China Manufacturing PMI Jumps To Highest In 2014; What’s Wrong With This Chart?

Despite all the shadow banking system hand-wringing, macro-data-collapsing, real-estate-bubble-bursting, stock-market-tumbling reality facing the Chinese macro, somehow, China’s official government manufacturing PMI just printed 50.8 – its highest in 2014 and the 20th month of expansion in a row. Given the mini-stimulus efforts of the government, perhaps it is not surprising that the official (more SOE-biased) data signals all-clear (when HSBC’s PMI is still in contraction for the 5th month in a row). The employment sub-index fell to a 3-month lows and the Steel industry’s output and new orders has cratered… So what’s wrong with this chart?



Charts: Bloomberg

via Zero Hedge Tyler Durden

As previously mentioned, it’s been a long week. I’ve done what I’ve needed to do because I’m committed and it’s habitual now, but my heart hasn’t been in it. It’s easy to get distracted by life and lose sight when other obstacles are distracting you, but I learned long ago that the gym is one place I can always go to escape the unwanted noise and just do me. So, even when I don’t feel like working out, that’s when I know I need to. Because it’s one of the few things I thrive on and if I’m not wanting to go to the gym, then I’m out of touch with myself (insert pervy joke here) and something deeper is going on. Anyway, it’s easy to lose motivation when the journey is slow, but then I look at progress pictures and remember shit is happening even if you can’t always see it day-to-day. And really, what are my options? Giving up on myself? Hell to the no! Stay the course and the motivation will always come back. Always. I’ve tested this theory dozens of times and tonight was no different. I had the best workout I have had in weeks and that’s all it took to motivate me again. So, watch out bitches, because I’m back. #BigGirlPanties


As previously mentioned, it’s been a long week. I’ve done what I’ve needed to do because I’m committed and it’s habitual now, but my heart hasn’t been in it. It’s easy to get distracted by life and lose sight when other obstacles are distracting you, but I learned long ago that the gym is one place I can always go to escape the unwanted noise and just do me. So, even when I don’t feel like working out, that’s when I know I need to. Because it’s one of the few things I thrive on and if I’m not wanting to go to the gym, then I’m out of touch with myself (insert pervy joke here) and something deeper is going on. Anyway, it’s easy to lose motivation when the journey is slow, but then I look at progress pictures and remember shit is happening even if you can’t always see it day-to-day. And really, what are my options? Giving up on myself? Hell to the no! Stay the course and the motivation will always come back. Always. I’ve tested this theory dozens of times and tonight was no different. I had the best workout I have had in weeks and that’s all it took to motivate me again. So, watch out bitches, because I’m back. #BigGirlPanties




from @hooper_fit – WEBSTA

Is A Russia-Japan Natural Gas Pipeline Next?

Submitted by Ankit Panda of The Diplomat,

Following Russia’s historic $400 billion natural gas supply deal with China last week, Japanese lawmakers are looking to revive efforts to tap into Russian natural gas supplies themselves. A Bloomberg report shows that a group of 33 lawmakers in Japan are backing a 1,350 kilometer pipeline that would run between Russia’s Sakhalin Island and Japan’s Ibaraki prefecture, just northeast of Tokyo. The project is estimated to cost $5.9 billion and could yield as much as 20 billion cubic meters of natural gas per year (equivalent to 15 million metric tons of liquefied natural gas). The pipeline would make up 17 percent of Japan’s imports.

The Japanese lawmakers backing the proposal belong mostly to the ruling Liberal Democratic Party and the New Komeito Party. The renewed interest in the pipeline is primarily due to Japan’s own energy shortages following the shutdown of all of Japan’s 48 nuclear reactors following the March 11, 2011 Tohoku earthquake and tsunami, which caused a triple meltdown at the Fukushima Daiichi plant. The Democratic Party of Japan government at the time decided to shut down Japan’s nuclear plants and begin moving the country away from a reliance on nuclear power following a public backlash after the Fukushima crisis.

