And The Biggest Contributor To U.S. Spending Growth in 2015 Was…

By now, not even CNBC’s cheerleading permabulls can deny that the US is in a manufacturing recession: in fact, it is so bad that even the staunchest defenders of Keynesian dogma admit what we said in late 2014, namely that crashing oil is bad for the economy.

And yet, the “services” part of the US economy continues to hum right along, leading to such surprising outcomes as a stronger than expected print in Personal Consumption Expenditures. How can this be?

Simple: one look at the chart below should explain not only how the “services” half of the US economy continues to grow, but just which tax, because that is how the Supreme Court defined Obamacare, is responsible for healthcare “spending” amounting to a quarter of the growth in US personal consumption expenditures, almost 100% higher than the second highest spending category which was… Recreational goods and vehicles?


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Will Nebraska Give Poor Kids a Way Out of Failing Schools? (New at Reason)

Nebraska is one of only seven states that don’t have any charter schools, voucher programs, or other publicly funded alternatives to traditional public schools.

On January 28, 2016, a coalition of education reform advocates came together at the state capitol building in Lincoln to call for new legislation to change that.

Reason TV was there to cover the rally.

View this article.

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EURUSD Snaps Lower, Tests Key Resistance

EURUSD just broke 80 pips lower instantaneously as it seems a somewhat delayed reaction to US GDP data sparked panic buying of USDollars (despite Fed Funds futures pricing in no more rate hikes in 2016). At 1.0855, EURUSD is testing the ket 50-day moving-average and is back below pre-Draghi levels…

EURUSD back below pre-Draghi levels…

 

As Rate-Hike odds for 2016 disappear in a puff of fed policy error…


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Grenade Hurled At Refugee Shelter As 40% Of Germans Tell Merkel To Resign

On Thursday evening we detailed the dramatic increase in Google search queries for gun permits in Germany. Specifically, since January 1, the number of Germans Googling “gun permits” has risen more than 1,000%.

Meanwhile, sales of non-lethal weapons such as tear gas pistols have skyrocketed, as Germans look to protect themselves against what many see as a hostile foreign invasion.

But while most Germans are (for now) content to counter the perceived threat from hostile migrants with non-lethal arms, at least one citizen on Friday decided to deploy a more deadly weapon in the “battle” to preserve German society: a grenade.

Unknown assailants hurled a hand grenade at a shelter for asylum seekers in southern Germany on Friday but the device did not explode and no one was injured,” AFP reports. “Police in Villingen-Schwenningen said about 20 residents of the shelter were temporarily evacuated but were able to return to their rooms in the early morning hours.”

“Security staff discovered the intact explosive device and notified the police,” a statement from authorities read.

The pin was pulled, but for whatever reason, it didn’t explode. Police later detonated it in a controlled explosion. 

Although no one was harmed in this particular attack, it underscores just how precarious the situation has become. Refugees probably thought the days of having grenades lobbed at them were over once they escaped the war-torn Mid-East. They were wrong.

Meanwhile, a new poll by Insa shows just how fed up Germans have become with Berlin’s refugee policy. According to the survey – which was conducted for Focus magazine – 40% of the country believes Angela Merkel should resign

“The Insa poll for Focus magazine surveyed 2,047 Germans between Jan. 22 to Jan. 25,” Reuters reports. “It was the first time the pollster had asked voters whether Merkel should quit.”

As Reuters goes on to note, “Merkel enjoyed record high popularity ratings early last year [but] has grown increasingly isolated in recent months as members of her conservative bloc have pressed her to take a tougher line on asylum seekers and European allies have dragged their feet on the issue.”

On Thursday, Germany moved to tighten asylum rules in an effort to stem the flow of refugees into the country. Specifically, Berlin added Algeria, Morocco and Tunisia to the “safe countries of origin list,” allowing Germany to easily deny asylum to migrants from those countries.

Vice Chancellor Sigmar Gabriel also said family reunions for migrants would be blocked for two years.

Also on Thursday, Finland joined Sweden in promising to deport tens of thousands of the refugees it sheltered last year. Paivi Nerg, administrative director of the interior ministry told AFP the country would deport two thirds, or 32,000 migrants in 2016.

Clearly, the situation in Europe is deteriorating at a rather rapid clip. All that’s needed now is one more major “incident” akin to the Paris attacks for the entire thing to unravel in earnest.


