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Is The Dam Bursting?
Submitted by Jeffrey Snider via Alhambra Investment Partners,
The fact that these deficient economic estimates continue in April instead of the forecasted and pleaded rebound has raised more serious concerns even among those most loyal to the mainline tendencies. It is getting more difficult to deny that there is a major economic problem brewing, one which may already be rather severe despite the fact that the heaviest pressures associated with recession itself are still absent. The changing perception about the economy, with that 5% GDP talk now dead and buried, is itself one of those factors as there are enormous downstream implications from such a potential reset.
It probably has always been that way to some degree, and there is no doubt that there is at least a small basis in monetary theory about recession being not much more than pessimism. But the QE-world seems to have run massive interference in the ability of business, in my opinion, to operate with some sense. Take the case of inventory, as there has been a massive buildup in the past year without the salving and saving grace of actual sales growth up and down the supply chain. That has left wholesalers and retailers full of “stuff” and not much sign that it will eventually and easily move in the near term.
The question is why businesses, service businesses as they are classified, would befoul their own circumstances to such a high degree. The only answer I can come up with is the Blue Chip Economic Survey and all its kin. After the polar vortex setback last year, it was proclaimed by every economists and policymaker all over the world that that was an aberration, an anomaly to ignore as the economic sun was finally about to rise. So certain were they that it was unceasing and relentless. Without much by way of alternative, what were businesses going to do? Many of them, undoubtedly, are full of recession fatigue and surely longed for that satiation of economic hope. Why not 2014 since “everyone” was so sure?
It certainly would not be the first time that business, in the aggregate, misjudged the economic circumstances, and surely not the first instance where monetary interference aided in the error. In fact, again, recessions used to be almost entirely made up of just this sort of inventory imbalance, a fact that traces back to that risk the supply chain must take in order to deliver economic flow. Business activity, for all the statistics and minutiae, is rather lumpy; retailers and wholesalers are quite used to the high degree of variation in sales and together smooth out the process by an almost constant flow of inventory.
You can see that quite clearly in the raw figures; sales are all over the place while inventory is almost unbroken:
What that means in practical terms is that the supply chain itself absorbs that variation and takes on a high degree of cyclical risk at times. It is not linear, however, as the selling process does not possess a static relationship to volatility. In other words, businesses will tolerate, as best they can, a temporary slump, smoothing it out with a constant flow of inventory even when sales fall away. Recession is the process whereby that patience becomes exhausted; the very point where tolerance for passing slump is replaced by changing perception toward recognition of something much worse and more sustained.
At that point, inventory on hand needs to be liquidated and orders for new inventory scaled back – slowly at first and then all at once. Again, this is not a linear process and is itself uneven, full of fits and starts – declines and false dawns.
In the case of 2014, you can begin to appreciate the danger as that hopeful optimism about the dawn of the actual recovery at long last gives way to something far darker. While economists might be excused for missing Q1 yet again, and thus business might retain at least some hope for 2015, even that has seriously faded as economists now turn themselves inside out, revealing the rotten intellectual foundation for their forecasts, to maintain that hopeful line.
The disappointing [retail sales] report prompted Michael Feroli of JPMorgan Chase to revise his estimate of second-quarter economic growth to 2% at an annual rate from 2.5%.
Americans were expected to finally splurge in April after harsh winter weather and stagnant wages were blamed for crimping their purchases since December. A closely watched Labor Department report early this month showed private wages rising at the fastest pace in seven years in the first quarter.
Other factors also have fattened consumers’ wallets, including strong job growth, high consumer confidence, lofty stocks and low gasoline prices.
“The disappearance of consumer spending in early 2015 has now become even more mysterious,” Feroli says.
The more “mysterious” this is to economists, the more businesses are going to lose that faith and head to that final break, and not just in inventory.
The fact is that even 2% GDP for Q2 is highly optimistic, though par for the course from the mainstream. The Atlanta Fed’s GDPNow tracking model, which was almost exact on Q1, is at just +0.7% for Q2. With revisions set to take Q1 likely to somewhere between -0.5% and -1.5% (depending on a few factors deep in the BEA’s models), that would mean the entire first half of 2015 is in very good danger of being negative on GDP; and I happen to believe +0.7% in Q2 is being charitable (PCE at 2.6%, with the worst retail sales figures of the recovery and some of the worst in the entire series in April? Imputations and Obamacare spending aren’t going to be that “good”).
In that case, it would be less likely that businesses would retain the inventory or any of the other plans they have based solely on economists getting it right this time. A negative H1 2015 would all but end any thoughts of a “transitory” “anomaly” no matter how much Janet Yellen will plead and obfuscate. Instead, thoughts will likely turn back to 2008 when we saw exactly this same process play out, with economists taking investors and a good many businesses over the cliff with them.