Based on current plans, natural gas originating on Russia’s Sakhalin Island would be transported via the Sakhalin-Khabarovsk-Vladivostok pipeline where it will be processed into liquefied natural gas for export to Japan. Russia has considered additional undersea and land-based pipelines to deliver gas to China, North Korea, and South Korea in the region, including one pipeline that would deliver gas to South Korea via North Korea.

For Russia, a pipeline deal with Japan would be particularly compelling. Japan is the world’s largest LNG importer, having purchased 87.49 million metric tons of LNG in 2013 according to the Japanese finance ministry. Despite being the largest importer worldwide and its proximity to Russia, Japan only imported 9.8 percent of its LNG from Russia. The proposed pipeline would see that number grow substantially, in part because Japan could import natural gas instead of LNG. LNG is costlier to transport. Naokazu Takemoto, the Japanese parliamentarian heading the group in favor of the pipeline, estimates that “the price of natural gas will be two times lower than the export of liquefied natural gas.” Politically, given Russia’s current isolation with the West over its actions in Ukraine, a pipeline deal would also gain Vladimir Putin some vitally needed political currency. Indeed, Russia’s recent deal with China was likely motivated by the Kremlin’s political concerns — China seems to have won a deal at a very favorable price.

If Japan and Russia formally begin negotiations for a pipeline, Tokyo will likely be able to win a favorable price as well. As Europe tries to reduce its dependence on Russia’s natural gas, Russia will lose a certain amount of leverage in negotiations. The group of Japanese lawmakers will propose the deal to Prime Minister Shinzo Abe, who will study the feasibility of the deal in June. It is likely that Abe will propose the deal to Vladimir Putin when he visits Tokyo later this year.

via Zero Hedge Tyler Durden

The Unfaithful Departed: Meet The People Who Bailed On The Obama Administration

Friday’s latest resignation of yet another former Obama administration faithful – that of White House press secretary Jay Carney – got us thinking: how many people have jumped off the USS Obamic? The answer is, in short, a lot.

Below is a list (by no means complete) of the most prominent officials and advisors who have quietly exited the Obama administration stage left over the past 6 years.

Jay Carney

White House Press Secretary Jay Carney is leaving his post. President Obama announced Carney’s departure in a surprise appearance at in the White House press briefing room May 30, 2014. He said principal deputy press secretary Josh Earnest will take over the job.

* * *

Eric K. Shinseki

Veterans Affairs Secretary Eric K. Shinseki gives the keynote address at the National Coalition for Homeless Veterans Annual Conference in Washington. Shinseki addressed what he called the “elephant in the room,” saying he was too trusting of some and calling breaches of integrity “indefensible and unacceptable.” Shinseki met with President Obama and resigned a short time later on May 30, 2014.

* * *

Kathleen Sebelius

Kathleen Sebelius resigned as secretary of Health and Human Services in April 2014 after numerous problems with the rollout of the Affordable Care Act

* * *

Keith B. Alexander

Keith Alexander has been the direct of the NSA since August 2005. Following the Edward Snowden whistleblowing scandal, Alexander announced in October 2013 that he would leave the NSA.

* * *

Lois Lerner

Lois Lerner ran the IRS’s section on tax-exempt organizations until her resignation in September 2013, following a scandal exposing the targeting of tea-party groups for IRS scrutiny.

* * *

Ray LaHood

Ray LaHood was secretary of transportation from 2009 until July 2013. He was strong proponent of high-speed rail, saying “This is what the American people want. If you build it, they will come.” Perhaps best known for saying “”America is one big pothole right now”, he did not seek any public office after that, and instead entered the private sector.

* * *

Jill Sommers

Jill Sommers was appointed in July 2009 by Obama to serve a five-year second term as Commissioner of the CTFC.  She announced her departure from the CFTC in July 2013, after concluding oversight of the agency’s investigation of MF Global. She now works at the IFM foundation as a consultant.