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Guvmint Is Not Done Screwing Over Flint Water Victims Yet

The Flint water mess that is wholly and solely a government creation, as I have noted before. But innocent taxpayersFlint Water Pollution — federal and state — are on the hook to pay for the cleanup. President Obama has announced an $85 million “relief” package for Flint victims and is also considering handing everyone under 21 years free Medicaid (arguably a fate worse than drinking poisoned water itself!). Snyder himself has arranged for $28 million in state aid.

All of this sounds like a lot of money but it is actually a pittance compared not just to what Flint residents are in for but also what General Motors and Toyota have paid their crash victims, I point out in my morning column at The Week.

The main reason why Flint residents won’t get more is that, unlike private companies, they can’t sue the government, thanks to the doctrine of sovereign immunity that protects government from tort lawsuits. In fact, prestigious law firms that are representing victims of the recent California gas leak in a class action lawsuit against Southern California Gas Co, owned by the non-governmental Sempra Energy, are so far declining to help Flint victims because the odds that they will succeed against the government are low to zero.

“Scrapping or at least circumscribing sovereign immunity may be worth considering although that isn’t a great answer because it will only expose taxpayers to liability for snafus they have not committed,” I note.

The real answer, however, is privatization, getting the government out of the business of running utilities completely. But that will of course give lefto-liberals like Castro lover Michael Moore a coronary – which would be reason alone to go for it.

Go here to read the whole piece.

 

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The Death Throes Of The Bull

Submitted by David Stockman via Contra Corner blog,

The fast money and robo-machines keep trying to ignite stock rallies, but they all fizzle because bad karma is beginning to infect the casino. That is, apprehension is growing among whatever adults are left on Wall Street that 84 months of ZIRP and $3.5 trillion of Fed balance sheet expansion, aka money printing, didn’t do the trick.

Not only is the specter of recession growing more visible, but it is also attached to a truth that cannot be gainsaid. Namely, having stranded itself at the zero bound for an entire business cycle, the Fed is bereft of dry powder. Its only available tools are a massive new round of QE and negative interest rates.

But these are absolutely non-starters. The former would provoke riots in the financial markets because it would be an admission of total failure; and the latter would provoke a riot in the American body politic because the Fed’s seven year war on savers and retirees has already generated electoral revulsion. Bernie and The Donald are not expressions of public confidence in the economic status quo.

So the dip buying brigades have been reduced to reading the tea leaves for signs that the Fed’s four in store for 2016 are no more. Yet even if the prospect of delayed rate hikes is good for a 50-handle face ripping rally on the S&P 500 index from time to time, here’s what it can’t do. The Fed’s last card—-deferring one or more of the tiny interest rate increases scheduled for this year——cannot stop the on-coming recession.

And it is surely coming. We got one more powerful indicator on that score in this morning’s data on core capital goods orders (i.e. nondefense excluding aircraft). Not only were they down sharply from last month, but at $65.9 billion were down 11% from the September 2014 peak, and are also now below the prior cyclical peaks in early 2008 and 2001.

In fact, core CapEx orders in December were at a level first reported in April 2000, and that’s in nominal dollars. In real terms, they are down nearly 25%.

Needless to say, there will be pandemonium in the casino when the downturn is no longer deniable. That’s because the main prop under the market today is, in fact, the Wall Street mantra that bear markets never happen in the absence of a recession and that none is purportedly visible.

On that score, it is no use listing and documenting all the flashing red lights or that the BLS jobs report is both a lagging indicator and virtually worthless. Today in a nearby column,  Lance Roberts reminds that at the top of the cycle the BLS nearly always over-reports employment gains, and that these estimates get revised away in the four subsequent iterations of the data over the next several years.

But in the current context, he thinks there is something especially fishy. Namely, that the continuing decline of the labor market participation rate is not consistent with the allegedly robust job count gains, and also it is not consistent with any prior historical relationship between the two.

But here is the potential problem for the Fed’s dependence on current employment data as justification for tightening monetary policy – it is likely wrong. Economic data is very subject future revisions. While the current employment data has indeed been the strongest since the late 1990’s, there is a probability that the data is currently being overestimated.

 

The reason is shown in the chart below.

