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Fed’s GDP and Unemployment Projections: Who Believes Them?

In addition to its blather about interest rates, the Fed also made numerous economic projections.
Economic Projections

Please consider the Economic Projections of FOMC Participants under their individual assumptions of appropriate monetary policy, September 2020.

Fed’s GDP, Unemployment, PCE Inflation Projections

Fed's GDP, Unemployment, PCE Inflation Projections 2020-09

GDP Projection

The Fed believes GDP will only contract 3.7% in 2020 then rebound 4% in 2021, and 3% in 2022.

Do you believe this?

Unemployment Projection

The Fed believes the Unemployment Rate will be 7.6% in 2020, 5.5% in 2021, and 4.6% in 2022.

Do you believe this?

PCE Inflation Projection

The Fed believes Core Personal Consumption Expenditure inflation (excluding food and energy) will be 1.5% in 2020, 1.7% in 2021, and 1.8% in 2022.

Do you believe this?

GDP Poll

Unemployment Poll

PCE Poll

My Take

  • GDP: I will take the under. Way under. Much of the rebound was due to $600 pandemic stimulus checks that expired on July 25. This will be a huge headwind going forward.
  • Unemployment: I am leery of games with the participation rate and labor force but I will go with higher.
  • PCE : This one is humorous. For months, the Fed has committed not only to 2% but letting inflation run hotter than expected for some time to make up for needed lost inflation. Yet the Fed admits it will not hit its targets until 2023. PCE inflation, as measured, is a joke. So perhaps the Fed is on target.

The Wonders of Free Money in Two Pictures

Lesson of the Day

If you give away enough free money, spending recovers.

Census Report on Advance Retail Sales 

The Census report on Advance Retail Sales provides half of our “Lesson of the Day“.

Adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, July sales were $536.0 billion, an increase of 1.2 percent from the previous month, and 2.7 percent above July 2019.Total sales for the May 2020 through July 2020 period were down 0.2 percent  from the same period a year ago.

The May 2020 to June 2020 percent change was revised from up 7.5 percent to up 8.4 percent. Retail trade sales were up 0.8 percent from June 2020, and 5.8 percent above last year.

Nonstore retailers were up 24.7 percent from July 2019, while food and beverage stores were up 11.1 percent  from last year.

Retail spending rose for the third straight month despite a rise in coronavirus infections with reopenings stalled.

Spike in Government Spending

Government Spendiing Spiked

The chart from Pew shows stimulus and deficits exceed that in the Great Recession.

Since March, government stimulus authorizations (not all spent yet) total at least $3 trillion. Another $2 trillion is on the deck when Democrats and Republicans agree to another package.

That is the second half of the Free Money Wonder.

The federal government has run deficits nearly every year since the Great Depression and consistently since fiscal 2002. Through the first 10 months of fiscal 2020, the government took in $2.82 trillion in revenue and spent $5.63 trillion, for a year-to-date deficit of just over $2.8 trillion, according to the Treasury Department’s Bureau of the Fiscal Service. Through the first 10 months of fiscal 2019, by comparison, the deficit stood at $866.8 billion.

…click on the above link to read the rest of the article…

A Surge in Small Business Bankruptcies is Underway

A Surge in Small Business Bankruptcies is Underway

The new rules make it easier for small businesses to file for chapter 11. And they are.

Small Businesses Walking Away

In 2008, homeowners walked away from mortgages. 

Thanks to the Small Business Reorganization Act of 2019 (SBRA), in effect as of February 19, 2020, small businesses have an easier shot at doing the same.

For example, the Twisted Root Burger grew quickly, but co-founder now says ‘I’m gonna walk away’ from some locations.

Twisted Root Burger was a Texas success story, expanding from one casual restaurant in 2006 to 24 sites including restaurants, bars, a brewery and a theater. Now, the company is moving fast in another direction—into bankruptcy.

“I’m not gonna open that restaurant at half the revenue,” said co-founder Jason Boso. “I’m gonna walk away from those restaurants. I’m not gonna set myself up for failure.”