There are some incoming indications that lean already in that direction, includingyesterday’s PPI report. It is too easy to dismiss the PPI as solely a product of petroleum related to the “rising dollar” (a “dollar” that has been, with a proper interpretation as wholesale finance, anticipating just this sort of determined negativity). Total PPI: Final Demand Goods less energy was negative in April as February. Further, on the services side, which includes the retail and wholesale supply chain, the trade PPI was down 1.5%, 0.2% and 0.8% in the past three months. That looks a lot like the opening rounds of inventory liquidation.
The overall PPI is at a level that is consistent with that view as it takes on recessionary form. The -4.2% year-over-year change in finished goods is equal only to the Great Recession itself.
This is much, much more concerning that just oil prices shocked by the good fortunes of sudden production from shale plays. The PPI is demonstrating, as retail sales, that there is enormous and still-building negative pressures that are in danger of breaking the longer this “transitory” garbage continues, especially as it remains “mysterious” for the mainline baseline of economists and FOMC members.
In fact, the history of the PPI coincides, with only one exception, to a decrease in inventory as picked up by GDP estimates.
With the exception of 1998, the correlation is quite consistent. The Atlanta Fed’s GDPNow tracker itself is forecasting/picking up the expectations for a sharp, but not yet devastating, inventory liquidation in Q2.
They did forecast that same liquidation idea for Q1, but it didn’t last long and, once more, you have to wonder how much the incessant aberration, transitory, anomaly talk might have interrupted that. So further weakness, even consumer recession itself, extending into Q2 endangers that proclivity to “ride it out.”
From a very broad perspective, we already have what looks like contractionary pressure in consumers for various reasons, including healthcare and a lack of wages. The alternate view is instead based on dubious statistics of increasingly dubious arrangement. Now we are seeing some initial signs of that shifting into the next stages, infecting deeper and penetrating wider. All of that could, certainly, turn around once more, but the longer this goes and the more that is pulled into the “vortex” (to pun around these orthodox dismissals) the less likely that will occur.
The wild card maybe if the bond market is correct in its “hope” for the FOMC to not only ditch their present suicidal course but to also gain a QE5. I can’t fathom as to why that might excite anyone but the habitual stock rationalizer, but you never know in that it may take some edge off business nervousness. The assumed power of QE is eroding quickly anyway, a lesson being learned the hard way as I write, but it isn’t quite exactly knowable how the economy might respond again. The deeper this goes before the FOMC might even get to that point, the less relevance even a big QE5 might have at that point (monetary history is always, always one of being too late due to overestimation and total misunderstanding; see: 2008).
It is a cornerstone of orthodox economics that recessions are not just emotion and pessimism but spring out of an exogenous “shock.” There is none to be found here in sharp contrast to 2008 which at least had a deep financial panic. However, the trajectory of the economy since 2012 has been seeded by a distinct lack of growth especially in wages and incomes – what economists have been taking as slow but steady growth was actually much more nefarious. We may find out that recession shock includes just generic and basic attrition; that “demand”, despite all the attention and “stimulus” given it, can only hold out for so long without any actual (as opposed to purely statistical) alleviation.
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I don't think the heavy stuff is going to come down for quite a while.
https://www.youtube.com/watch?v=t3lshY4PwI4
Agreed it is going to take time but not much time
WRONG!
just like 2008, it was "raining" until August, when the 'event' of Putin invading Georgia sent things south in a hurry
There's this "delay" thing... like when the coyote runs off the cliff, and he for a moment stands still on thin air. A pause, and then comes the inevitable. Do you have to realize the ground underneath you is gone before you fall? Maybe if you just don't look down...
But in this case he will pause mid air and face the camera pulling out a sign saying "But we are in a RECOVERY?"
+100 for CaddyShack reference
"ObamaCare";
It was supposd to have recollateralized the derivative house of cards by hustling another 30 million paying bodies into the bankers service-but that hasn't materialized. "can't get blood from a stone" There are good reasons 30 million people were uinsured. Waving a wand can't change that. Nor does Congressional or Presidential edict.
Obamacare's increased costs have sucked out discretionary spending from all corners of the service economy, in the process hollowing out previously "good" collateral.
Its complete repeal by MN tonight would lessen the October Crash on the horizon triggered by lack of discretionary spending income; it would also bolster some of the collateral dykes a bit.
But absent a productive economy since about 2006, the collateral shortage on the horizon is a tsunami at this point.
The banks, fueled by government Constitutionally unrestrained, have managed to crap the world.