* * *

Ken Salazar

Ken Salazar was US Secretary of the Interior from 2009 until his resignation in April 2013. On June 10, 2013 he became a partner in the major international law firm of WilmerHale, and was charged with opening a Denver office for the firm

* * *

Lanny Breuer

Lanny Breuer was Assistant Attorney General for the Criminal Division of the US from April 2009 until March 2013 when he departed following a scandal in which it was revealed that the DOJ is unwilling to prosecute certain financial firms over concerns they are “Too Big To Prosecute.”

* * *

Lisa Jackson

Lisa Jackson served as the Administrator of the United States Environmental Protection Agency from January 2009 to February 2013. In May 2013, it was announced that Jackson would be joining Apple, Inc. as their environmental director

* * *

Leon Panetta

Leon Panetta resigned as secretary of defense in February 2013.

* * *

Janet Napolitano

Janet Napolitano resigned as homeland security secretary in July 2013 to become president of the University of California system.

* * *

Hillary Rodham Clinton

Hillary Rodham Clinton resigned as secretary of state in February 2013 after four years in the post.

* * *

Tim Geithner

Tim Geithner was US Treasury Secretary from January 2009 from January 2013, following a stint as head of the NY Fed following his personal admission he had no actual experience as a banker, and after admitting ” I’ve never been a regulator.” After his tenure as the worst US Treasury Secretary in history (perhaps only tied with Hank Paulson), Geithner joined Warburg Pincus as president and managing director in March 2014. He also wrote a book which briefly sold a lot of copies in the fiction section on

* * *

Mary Schapiro

Mary Schapiro was Chairman of the SEC from January 2009 until December 2012 when she left following zero banker prosecutions as a result of the great financial crisis/robbery, and after formalizing the rigging of the capital markets by the HFT lobby. In April 2013, Schapiro joined Promontory Financial Group as a managing director and chairwoman of its governance and markets practice.

* * *

David Petraeus

David Petraeus was Director of the CIA from September 2011 until his resignation in November 2012, when he resignedciting his extramarital affair which was reportedly discovered in the course of an FBI investigation

* * *

William Daley

President Obama announced Jan. 9, 2012, that Chief of Staff William Daley will step down. Obama named Budget Director Jack Lew as Daley’s replacement.

* * *

Dennis Ross

President Obama’s key Middle East adviser, Dennis Ross, said he would resign after a period of turmoil in the Arab world and a difficult period in U.S. relations with Israel. Ross, a veteran U.S. peace negotiator, said in a statement that he had made a promise to his wife to return to private life after two years in the administration and had outstayed that promise by a year. He added that he was returning to private life with “mixed feelings.”

* * *

Reggie Love

Reggie Love, a key member of the Obama entourage and onetime forward for the Duke Blue Devils basketball team, left the White House at the end of 2011. Love started out as a staff assistant in Obama’s Senate office after college, rising to become his personal assistant, known as the “body man.”

* * *

Melody Barnes

White House Domestic Policy Council Director Melody Barnes, one of a handful of high-profile women in the White House, will leave her post as President Obama’s domestic policy adviser at the end of 2011, two senior administration officials confirmed.

* * *

Jen Psaki

Former White House deputy communications director Jen Psaki announced her departure from the administration in September 2011 to take on a senior role at Global Strategy Group, a well-known Democratic communications and research firm.

* * *

Vivek Kundra

Vivek Kundra, the federal government’s first chief information officer, left his position in August 2011 for a fellowship with Harvard University.

* * *

Michael Leiter

After five years as the director of the National Counterterrorism Center, Michael Leiter plans to resign because he thinks he has spent enough time in the position. President Obama praised Leiter, calling him “a trusted adviser to me and the entire national security team.”

* * *

Austan Goolsbee

White House Council of Economic Advisers Chairman Austan Goolsbee plans to resign and return to academia, the White House said June 6, 2011.

* * *

Bob Bauer

Counsel to the President Bob Bauer meets in the Oval Office with President Obama and other senior advisers. Bauer, a longtime Obama adviser, will return to private practice but will continue to advise Obama as a personal lawyer and offer legal counsel to Obama’s reelection campaign and the Democratic National Committee.