More than 500 companies filed for bankruptcy under the small-business bankruptcy rules since February, according to the American Bankruptcy Institute. June was the top month for filings with 131 cases; many were filed in states hit hard by the pandemic like Florida, Texas, California, New York and Illinois.

“It was somewhat prescient,” said Ryan Wagner, a restructuring and bankruptcy attorney with international law firm Greenberg Traurig LLP. “It was passed without the foresight of the pandemic.” The law is the most significant change to the bankruptcy code since 2005.

SBRA Highlights

  • Applies to businesses with $2.7 million in liabilities, raised to $7.5 million under coronavirus stimulus
  • Owners continue operating their business while in court
  • Owners can retain equity after exiting bankruptcy
  • Owners can modify residential mortgages if home was collateral for a business loan
  • Faster turnaround to save time and minimize legal fees
  • Owners generally have three to five years to repay creditors
  • Creditors can be paid based on a business’s projected income

Walking away gets a new lease on life, this time for small businesses.

Industrial Production Declines Most in 101 Years

Industrial Production Declines Most in 101 Years

On the heels of miserable retail sales numbers comes the worst ever industrial production numbers.

The Fed’s Industrial Production report provides another grim look at the Covid-19 wrecked economy.

Total industrial production fell 11.2 percent in April for its largest monthly drop in the 101-year history of the index, as the COVID-19 (coronavirus disease 2019) pandemic led many factories to slow or suspend operations throughout the month.

Manufacturing output dropped 13.7 percent, its largest decline on record, as all major industries posted decreases. The output of motor vehicles and parts fell more than 70 percent; production elsewhere in manufacturing dropped 10.3 percent.

The indexes for utilities and mining decreased 0.9 percent and 6.1 percent, respectively. At 92.6 percent of its 2012 average, the level of total industrial production was 15.0 percent lower in April than it was a year earlier.

Capacity utilization for the industrial sector decreased 8.3 percentage points to 64.9 percent in April, a rate that is 14.9 percentage points below its long-run (1972–2019) average and 1.8 percentage points below its all-time (since 1967) low set in 2009.

No V-Shaped Recovery

As noted earlier today Retail Sales Plunge Way More Than Expected

Despite talk from hopers, even the fed understands there will not be a V-Shaped recovery.

Instead they are promoting a helicopter drop of money. For details, please see Panic Sets In: Fed Promotes More Free Money

The Problem is Not Deflation, It’s Attempts to Prevent It

The Problem is Not Deflation, It’s Attempts to Prevent It

Let’s investigate the Fed’s effort to prevent price deflation.

Here’s a Tweet that caught my eye. 


Real Vision✔@RealVision · 

“We’re about to have deflation and the market hasn’t figure it out yet… when it does, the Fed is going to shit itself.” @hendry_hugh @raoulGMI
https://rvtv.io/3aWzxf4 

Embedded video

david moravec@davidmooravec

Problem with deflation is- Why buy anything if you know it will be cheaper in the future.


Problem with deflation is- Why buy anything if you know it will be cheaper in the future.,” responded one person. 

Let’s investigate that question starting with a look at the CPI basket.

CPI Percentage Weights

CPI percentage weights

Why Buy Anything Questionnaire

Q: If consumers think the price of food will drop, will they stop eating?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes? 
Q: If consumers think the price of gasoline will drop, will they stop driving?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of taxis will rise, will they take multiple taxi rides on advance?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?

All of the above questions represent inelastic items. Those constitute over 80% of the CPI.  Let’s hone in on the elastic portion with additional Q&A.

Questions for the Fed – Elastic Items

Q: If people think the price of coats will rise will they buy a second coat they do not need?

…click on the above link to read the rest of the article…

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Eurozone Economy Collapses 3.8% in the first quarter, the worst on record.  Spain (-5.2%) and France (-5.6%) GDP were much worse than Italy (-4.7%).

Economist Daniel Lacalle offers his thoughts on the European economy in a YouTube video. 