MisStating of inflation rate for past 15 years means we have to correct the GDP growth by at least -6%
Our economy has been in free fall for 14 years, making the great depression look like a nap
Every year we import 265,000 Inidans with fake degrees to tak our tech jobs on the H-1B Genocide aka the cultural revolution to destroy smart people
What we are debating is going from depression to hyper-depresson. Already 50%% of americans are out of work. Unemployment is 25% and has been for seven straight years.
Will anyone else dare speak the truth?
Stop the Genocide, Stop the H-1B. Murdering our best and brightest is no way to run a country.
MisStating of inflation rate for past 15 years means we have to correct the GDP growth by at least -6%
Our economy has been in free fall for 14 years, making the great depression look like a nap
Every year we import 265,000 Inidans with fake degrees to tak our tech jobs on the H-1B Genocide aka the cultural revolution to destroy smart people
What we are debating is going from depression to hyper-depresson. Already 50%% of americans are out of work. Unemployment is 25% and has been for seven straight years.
Will anyone else dare speak the truth?
Stop the Genocide, Stop the H-1B. Murdering our best and brightest is no way to run a country.
time for fiscal stimulus! we need moar debt. and yellen needs moar bonds to buy so she can turn on the printers. all problems fixed.
What does "orthodox economics" have to do with anything that has been going on for the last 15, or last 45 years?
They need to cut immigration and H1B, cut payroll taxes, stop paying banks for excess reserves on deposit at the FED, prosecute financial criminals, and make student loans dischargable in bankruptcy. Thats a good start.
And limit health care costs, make military service mandatory, build Thorium reactor power stations, revamp air traffic control, modernize railroads, fix the roads, bridges...
print moar, ramp mic, create moar guv red tape for small buss. intervene in other countries affairs, lie deceive, expand free shit army, welcome illegals with open arms, transfere homeland security/mic excesses to police departments-militarize local police, send in goons to take childern from inocent law abiding mericans. need moar? realism is a bitch bitchezz..
then there is wages. healthcare and so on. pretty fucked up..
you got my vote!
Yes. This POS legislation that Obummer rammed through to reform health care has NOTHING to do with health care reform. All it attempts to do is reform how health care is paid for.
If they were to reform health care maybe it wouldn't cost 8 bucks for a fkn aspirin in the hospital.
I'm sorry, but I can't disagree more. If some stupid ass goes $100,000 in debt to get a degree in basket weaving they need to pay for it and not the tax payer.
I tend to agree with that sentiment but I don't think it's that simple. What we have is a generation of basically children who have been lied to and given no other alternative (at least in their minds). This lie has been organized and funded by government and it is in breach of their fiduciary responsibility to their citizens. This is breach of contract and downright fraud.
I think the war against young people in this way demands reparation and all student loan debt should be abolished at this time. At the same time all government backed loan programs should also be abolished.
Without this free money Universities will lower their prices to accomodate their students already enrolled, many students will leave high priced universities for community colleges, basically the market for education will be returned to normalcy overnight and the lives of individuals saddled with usurious sums of debt will be as well.
education is another guv tit reliant on easy fed money. univ. budgets gonna be in trouble as some already are. need moar easy college loans to ramp the free ed army payor, false dicotmy. where is the job u said i am entitled to? book smart, lack of common sense plebs turning to moar guv assistance... pretty fucked up. all by design to tap moar easy printed irresponsible money by insiders gaming the system for their gain. same template differnt menu.
What do you think is going to happen the moment all that debt is extinguished? I can tell you exactly what will happen. It will lead to yet another bail out of the banks and the debt will be thrown on the tax payer. I do agree that without the free guaranteed money tuition costs will be forced to come into line,but there is no way I would support the forgiveness of these fool's debt.
I agree, obviously there are larger issues to solve before we can start contemplating a solution to student loans. It truly is a house of cards you can't solve one problem without having a collapse.
Education bubble
Housing Bubble
Sock Bubble
Bond Bubble
The debt could be extinguished over a period of time, and not all borrowers were dumb asses.
You do realize the student can make a minimal payment for 30years and the debt is forgiven, currently.
We have created a financial zombie class.
Why aren't student loan rates <1%. Answer - they are subsidizing other student educational expenses.
I disagree with you.
A student should not be able to rack up $100k in debt for a degree in basketweaving. This is loansharking at its finest.
If I lend someone money I know they cannot repay, isn't this my problem?
The lender would not lend money if it was at risk of non payment, through bankruptcy dismissal.