* * *

Bill Burton

White House deputy press secretary Bill Burton and White House political adviser Sean Sweeney (not pictured) are leaving the administration to form their own political and strategic consulting firm. They announced their plans on Feb. 16, 2011. Burton has been mentioned as a potential candidate in the race to replace Rep. Chris Lee (R-N.Y.).

* * *

Ron Klain

Ron Klain, the chief of staff to Vice President Joe Biden, is leaving the White House to become president of Case Holdings, the holding company for the business and philanthropic interests of former AOL chairman Steve Case. Klain also served as chief of staff Al Gore and was portrayed by Kevin Spacey in the HBO film “Recount,” about the 2000 presidential election.

* * *

Glenn Fine

Justice Department Inspector General Glenn Fine left after a decade in the post. First appointed by President Clinton, Fine became a prominent figure during his office’s investigation of Bush administration scandals.

* * *

Gen. James L. Jones

It was revealed the morning of Oct. 8, 2010, that National Security Advisor Gen. James L. Jones was resigning and being replaced by his deputy, Thomas Donilon. A recent book exposed tension between Jones and President Obama over war strategy.

* * *

Lawrence H. Summers

Lawrence H. Summers, will step down as director of the National Economic Council after the November elections and return to a teaching post at Harvard University, the White House announced Sept. 21, 2010.

* * *

Christina Romer

Council of Economic Advisers Chair Christina Romer resigned to return to academia. President Obama said in a statement that Romer’s decision was guided by “family commitments.” She has long signaled that her time in Washington would be temporary.

* * *

Gen. David McKiernan  

Defense Secretary Robert M. Gates, left, decided to replace former Army Gen. David McKiernan less than a year after he took over the war effort in Afghanistan. McKiernan was criticized as too cautious and conventionally minded.

* * *

Ellen Moran

Ellen Moran left her post as communications director to become the chief of staff at the Commerce Department, becoming the first of Obama’s top advisers to depart.

* * *

Gregory B. Craig

Gregory B. Craig was fired as White House counsel after months of tumult over the administration’s inability to close the military detention facility at Guantanamo Bay, Cuba.

h/t WaPo, @Stalingrad_Poor

via Zero Hedge Tyler Durden

The United States Of Secrets (Part 2)

On the heels of this week's mainstream US media interview with Edward Snowden, it appears the general public is growing increasingly aware of the US surveillance leviathan's reach. In the following (part 2 of a 2-part series, part 1 here), PBS' FrontLine reveals the dramatic inside story of how the U.S. government came to monitor and collect the communications of millions of people around the world – and the lengths they went to trying to hide the massive surveillance program from the public. From 9/11 to Edward Snowden and on to NSA reform – what must be done… a must-watch for all US citizens (if they can spare some time away from Americas Got Talent or Instagram).


Part 1 Here


Part 2:

via Zero Hedge Tyler Durden

Been sooo unmotivated and struggling all week, but I’ve been grinding it out anyway, because fuck fleeting emotions. I have goals I’m chasing. Off to train the glutes!


Been sooo unmotivated and struggling all week, but I’ve been grinding it out anyway, because fuck fleeting emotions. I have goals I’m chasing. Off to train the glutes!




from @hooper_fit – WEBSTA

Here Comes QE In Financial Drag: Draghi’s New ABCP Monetization Ploy

Submitted by David Stockman via Contra Corner blog,

You can smell this one coming a mile away:

The European Central Bank and Bank of England on Friday outlined options to reinvigorate the market for bundled bank loans, which was “tarnished” by the global financial crisis, saying a better-functioning market for asset-backed securities can help boost lending to the private sector, particularly small businesses.

Yes, the ECB is now energetically trying to revive the a market for asset-backed commercial paper (ABCP) – the very kind of “toxic-waste” that allegedly nearly took down the financial system during the panic of September 2008. The ECB would have you believe that getting more “liquidity” into the bank loan market for such things as credit card advances, auto paper and small business loans will somehow cause Europe’s debt-besotted businesses and consumers to start borrowing again  thereby reversing the mild (and constructive) trend toward debt reduction that has caused euro area bank loans to decline by about 3% over the past year.