Daniel Lacalle✔@dlacalle_IA

EUROZONE COLLAPSE

The V-Shaped Recovery Mirage Is Gone.

https://www.youtube.com/watch?v=kO_RxjESCk4 … YouTube at 🏠 ‎@YouTube


What LaCalle says about the Eurozone also applies to the US. 

What’s Next for America?

For a 20-point discussion of what to expect, please see Nothing is Working Now: What’s Next for America?

No V-Shaped Recovery

Here’s the correct viewpoint: The Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.

Simply put, a quick return to business as usual is not in the cards.

Inflation or Deflation?

Meanwhile, the debate over inflation or deflation continues.

Will it be Inflation or Deflation?

If you believe the answer is inflation, then you do not understand the importance of credit and demand shocks. Click on the link for discussion.

Rate of Contraction Exceeds the Global Financial Crisis

Rate of Contraction Exceeds the Global Financial Crisis

The US is suffering  the fastest deterioration in operating conditions for over 11 years.

Markit reports Output Contracts at Fastest Pace in Survey History amid COVID19 pandemic .

Key Findings

  • Flash U.S. Composite Output Index at 27.4 (40.9 in March). New series low.
  • Flash U.S. Services Business Activity Index at 27.0 (39.8 in March). New series low.
  • Flash U.S. Manufacturing PMI at 36.9 (48.5 in March). 133-month low
  • Flash U.S. Manufacturing Output Index at 29.4 (46.5 in March). New series low

Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 27.4 in April, down from 40.9 in March, to signal the fastest reduction in private sector output since the series began in late-2009.

Services companies registered the steepest rate of decline in the survey’s history, while manufacturers recorded the sharpest fall in sales since the depths of the financial crisis in early-2009. 

The cancellation and postponement of orders led firms to reduce their workforce numbers at a rate far exceeding anything seen previously over the survey history at the start of the second quarter. 

Chris Williamson, Chief Business Economist Comments

  1.  “The COVID-19 outbreak dealt a blow to the US economy of a ferocity not previously seen in recent history during April. The deterioration in the flash PMI numbers indicates a rate of contraction exceeding that seen even at the height of the global financial crisis, with jobs also being slashed at a rate far exceeding anything previously recorded by the survey.” 
  2. “The large swathe of non-essential business that has been shut down temporarily amid efforts to contain the virus means the blow has been most heavily felt in the service sector, and especially for consumer facing companies in the recreation and travel industries. Those companies still actively trading meanwhile reported the steepest drop in demand seen since data were first available, and are also struggling against twin headwinds of staff shortages and supply chain delays.”

…click on the above link to read the rest of the article…

As Unemployment Claims Rise, So Do Missed Mortgage Payments

As Unemployment Claims Rise, So Do Missed Mortgage Payments

Over 22 million people have filed for unemployment benefits in the past 4 weeks. Many struggle with payments.

Black Knight reports More than 2.9 Million in Forbearance, 5.5% of All Mortgages

Key Details 

  • As of April 16, more than 2.9 million homeowners – or 5.5% of all mortgages – have entered into COVID-19 mortgage forbearance plans
  • This population represents $651 billion in unpaid principal and includes 4.9% of all GSE-backed loans and 7.6% of FHA/VA loans
  • At today’s level, mortgage servicers would be bound to advance $2.3 billion of principal and interest payments per month to holders of government-backed mortgage securities on COVID-19-related forbearances
  • Another $1.1 billion per month in lost funds will be faced by those with portfolio-held or privately securitized mortgages

Forbearance Totals

Black Knight Forbearance Totals 2020-04-16

Payment Forbearance Under Cares Act

On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) into law. A provision of the CARES Act allows borrowers with federally backed mortgages to request temporary loan forbearance for up to 180 days. Borrowers also have the right to apply for an extension of another 180 days of forbearance

Once a borrower requests hardship forbearance due to the COVID-19 pandemic, the act requires the servicer to offer a CARES Act forbearance. 