There are alot of benefits to putting student loans at risk again, I see an immediate tightening of money and corresponding reduction in tuition fees.
there was a time I would have agreed. but now?
several generations of marxist inspired public education have had their expected results. creation of irresponsible entitlement junkies.
we have passed the tipping point in creating a society dependant on government handouts that extends from the homeless on the street all the way to the To Big To Fail boardrooms.
Good start to what?
There will NEVER be "growth" like we know it to have been. No longer is it possible. We're losing SCALE, which means that things will ONLY get more expensive (less affordable), which in turn puts downward pressure.
The debt is based on over-borrowing from the future. How are we going to BOTH pay off that debt AND spend enough to support jobs and industry (such that it maintains the scale to allow it to function? [ask yourself at what capacity utilization level do doors start closing?]), let alone GROW.
Fuel prices and miles driven are a pretty good indicator of how growth is doing:
http://www.advisorperspectives.com/dshort/updates/DOT-Miles-Traveled.php
Cash For Clunkers. Low interest rates. Subprime auto loans. And, yet, as can be seen from the above article, none of this really exerting any real pulling/lifting power.
This article by Snider does a very good job in pointing out that we're painted in a corner.
Companies have bought up their stock. Most people miss that this is a staging to pull back from Wall Street; there's not going to be any more "investing" going on, it's all about survival now, and companies don't want to be tossed around and picked apart by corporate raiders. Nonetheless, there will be lots of companies closing down or being bought up by larger rivals. We will see less and less "competition" as this happens because there will be fewer competing businesses: only those that have enough power to sway suppliers and end-customers will last, until, that is, they don't. TIP: robotics, natural resources and undertakers, the only sectors that can be expected to at least hold flat.
It's only when i read articles like this (twice) and cant make head nor tail of them that i realise i'm not as bright as i think i am.
You actually tried to read the article? And tried to understand it? Its an ECONOMICS article, with graphs. You wouldn't feel bad if you ate something from a tin labelled "fruitcake", and got a stomachache, would you?
Ever try that stuff they eat in England called "spotted dick"?
Is it as eye appealing as "Head Cheese"?
Better than kidney pie, the other-other-other mystery meat.
I do like me some nice sweetbreads, though. ;-)
It's transitory boys, just transitory.
Everyone....Sunshine lollipops and rainbows........hey!! ....You in the back!! Start singing or its off the FEMA 15 for you
I thought it was Jade Helm 15.
Maybe it was Agenda 21.
You need a damn score card to keep up with these guys.
One more sucker's rally, the Vix down to 11ish, something comes in out of left field, then whammo. Keep your powder dry.
You mean like the 'sucker's rally' from 2009 to now?
Like that?
Who cares.. it is friday and lets all get drunk!
Awh quit your belly-aching, FEDs got software to take care of all that now.
exogenous: of, relating to, or developing from external factors.
What exactly is an external "shock" when some factor upsets the world's economy, as was the case with with oil price spike in the early 1970s, courtesy of OPEC? An invasion by Martians, maybe? Vagueness in writing is a characteristic in bad writing, where you leave out specific details to support a general (and usually boring) statement. For instance, in the USA, the massive amount of addictive drugs shipped in by the CIA through Governor Bill Clinton's favorite airport at Mena, Arkansas was an external "shock" that had the effect of devastating inner city neigborhoods.
The wild card maybe if the bond market is correct in its “hope” for the FOMC to not only ditch their present suicidal course but to also gain a QE5...
i find this reasoning to be utterly fallacious.
there is no "bond market" per se. only the fed. sure, price action is built on front running speculators who buy the expectation and sell the news but this only leads to bizarro up-is-down "bond market", not a "bond market" that is correct and forward thinking, or thinking at all really. without fed intervention the "bond market" would be setting the ust 10Y at nirp and the "stock market" at near zero. moar qe is a given, just don't expect the "bond market" to be indicative of anything whatsoever because all prices are fixed and manipulated.
Is the author claiming to believe this or is he just stating that that's the belief per the old "norms?"
ALL markets are broken because we hit peak growth a long time ago and have been faking it to such levels that we now have nothing but incredulous statements to hold anything together.
If the bond market is the only way in which the "imbalances" can be corrected (w/o wars and such) then that pretty much tells us that it AIN'T going to get corrected w/o suffering from calamity, if even then.
"orthodox economics"...Hahahaha!!
NO! the damn is not "bursting". Why, simple, there isn't any fucking water behind it!
Sure there is - the tears of Zeroes watching gold plummet and equities skyrocket.
You betcha... Now is it $650 or $200...? Any day/week/month/year now, right...? $DX 120 handle from here to eternity...?
“The disappearance of consumer spending in early 2015 has now become even more mysterious,” Feroli says.