What they are really up to, however, is money-printing and snookering the German sound money camp. That is, the ECB is getting set to launch QE in financial drag by purchasing or discounting ABCP while loudly proclaiming that it’s not “monetizing” any stinking sovereign debt!

And that gets to the heart of monetary central planning. It doesn’t matter what the central bank buys with the digital credits it transfers to sellers. Purchasing government debt, Fannie Mae securities, IBM bonds or corporate equities, as has been done by the BOJ and Bank Of Israel under the new Fed Vice-Chairman, has a common effect.  That is, it raises the price of the purchased “assets” relative to what would obtain in the unfettered market, and injects fiat liquidity into the financial system in a manner that promotes speculation and excessive risk-taking.

Thus, if some clever Wall Street operators could figure out how to bundle sea shells and securitize them, central bank purchase of the resulting ABCP would be no different than purchase of treasury notes or Fannie Mae paper.

Unfortunately, the German keepers of the flame of financial orthodoxy have been too narrow in their focus on central bank “monetization” of government debt. To be sure, they are correct in maintaining that central bank purchase of sovereign debt inexorably promotes fiscal profligacy among the politicians. The fact that the debt of nearly ever DM government has soared to 100% of GDP and beyond since the era of monetary central planning got going in the 1990s is undeniable evidence.

But the true economic sin lies in the fiat credit generated by central banks monetization, not the particular type of “asset” purchase by which it is accomplished. Stated differently, debt which is priced at honest market rates and is funded by new savings from businesses or households is economically healthy; it involves a deferral of current consumption in order to finance a longer-lived project or productive asset that promises a return in excess of the funding cost.

By contrast, central bank balance sheet expansion – that is, monetization of government debt or asset-backed sea shells – results in borrowing without saving; investment without honest hurdle rates; and the re-rating of existing asset prices based on carry trades, not an elevation of expected economic returns.

So in clearing the way to “monetization” of ABCP, the ECB is simply heading down the path of Bernanke/Yellen style quantitative easing though a transparent gimmick that may or may not bamboozle the Germans. But it most certainly will succeed in snookering the financial press as the post below from the ever gullible Brian Blackstone of the WSJ clearly conveys.

But here’s the thing. The ABCP market is not a place where hard-pressed business borrowers or consumer’s can find a new source of credit outside the banking system. Instead, it is a financial engineering arena in which banks will have a chance to mint phony overnight profits through an accounting expedient known as “gain-on-sale”.

What that means is that when credit card receivables or small business loans are “bundled” by their commercial bank issuers and sold into an off-balance conduit which issues ABCP against these “assets”, the life-time profits of these loans can be booked instantly. Indeed, modern technology allows the credit card swipe to be booked as a profit nearly the same nanosecond as it happens, and accounting convention allows the profits from a 7-year car loan issued at 110% of the vehicle’s value to be recorded virtually at the time it rolls off the dealer lot.

The smoking gun with respect to the current ECB ploy is contained in the graph below for the US ABCP market. As is evident, it went parabolic in the run-up to the 2008 meltdown, but has virtually vanished since. In fact, current outstandings of about $250 billion are 80% below the July 2007 peak.

But there is nary a word in the financial press about credit card or auto loans being too “tight” in the US for a simple reason. Banks are more than happy to issue new loans to credit-worthy business and consumer borrowers and hold them to maturity on their own balance sheets. After all, with $2.7 trillion of “excess reserves” parked at the New York Fed, “funding” is not an issue. Moreover, the whole point of the Fed’s interest rate repression regime is to create an artificially large profit spread on bank loan books in order to revive dodgy balance sheets.


So we get back to the same old ritual of Keynesian central banking: namely, if you only have a hammer, everything looks like a nail. In truth, the only tool that central banks actually have is monetization of existing assets and sea shells. Accordingly, they invent excuses for more of the same, and devise clever stratagems to disguise what they are doing.