Pitfalls 

Forbes warns of Mortgage Forbearance Pitfalls

John Ulzheimer, an Atlanta-based credit expert formerly of FICO and Equifax, warns of a potential balloon payment.

“If the lender or servicer demands that you pay back the deferred amount all at once or in an otherwise expedited manner, that could be impossible for the borrower.” 

Unfortunately, having a mortgage servicer ask for a “balloon” payment once your forbearance period ends is a very real possibility. Borrowers from multiple national banks have reportedly been informed of the need to repay any delayed payments in a lump sum at a future date.

Three Things Not to Do

…click on the above link to read the rest of the article…

Hyperinflationists Come Out of the Woodwork Again

Hyperinflationists Come Out of the Woodwork Again

CoinDesk asked me to share my opinions on the chance of hyperinflation. My thoughts are below.

From CoinDesk

Hi Mish,

I am working on an article for CoinDesk about recent fiscal and monetary splurge by governments and central banks across the globe and the impact on gold and bitcoin. As I see, a majority of analysts and economists are calling for hyperinflation and rally in gold.

Could you please share your take?

Thanks

CoinDesk

Matter of Definitions

Before there can be a rational debate on anything, people must agree on definitions.

I believe most people would accept this definition: Hyperinflation is the complete collapse in currency against every other asset.

Pick a currency, say the US dollar. To bet on hyperinflation and be correct, the dollar would have to go nearly worthless vs the Euro, the Pound, the Yen.

Alternatively, 50% in a single month would quality. Professor Hanke defines Hyperinflation as a 50% Currency Collapser in a Month.

Q: How likely is that?

A: Close to zero.

Replay Discussion

Curiously, this is a replay of my 2010 article Williams Calls for “Great Hyperinflationary Great Depression”.

Williams is John Williams of Shadowstats. He was not alone. Here is a snip changing the name Williams to “Hyperinflationsists” in the first word of these four points.

  1. Hyperinflationists focus on money supply, ignoring credit although credit is far more important.
  2. Hyperinflationists ignore numerous global interconnections. Calling for hyperinflation in the US alone ignores happenings in Europe, Japan, and China. I remain amazed at how US-centric hyperinflationists in general are.
  3. Hyperinflationists ignore US gold holdings, the largest in the world.
  4. Hyperinflationists ignore the massive influence of consumer attitudes and bank attitudes towards lending.

To expect the US dollar to go to zero vs the Euro, Yen, Food, gold, Yuan, etc., was then and is now pure silliness.

…click on the above link to read the rest of the article…

50,000 New Coronavirus Infections Per Day in China

50,000 New Coronavirus Infections Per Day in China

Prof. Neil Ferguson, Vice Dean Faculty of Medicine, Imperial College in London, estimates 50K new infections per day. 

Please consider the following video by Prof. Neil Ferguson.

10 Key Video Points

  1. 50,000 new cases a day in china
  2. Infections doubling every 5 days
  3. Death rate is still unknown
  4. China likely to peak in March
  5. Epidemic peak is still a month away
  6. It will be very hard to control this epidemic the say way we did with SARS 15-20 years ago
  7. Cases are always underestimated
  8. Death delays are as long as three weeks
  9. Reported deaths outside China are not reassuring because of delays
  10. We still don’t know the full effects

Tweet on Containment Strategies


Building on @ChristoPhraser et al’s work, @coreypeak‘s model examining the impact of disease dynamics on the relative benefits of symptom monitoring v quarantine seems relevant for thinking through #nCoV2019 containment strategies. https://www.pnas.org/content/114/15/4023.abstract …


Jim Bianco’s Latest Update

…click on the above link to read the rest of the article…

“Made in China” Economic Hit Coming Right Up

“Made in China” Economic Hit Coming Right Up

Economic contagion due to the coronavirus is underway. Hyundai halted production. Sony, Apple, and Ford issued warnings.

If you can’t get parts, you can’t build cars.

And due to a coronavirus-related manufacturing halt in China, Hyundai to Shut Down Some Production.