 

Employment-FullTime-LFPR-012816

 

If the employment gains were indeed as strong as the Fed, and the BLS, currently suggest; the labor force participation rate should be rising. This has been the case during every other period in history where employment growth increased. Since the financial crisis, despite employment gains, the labor force participation rate has continued to fall.

No, the consumers of America cannot shop the nation out of recession, either. That would take robust job and earnings gains, which are not happening, or a new round of household leverage gains, which are not remotely feasible given the condition of “peak debt” now prevalent.

On this score, we reported the other day that the vaunted strength of auto sales was actually nothing of the kind; and that we are likely at the turning point in the auto sales recovery cycle because virtually anyone who can fog a rear view mirror has already been given a car loan.

Indeed, during the past 12 months auto dealer sales rose by $65 billion but vehicle loans outstanding soared by $90 billion to an all-time high!  The surging dealer lots would actually have been even more flooded with unsold cars without this final injection of cash to the bottom of the credit ladder.

Still, the talking heads keep telling you that households have substantially deleveraged and are fixing to embark on a new spending spree.

No they are not. After a few quarters of reduction owing to the massive write-downs of mortgage debt after the crisis, household debt has again crept higher. In fact, it is up by nearly $1 trillion since the late 2011 lows; and at 180% of wage and salary income remains drastically elevated by all historical standards.

Wall Street never forecasts a recession, of course. Not even when powerful indicators like the soaring inventory-to-sales ratio suggest that a downward production and income adjustment is just around the corner.

In fact, as of the most recent data, total business sales—–manufacturing, wholesale and retail—–were down by nearly 4% from their mid-2014 peak. And the ratio of inventory to sales has shot up to levels last posted in October 2008.

Business sales and investment are the heart of the equation. When they head south, the recession is just around the corner. It is only after the fact that the nation’s stock market obsessed C-suites get around to unloading excess labor inventories.

In the meanwhile, the sell-side does its level best to keep the dying bull alive with its own hockey stick projections. At the moment, the all is awesome chorus insists that what will be another negative growth earnings season should be ignored. That’s because its just the energy industry profits plunge rotating through the year-over-year comparisons.

Needless to say, by the second half of this year and 2017 it will all be blue skies again. In fact, the current consensus EPS for 2017 is no less than $141 per share on the S&P 500. And at today’s closing price of 1893 that’s a PE multiple of just 13.4X. No sweat!

Then again at the comparable point in the 2015 earnings cycle—-that is, February 2014—-the Wall Street hockey stick pointed to $137/per share. After three quarters of actuals and the downgraded estimates for Q4, that number has plummeted to $106 per share; and that’s after excluding about $12 per share of inconvenient “ex-items” stuff  like restructuring charges, plant closings, lease write-offs, stock option costs and much more.

In fact, however, the actual GAAP earnings reports, which are filed with the SEC and signed off by the CEO and CFO on penalty of jail time, are pointing in a decidedly different direction. Reported GAAP earnings peaked at $106 per share on the S&P 500 more than a year ago for the LTM period ending in September 2014.

By the most recent reporting period they were down by 14.4% to $90.66 per share, and there is no reason to believe that this slide will rebound when the Q4 numbers are actually tallied.

Here’s the thing. This exact pattern occurred during the 2007-2009 collapse. While the Wall Street hockey sticks were projecting earnings of $120 per share or more for 2008, actual GAAP earnings starting falling in the June 2007 LTM period, and kept plunging until they hit bottom at $7 per share in June 2009.

S&P 500 Earnings

The blue bars mark the death throes of a dying bull last time. Self-evidently, this one—market in red—– is not far behind.


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Trump Not Missed at GOP Debate, FBI Releases Oregon Standoff Video, Stop Tweeting Porn at Tony the Tiger: A.M. Links

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“Peddling Fiction” – US Economy Grew A Paltry 0.69% In The Fourth Quarter, Missing Expectations

And so the final quarter of 2015 is in the history books and we can officially accuse the US Bureau of Economic Analysis of “peddling fiction” about the US recovery, because at a growth rate of 0.69%, the annualized rate of economic growth was the lowest since the first quarter of 2015 when it grew an almost identical 0.64% which was blamed on the harsh weather. This time however, there is no easy scapegoat.