In the present instant, the ECB and its acolytes have been gumming for several months now about “low-flation”. But that is ridiculous—if the claim is viewed in any context except the run-rate of the last few hours or quarters.

Yes, during the last 12 months, euro area inflation has come in near what used to be viewed as salutary price stability at 0.8%. But in the three years before that it averaged about 1.9% or about as close to the ECB’s so-called inflation target as your can get. Indeed, moderate inflation is endemic in the European economies. It has averaged 1.8% since the eve of the 2008 crisis and essentially the same since 1997.


In short, Europe has more than enough inflation and doesn’t need a revived ABCP market to generate loans for the un-creditworthy. Today’s announcement is just part of Draghi’s desperate attempt to deliver QE next week in a manner which will not elicit a loud “nein!” from his German overseers.

via Zero Hedge Tyler Durden

Israel Deploys 3 Nuclear-Armed Subs Off Iran Coast; Iran Warns Of Forceful Response To “Evil Acts”

With tear-gas flying in the streets of Turkey, Ukraine’s civil-war raging in the south and east, US drones based in Japan to oversee the South China Sea, and Europe’s extremist parties gaining significant traction, today we get one more piece of considerably worrisome geopolitical news that global stock markets must ignore. The Sunday Times reports that Israel is to deploy three submarines equipped with nuclear cruise missiles in the Persian Gulf that are meant to act as a deterrent, gather intelligence and potentially to land Mossad agents. Iran is not happy, warning that “anyone who wishes to do an evil act in the Persian Gulf will receive a forceful response from us.”



As Haaretz reports,

Israel is to deploy three submarines equipped with nuclear cruise missiles in the Persian Gulf, the Sunday Times reported on Sunday.


According to the Times report, one submarine had been sent over Israeli fears that ballistic missiles developed by Iran, and in the possession of Syria and Hezbollah, could be used to hit strategic sites within Israel, such as air bases and missile launchers.


Dolphin, Tekuma, and Leviathan, all German-made Dolphin class submarines of the 7th navy Flotilla, have been reported as frequenting the Gulf in the past, however, according to the Sunday Times report, this new deployment is meant to ensure a permanent naval presence near the Iranian coastline.


A flotilla officer told the Times that the deployed submarines were meant to act as a deterrent, gather intelligence and potentially to land Mossad agents.


“We’re a solid base for collecting sensitive information, as we can stay for a long time in one place,” the officer said.


The flotilla’s commander, identified only as “Colonel O,” was quoted by the Times as saying that the submarine force was “an underwater assault force. We’re operating deep and far, very far, from our borders.”


The submarines could be used if Iran continues its program to produce a nuclear bomb. “The 1,500km range of the submarines’ cruise missiles can reach any target in Iran,” a navy officer told the Times.

ran’s response to this action was not too diplomatic…

Apparently responding to the reported Israeli activity, an Iranian admiral told the Times: “Anyone who wishes to do an evil act in the Persian Gulf will receive a forceful response from us.”


Last July, defense sources reported that an Israeli submarine had sailed the Suez Canal to the Red Sea last month, describing the unusual maneuver as a show of strategic reach in the face of Iran.

We are sure this is nothing to worry about and that investors worldwide should BTFATH with both hands and feet…

via Zero Hedge Tyler Durden

The Linoleum Economy

Submitted by Peter Tchir of Brean Capital,

The Linoleum Economy

Before reading further, just pause and think about what linoleum means to you. If flooring isn’t your thing, go ahead and think about Formica cabinets or anything else that fits the genre.

To me, it is something functional, which looks okay from a distance, but doesn’t stand up well to closer inspection. It conveys the disappointment of something that looked good, but turns out only to be a thin veneer covering cheap particle board.

That is how I see the economy right now. I think that at the moment we are getting a bit of a “bounce” from the disastrous first quarter, but that it is far lower than it should be if the underlying economy was strong. Even worse, is I think there is a real chance that the economy slows again, driven by a weakness in housing, and the Fed has very few useful tools left, if that happens.