Hyundai, the world’s fifth-largest carmaker, announced Tuesday that it was suspending production lines at its car factories in South Korea, one of the first major manufacturers to face severe supply-chain issues because of the coronavirus.

Many auto plants in China have already shut down because of the virus, including factories run by Hyundai, Tesla, Ford and Nissan. Hyundai plants in South Korea would be the first to shut down lines outside of China, and comes as Hyundai has ramped up production in China over the past two decades.

Economic Contagion

The Wall Street Journal comments on China’s Economic Contagion

More than 20,000 coronavirus cases have been confirmed worldwide—an eight-fold increase over the last week—and experts say hundreds of thousands may not yet have been diagnosed. Two dozen or so countries have reported cases, and many have restricted travel from China to limit the contagion. Companies are evacuating employees from China.

U.S. manufacturers such as Ford, Apple and Tesla have temporarily halted production. One-sixth of Apple sales and nearly half of chip-maker Qualcomm’s revenues come from China. So do 80% of active ingredients used by drug-makers to produce finished medicines. Because China is the world’s largest manufacturer and an enormous consumer market, the economic freeze will disrupt supply chains and reduce corporate earnings.

China’s GDP growth was already almost certainly lower than the official figure of 6%, and it is likely to fall by a third or more.

…click on the above link to read the rest of the article…

Recession Arithmetic: What Would It Take?

Recession Arithmetic: What Would It Take?

David Rosenberg explores Recession Arithmetic in today’s Breakfast With Dave. I add a few charts of my own to discuss.

Rosenberg notes “Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened twice outside of a recession.”

Here is the chart he presented.

Fixed Investment, Imports, Government Share of GDP

Since 1980 there have been five recessions in the U.S.and only once, after the dotcom bust in 2001, was there a recession that didn’t feature an outright decline in consumption expenditures in at least one quarter. Importantly, even historical comparisons are complicated. The economy has changed over the last 40 years. As an example, in Q4 of 1979, fixed investment was 20% of GDP, while in 2019 it makes up 17%. Meanwhile, imports have expanded from 10% of GDP to 15% and the consumer’s role has risen from 61% to 68% of the economy. All that to say, as the structure of the economy has evolved so too has its susceptibility to risks. The implication is that historical shocks would have different effects today than they did 40 years ago.

So, what similarities exist across time? Well, every recession features a decline in fixed investment (on average -9.8% from the pre-recession period), and an accompanying decline in imports (coincidentally also about -9.5% from the pre-recession period). Given the persistent trade deficit, it’s not surprising that declines in domestic activity would result in a drawdown in imports (i.e. a boost to GDP).

So, what does all of this mean for where we are in the cycle? Private fixed investment has declined two quarters in a row as of 2019 Q3. Since 1980, this has only happened two other times outside of a recession. The first was in the year following the burst of the dotcom bubble, as systemic overinvestment unwound itself over the course of eight quarters.

…click on the above link to read the rest of the article…

Jim Bianco Says This Is QE, Like Y2K

Jim Bianco Says This Is QE, Like Y2K

In contrast to Hussman, Jim Bianco, at Bianco Research says the Fed’s repo actions are QE. 

Earlier today I posted, Hussman Sides with Powell: It’s Not QE4.

If Hussman convinced you the Fed was not conducting QE, I will give you a chance to change your mind again.

“Not QE” Looks a Lot Like Y2K

This is a guest post by permission from Jim Bianco

Jim Bianco at Bianco Research says “Not QE” Looks a Lot Like Y2K

We would argue the special lending facility that started in late 1999 to support the feared Y2K computer glitch offers a historical analogy to the current period.

Stories 20 years ago sound like they are describing what is happening today:

Dow Jones News Service – (December 28, 1999) CASH IS FLOWING LIKE CHAMPAGNE FOR Y2K
The volume of cash that the Federal Reserve has temporarily given to banks to avert potential Year 2000 strains is rising to dizzying levels. Including nearly $20 billion it gave to the banking system in the form of term “repurchase” agreements Monday, the Fed has almost $100 billion in hard currency loans outstanding to banks. That’s the most money lent out through repurchase agreements ever, said Peter Bakstansky, spokesman for the New York Federal Reserve. For some perspective, the Fed had $23 billion in outstanding “repos” in December 1998, and around $9 billion in December 1997.

