic terms, we all know, as history has shown, that money printing leads to inflation. In most cases, it leads to the most extreme forms of inflation, which is why human history in financial and economic terms is really a study in how to keep official efforts from ever going in that direction (gold worked the best, which is why it survived for so long).

Yet, despite the warnings, global monetary policy went there in 2009 and hasn’t really stopped. The initial (mainstream) criticisms of quantitative easing were mostly in relation to this historical expectation for runaway inflation, the inevitable C to the money printing of B. By the middle of 2012, though, there were already indications that both QE and its mainstream critics were wrong due to one fundamental flaw.

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It’s Not A Cycle Nor Did “Stimulus” Work—–All The Answers Were There in 2012 China

August 22, 2016

The simple fact of the matter is that 2012 wasn’t supposed to happen. By every orthodox prediction and theory about the set of tools deployed after the Great Recession (after it, the first clue) there was no reason to suspect anything but the usual cyclical occurrences. Sure, the recovery would be weak because the recession large, but retrenchment was never even considered. The recovery might be somewhat shallow, but there was no way it could be bent or durably altered.
The first rebuke to the mainstream came from Europe. Though the European economy would fall right back into recession so soon after the “Great” one, it was easily dismissed as a product of Greece, debt, and the demographics of Greek debt. So tantalizing was its allure, the European debt crisis of 2012 even made its appearance within excuses for China.
China’s fixed-asset investment has already started to pick up and a jump in spending on railway construction would echo the expenditure on rail lines and bridges that was part of stimulus during the global financial crisis. A decline in foreign direct investment reported by the government today underscored the toll that Europe’s debt woes and austerity measures are taking on Asia’s largest economy.

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Broader Alarm And Business Cycles

August 17, 2016

The NBER does not define a recession as two consecutive quarters of contracting GDP. That is the mainstream definition that largely survives as a coping mechanism to deny what might otherwise be quite apparent. That was certainly true in 2008, as only Q1 GDP declined and it wasn’t until Q4 2008 that this mythical “technical” definition was met. The NBER only made it worse by waiting until December that year to declare what was by then obvious to everyone, already one year in length.
The organization actually employs a Business Cycle Dating Committee whose job it is to decide both cycle peaks and troughs. The Committee, according to the NBER, considers a broad range of data that includes GDP, but relies primarily on four sources or accounts. The first two are broad monthly figures, real personal income less transfer payments and employment, while the second two are basically manufacturing, industrial production and inflation-adjusted total sales aggregated for the whole supply chain.
Updated figures for Industrial Production continue to show contraction, even if only slightly. The decline now stretches about a year, which suggests something more significant than simple and expected variation.

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Housing Starting To Suggest Where Autos Already Are?

August 16, 2016

In yet another data point that identifies depression rather than a Great Recession, the Wall Street Journal reported last week what most people outside the economics profession had realized a long time ago. Janet Yellen likes to say that the housing market is recovering, highlighting the economic sector as one of the few bright spots left. The FOMC regularly and officially makes mention of it, largely for the same reason.
As with everything else in this economy, however, that something is not getting worse does not immediately indicate that it is getting better. The housing market has been out of its crash for five years, but that is not at all the same as a housing recovery. Monetary policy interference is still interference, even if it is done with the best of intentions.
The housing recovery that began in 2012 has lifted the overall market but left behind a broad swath of the middle class, threatening to create a generation of permanent renters and sowing economic anxiety and frustration for millions of Americans…

But most of the price gains, economists said, stem from a lack of fresh supply rather than a surge of buyers.

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