But before going into more detail on why I have that view of the economy and what I think it means for the market, let’s look at what others are thinking.

The 2007 Recession

I won’t spend more than a moment on this, but I still find it “perplexing” if not insane, that the recession that started in December 2007 wasn’t “identified” until December 2008. We were only told that we had been in a recession for a year AFTER Lehman failed and AIG was bailed out.

I understand the saying “better late than never” but seriously, this is a bit ridiculous. It really shouldn’t have taken a -765,000 NFP print to confirm to the powers that be, that the economy had already been sucking wind for a year.

I am not saying that the same thing is happening again, but I would not be handing out any awards for seeing what is right before your eyes to the group of prognosticators responsible for seeing bad things in the economy.

Q1 2014 GDP

Which brings us right to Q1 2014 GDP.

I do not know what the expectations were back in January of this year. But I do know that by the time the first release of GDP came out, we all knew the weather had been bad.

Expectations had been ratcheted down to 1.5%, yet the number was an appallingly low 0.1%. A huge miss.


As more data came out, the economists could refine their forecasts. They came in at -0.5% and once again the estimates were too optimistic as the actual number was -1.0%. Maybe not quite as embarrassing as the initial miss, but…

While I have heard some “positives” like inventory build will help Q2, I have heard any things that show we may have gotten lucky to “only” be at -1%. It seems many people were surprised how much of a “positive” impact Obamacare had on the numbers. There is also a debate that is getting louder by the day, that the real inflation rate is higher than the reported inflation rate, artificially making Real GDP seem higher than it is.

Fool me once, shame on you, fool me twice, shame on me.

They had two chances to get this number right and missed both times by being too optimistic. Why are we so eager to believe the optimism most share for the first quarter? The fool me once phrase resonates with me right now.

Mailing it In

I promise I am almost done picking on our “ability” to forecast GDP, but I cannot resist showing this one last chart on the street’s view of GDP.

Consensus GDP Forecasts

GDP is fully expected to bounce back to just over 3% for Q2 and then settle into a nice cozy run rate of 3.0%. All is good, right?

Not so fast. The data just looks careless. The prior 5 quarters have been 1.1%, 2.5%, 4.1%, 2.6%, and -1%. The average isn’t anywhere close to 3% and the numbers have shown no consistency.

I would be much more comfortable with the chart if I saw some peaks and valleys in the estimates. I would like to see some evidence in the data that the estimates include any seasonal adjustment issues the data is experiencing (post Lehman, many adjustments seem to fail frequently as they are not good at adapting to 7 standard deviation moves). Maybe there is something that should be helping drive one quarter versus another quarter. (Obamacare? Heck even a new iPhone).

There is little evidence much real work has gone into these projections, but then again, why should there, when the Fed is already telling us what to expect and has no shame in being wrong.

The Fed’s Forecasts

Enough picking on the little guy. Let’s move straight to the Fed. The Fed has become the single biggest market driver. Between zero rates, forward guidance, QE, taper, and whatever else the Fed chooses to throw at the market, they drive the market more than ever.
With more than $60 billion of annual interest income, just from their treasury holdings alone, they are the biggest single player in the treasury market.

What they say and think matters. This almost omnipotent entity must have the ability to analyze and forecast the economy better than anyone else. Surely, anyone with so much power must be basing their decisions on analysis that time and again comes true. And clearly if the Fed says the economy is going to be okay, then it has to be okay.

So what is the Fed telling us? Fortunately, on June 18th we will get updated projections for the Federal Reserve, but for now let us look at what they are currently telling us.

Where to start with this data?

We will ignore the member who didn’t get the memo that growth is “good” and made the mistake of picking 2.1% for 2014 rather than the party line of “just about 3.0%”


To get 3.0% for this year, after a quarter of -1% we need to average 4.3% for the remaining 3 quarters. Seems highly unlikely when even the “bounce” quarter is tracking sub 3% so far as I can tell.