How is it mysterious?
A quarter of workers are paying half their income in rent. I forget the percentage, but a huge number of people don't have enough savings to pay for a major car repair. 250,000 full time jobs were disappeared last month and 400,000 part time jobs were created. The ACA has increased health care spending. So what money do consumers have left to spend on discretionary items?
Maybe someone selling his CEO stock options, from piling up company debt to buy back corporate stock, has 179 million dollars to buy a Picasso, but a lot of the rest of us, can't even afford a Jack in the Box burger.
If you write the debt off, what about all the people lending against that debt? What about all financial institutions that are leveraged against that debt? You are talking about government bond market of something like $60 trillion. The total bond market worldwide is over $100 trillion. So, if you think about that $60 trillion just in government debt, then you look at what the investors have done with that debt. That is collateral for leveraging 3, 4, 5, 10, 20, 40, 50 times, depending on the institution, and if the values of that debt start declining and it is guaranteed to decline . . . and we haven’t even talked about the derivatives, the combination of all that, and the leverage of the implosion will be so big the world will never cope with that.”
http://usawatchdog.com/risk-unprecedented-in-bubble-land-egon-von-greyerz/
GAME OVER!
People have yet to understand that all that debt is a claim on the future. Writing off the debt means, well, writing off the future, as it pertains to the System that is.
We created a debt via paper instruments. The corrections are going to be based on actual physical things (work, materials etc.): This WON'T be anything that can be papered over...
"The fact that these deficient economic estimates continue in April instead of the forecasted and pleaded rebound has raised more serious concerns even among those most loyal to the mainline tendencies."
The FED has spent 6 years destroying people's savings.
News Flash! Most of that savings came from the bubble era. The vacuum was always going to be strong...
The only 'crisis' is with the knuckleheads on Zero Hedge, which have manufactured it out of whole cloth.
The recovery continues apace, Zeroes be damned.
"The recovery continues apace, Zeroes be damned."
There is no recovery. The credit bubble has grown even larger, thus the problem is even worse than it was in 2007.
"We may find out that recession shock includes just generic and basic attrition"
The FED has spent 6 years destroying people's savings.
Germans are now "frantically" buying gold. So not just Russia, China, India. German people started to hoard up gold as well now. It seems common Germans are now waking up and realising that something is very wrong and that they should not trust fiat currencies (unlike people in the USA?) Not even those great claims by central banks that "gold is not money", "gold is not good for anything" seem to help. But when not just BRICS, but even common Western people from the streets are starting to do this, it means the tide is turning. This cant hold on much longer. And as for gold, I am just waiting for the day, when I come to one of my favourite shops and there wont be any gold. That day may be close. They may keep pushing down the price of gold, but they cant control the real world out there and when so many people start buying physical gold (for such a cheap price), there soon just wont be any left for the common people.
How do you know that Germans are buying gold? I'm curious. Is this comment based on annecdotal evidence (which can be useful) or something else? If you are right, I agree -- it's important.
I live in the Central Europe next to Germany a I travel there often:-) In my country, people are also starting to buy gold, but not as much as Germans. It appears that it started in the beginning of this year. I was told that Germans somehow remember their scary history of hyperinflation and they are becoming very nervous because of the ECB's QE and that it is not working.
I certainly agreed with that article!
But its charts are too short-term.
The bigger picture has been making "money" out of nothing to "pay" for strip-mining the planet's natural resources for long time, which had been developing at an exponential rate, enabled by a fresh planet to do that to. The latest rounds of QE were the central banks stepping into the breach to create more "money" out of nothing, to make up for the increasing inability of the lesser banks to be able to find enough "borrowers" to justify them being able to make enough "money" out of nothing to lend into the economic system.
Since the entire political economy is based on fundamentally fraudulent financial accounting systems, where governments ENFORCE FRAUDS by privately controlled banks, it is impossible for that system to adapt sanely to the problem of diminishing returns from being able to continue to strip-mine the planet's natural resources at increasing rate. Since it is politically impossible for the economic system to admit the ways in which is it is based on ENFORCING FRAUDS, it is impossible for it to sanely adapt to, nor rationally accept, the limits to growth. Rather, the established systems must necessarily behave more and more psychotically, as the debt slavery systems continue to drive themselves through debt insanities toward death insanities.
The established systems will continue to deliberately ignore and deny that money is necessarily measurement backed by murder, because those systems will refuse to recognize and admit that the existing political economy has been based on being able to ENFORCE FRAUDS. Therefore, eventually, the only "corrections" to the system as a whole must be due to factors beyond its control, which are driven beyond its control because that system is too criminally insane to recognize how criminally insane it has become ...