The breakdown was as follows:

  • Fixed Investments, that residual from the oil collapse, tumbled although at 0.03% annualized it was still a contributor to growth. Expect this to change
  • Inventories, as expected, subtracted -0.45% from GDP. This was less than many had expected suggesting there will be more inventory liquidation in Q1
  • The government contributed 0.12% to Q4 GDP
  • Net Trade, as was to be expected in a world in which global trade is slowing drastically, subtracted another 0.47% from the annualized report
  • The only silver lining was Personal Consumption, which rose 2.20%, above the 1.8% expected, and contribted 1.46% to the bottom line. However, as we will show in a subsequent post, the bulk of this “growth” came from just one line item again: healthcare.

In other news, core PCE rose 1.2% in 4Q after rising 1.4% prior quarter, while the clearest confirmation of the rapidly slowing US economy was final sales to private domestic purchasers which rose just 1.8% in 4Q after rising 3.2% the prior quarter.

Here is a chart of US GDP by quarter:

And a full breakdown:

 

Most importantly, the inventory hangover remains strong as ever, because if anyone can spot the “inventory liquidation” in Q4, they win a Zero Hedge hat.


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What If Donald Trump Wins?: New at Reason

What if Donald Trump wins the Republican nomination? There are many potential outcomes, writes David Harsanyi, and every one of them is a disaster for conservatives.

Fact is, Trump fans will not be placated. Not if they lose, and definitely not if they win. Unless unforeseen events alter the dynamics of American politics, it’s difficult to imagine conventional Republicans and Trump fans inhabiting the same space after this is all done. Me? I look forward to loathing three major political parties.

View this article.

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Macy’s Slashes Guidance Again, Twice In One Month

Less than 4 weeks ago, on January 6, we reported of the “Macy’s Massacre: Thousands Fired; Guidance Slashed (Again); Weather Blamed“, where in addition to the massive layoffs announced by the iconic retailer, we learned that as a result of the “historically warmer weather”, the company’s prior guidance was no longer valid. Here is what it said in early January:

Macy’s, Inc. is not expecting a major change in sales trend in January and expects a comparable sales decline on an owned plus licensed basis in the fourth quarter of 2015 to approximate the 4.7 percent decline in November/December (from previous guidance of down between 2 percent and 3 percent for the fourth quarter). This calculates to guidance for comparable sales on an owned plus licensed basis in the full-year 2015 to decline by approximately 2.7 percent (from previous guidance of down 1.8 percent to 2.2 percent).

 

Earnings per diluted share for the full-year 2015 now are expected in the range of $3.85 to $3.90, excluding expenses related to cost efficiencies announced today and asset impairment charges associated primarily with spring 2016 store closings. This compares with previous guidance in the range of $4.20 to $4.30. Updated annual guidance calculates to guidance for fourth quarter earnings of $2.18 to $2.23 per diluted share, excluding charges associated with cost efficiencies and store closings. This compares with previous guidance for earnings per diluted share of $2.54 to $2.64 in the fourth quarter. Earnings guidance for 2015 includes an expected $250 million gain on the sale of real estate in downtown Brooklyn.

Well, moments ago Macy’s issued a press release in which it announced that as a result of the completion of a “real estate transaction with Tishman Speyer that will enable the re-creation of its Brooklyn store on Fulton Street” (there is always something), it has just cut guidance once again:

Given this timing change in accounting for the transaction, Macy’s management has revised its earnings guidance for the fourth quarter and full-year 2015, which previously has assumed the entire gain would be booked in the fourth quarter of 2015. Earnings per diluted share for the full-year 2015 now are expected in the range of $3.54 to $3.59, excluding expenses related to cost efficiencies announced earlier in January and asset impairment charges associated primarily with spring 2016 store closings. This compares with previous guidance in the range of $3.85 to $3.90. Updated annual guidance calculates to guidance for fourth quarter earnings of $1.85 to $1.90 per diluted share, excluding charges associated with cost efficiencies and store closings. This compares with previous guidance for earnings per diluted share of $2.18 to $2.23 in the fourth quarter.

At least Macy’s didn’t blame the “historical snow storm” in January for this latest cut.

And just like that, in the span of several months, with the January 6 interim step, Macy’s has lowered its full year outlook by 16% from $4.25 to $3.57. And since the stock is now trading near the highest levels since early November when the guidance cuts began, we can only imagine that all those betting on multiple expansion will be richly rewarded at a time when the US consumer is starting to finally feel to full impact of the manufacturing, at first, recession that is spreading across the nation.


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