The Y2K special lending facility had a similar effect on the Fed’s balance sheet. It was also done for “plumbing reasons.”

And, as the [Champagne] story points out, the Fed supplied record amounts of repo never before seen at the time.

…click on the above link to read the rest of the article…

France Grinds to a Halt in Massive Strike

France Grinds to a Halt in Massive Strike

Hundreds of thousands of lawyers, teachers, students and air-traffic controllers protest pension Macron’s pension reform

Cities Paralyzed

French president Emmanuel macron is back in the hot seat over reform proposals. Over 800,000 protesters have taken to the streets in a Massive Strike that has paralyzed cities.

Cities across France were paralyzed by a massive public transport strike against a planned overhaul of France’s pensions system, in a test of President Emmanuel Macron’s resolve to modernize the economy.

Trains, including the high-speed line between Paris and London, subways and buses were severely curtailed if not halted altogether. Hundreds of flights were canceled. Many schools, and nurseries remained closed, while several museums, including the Louvre, said parts of their collections might not open. Even the Eiffel Tower was closed.

About 806,000 protesters—including lawyers, teachers, students and air-traffic controllers—hit the streets across the country, according to the French interior ministry. Unions warned the strike could last days and become one of the biggest in France in over two decades.

Mr. Macron wants to extend the number of years that people are required to work before collecting their pensions—now set at 43 years—rather than raising the age of retirement of 62 years old for all workers. That retirement age remains lower than in most other OECD group of rich nations. Under the plan, some people retiring before 64 could receive a lower pension.

Mr. Macron also wants to consolidate France’s 42 different retirement plans—and their special benefits—into one universal system that he says would be more fair. Civil servants, in particular, fear they may lose advantages they have compared to private sector employees.

Yellow-Vest Movement

Recall that the yellow vest protests went on for months.

On December 10, 2018 I wrote Macron Attempts to Placate Yellow Vest Protesters With Free Money.

…click on the above link to read the rest of the article…

The US Wanted a Coup in Bolivia: Like Magic, It Got One

The US Wanted a Coup in Bolivia: Like Magic, It Got One

Bolivia’s President Evo Morales was ousted in a coup. What happened?

Military Coup

The US wanted Leftist President Evo Morales gone.

Guess what? He’s gone.

The Guardian reports Many Wanted Morales Out. But What Happened in Bolivia was a Military Coup.

On Sunday the head of Bolivia’s military called on Evo Morales to resign from the presidency. Minutes later Morales was on a plane to Cochabamba where he did just that. These facts leave little doubt that what happened in Bolivia this weekend was a military coup, the first such event in Latin America since the 2009 military coup against Honduran president, Manuel Zelaya. (The 2012 and 2016 impeachments of Paraguay’s Fernando Lugo and Brazil’s Dilma Rousseff are widely viewed as “parliamentary coups.”)

The mainstream press has bent over backwards, and tied itself in more than a few tangled knots, to avoid drawing this conclusion. The Wall Street Journal celebrates Morales’ ouster as a “democratic breakout.” The New York Times is characteristically more circumspect, hemming and hawing about how “the forced ouster of an elected leader is by definition a setback for democracy” but might also “help Bolivia restore its wounded democracy.” This head-spinning rhetoric does not prevent the Times from swiftly dismissing left-of-center politicians’ “predictable” claims that what happened was a coup.

It is hardly surprising that conservative governments and powerful media outlets applaud Morales’ ouster and dismiss the claim it constitutes a coup. More surprising is that leftist commentators, including Raquel Gutiérrez and Raul Zibechi, have taken a similar stance. Zibechi attributes Morales’ fall to a “popular uprising.”

Morales’ Illegitimacy

 …click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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