How we jump to 3.1% next year remains unclear to me, especially as QE and any impact it had will be gone


I am not exactly sure how 2.9% this year, 3.1% next year, and 2.75% in 2016 leads to a “longer run” average of 2.25%. 3 years of well above average growth, followed by some indeterminate amount of time [insert some hand waving here] then finally settling into a very stable long term future, much below any current levels we are told to expect.

Maybe we should ignore their near term projections and assume that their “in the longer run” projections are what they really believe is achievable and not the near term stuff they are using to try and use optimism as a policy tool. I find it far more believable that the economy is currently hovering around a 2.25% trend (still high, but at least believable). A 2.25% trend, when couple with some level of cyclicality, and some element of randomness in the data, should produce some negative quarters alongside some 4% quarters (exactly what we seem to be getting).

But maybe I am not giving the Fed enough benefit of the doubt. Maybe they really believe the near term will outperform the sustainable long term rate by so much. Maybe it is carefully thought out analysis that leads them to the conclusions. Maybe they are just that much better at this than anyone else.

So here we are back in December 2012 – not even 18 months ago.

2013 came in at 2.5%. Lower then their central tendency of 2.65%. Honestly, not a bad guess on their part.

But 2014 was going to be a breakout year hitting 3.25% and 2015 was going to be 3.35%. Those have already started to be nudged down. Maybe the Fed knows something about 2015 weather that we don’t?

The “low” guess (I really can’t keep calling these estimates with a straight face) for 2014 was 2.8%. That fell to 2.1%.

Even more worrisome to me is that the “longer run” number, which I believe they think is the real sustainable level, dropped on average since their 2012 projections. Some wild eyed optimist thought the long run could be sustained at 3%. That person either didn’t understand long run, has left the Fed, or has to come to their senses put in 2.4%.

So in the long run, no one at the Fed thinks a rate higher than 2.4% is sustainable.

Another good time to pause. We are supposed to get a few years of 3% growth when no one believes that the longer run potential best case is above 2.4%. When wondering whether the short term numbers are a realistic assessment of any real data, or just wishful thinking meant to encourage the public, I would be leaning heavily towards the latter.

I will point out that last June, someone thought that the average guess of 3.25% was so low, they submitted a 3.6% guess for 2014 GDP.

Last June’s report was actually the one report that really got the “growth juices” flowing. The Fed looks like they were wrong. Again.

I will say it again, “fool me once, shame on you, fool me twice, shame on me”.

Don’t Get Fooled Again

I was wondering how I could turn this note a little more upbeat, and if I can’t do it with the content, at least I can put a loud song into your head for the weekend.

But the message is serious:

  • Economists missed the first quarter GDP by a wide margin, not once, but twice
  • The Fed has missed growth expectations repeatedly and has been ratcheting down longer term growth forecasts
  • While GDP estimates are being revised up or 2014 estimates are now only “going forward” estimates, look around and see if it makes sense.

When your sources consistently overestimate growth, you can either continue to go along for the ride, or you can “adjust” the expectations down, which is what I am doing.

The Linoleum Economy

If everything is so “good” then why are we getting data points such as the following

Maybe you can see the pattern of accelerating growth, but I can’t.

Again, I look at the data, and I can see some evidence of being better than prior years, but I think I would rather have back 2011’s data. Maybe this spike in March is creating some new trendline, or maybe, just like every other March for the past 4 years, it will be a local high as some adjustment process isn’t working.

Whatever bounce we got, after a horrific December seems to be fading, and wasn’t as strong as some earlier bounces. This does not look like a longer run average affected by weather, it looks like a longer run average affected by the inability to the unwillingness of people to purchase homes.

Are Stocks Pricing in too Much Growth?

I believe the answer is yes, and it is important this time, because QE has become more than just a monetary policy of dubious quality, it is becoming a political issue, domestically and internationally, so it won’t be run in a way to help the markets like it was last time.

via Zero Hedge Tyler Durden