If You Think The Last One Was Ugly . . .

I will post more on this later, but for a nice macroeconomic overview of where we are today and how we got here, I highly recommend the following article to your reading pleasure:

http://seekingalpha.com/article/3053346-meet-the-new-recession-cycle-its-triggered-by-bursting-bubbles-not-surging-inflation

ECB Putten Der QE Into Der EU - das ist gut?

Bloomberg notes that the ECB plans for $1.1T QE in the EU are certainly fueling an already booming German economy:

http://www.bloomberg.com/news/articles/2015-03-29/german-economy-finds-new-fuel-as-it-reaps-benefits-of-draghi-qe

The German economy is hitting on all fours and the future looks bright.  Unemployment is at record lows, the DAX is skyrocketing (Index up 23% this year), consumer spending is on the rise, exchange rates are good and every thing is just dandy.  Add in a little QE and ya, das ist gut.  There is that little Greece thingy, but relatively speaking Greece is economically a small country.  Of course it is part of the broader based PIIGS problem, which is part of the broader EU structural problem, which is part of the global economy problem, but Germany is immune to all that.  Und ya, deflation is behind it too.  After two months of deflation it showed .1% inflation.  Yeah!

One instigator for all this glowing success is likely the exchange rate with the U.S., it's number two trading partner after France.  Yet that might not continue be the benefit one would think.  I have not seen anything yet on the U.S. trade deficit shrinking in terms of what that means to Germany and the rest of the EU, but it has to mean something.  Imports in the U.S. were down over $10B in February, which is over 4%.  That is not a small drop, though one month does not a trend make.  The point being, however, that it will be exceedingly difficult for Germany to continue doing well when its trading partners generally are on the brink of a recession - if not already in one.  And last I checked, Germany's number one trading partner France, was not exactly booming - unless you like Zombies:

http://www.businessinsider.com/frances-zombie-economy-is-missing-out-on-europes-recovery-2015-3


I have little doubt Germany will have a wonderful 2015, especially benefiting more than most from the QE in the EU and that comparatively speaking it will continue to do better than the rest of the EU and most other countries as it has its fiscal house in pretty good order, but the DAX at levels 50% above the records set 2007 is unrealistic and likely due to there being no place else for a lot of people to put their money.  Und das ain't gut.

Fedspeak

The head of the Atlanta Fed, Dennis Lockhart, is  quoted in the NY Times as saying:

"The slowness in the first quarter obviously raises concerns that we’re going to see a continuing or persistent slowdown, but that’s not my base case view. My base case view is that we’ll see a rebound in the second and third quarter and beyond and that we’ll stay on the basic track that has been our story, our narrative here, for the last year or more. And that is a 2.5 percent to 3 percent growth rate with continuing improvement on the employment front, and gradual rise in inflation toward the 2 percent target. So to some extent I’m taking on a Wilbur Mills position: That’s my story and I’m sticking to it."

So the "story" is that we were in a short term tough patch this past quarter but will bounce back this quarter and next to a 2.5-3% growth rate. Yep, that's his story and he's sticking to it.  I like this guy.  At least when he is telling you what he knows to be a "story" he flat out tells you he is telling you a "story" and does not feign that it is reality like most the Fedspeaks do.  His "story" is proven just that by the Atlanta Fed GDP Now site that is putting GDP forecast for the year at .1%.  As I have noted recently, that is a drop of nearly 2% in the forecast in two months, which is huge.

Now compare this to the Fedspeak from John Williams, head of the Fed in San Francisco, as quoted in the Wall Street Journal:

"'Things are looking better–in fact, they’re looking downright good,' the official said in a speech to be delivered to an audience in Sydney and Melbourne via video.
Given how much the economy has improved and is likely to continue to gain ground, “I think that by mid-year it will be the time to have a discussion about starting to raise rates,” Mr. Williams said.
The strength of the U.S. dollar against a “broad index” of currencies is not an impediment to the U.S. economy reaching real GDP growth of 2.5% this year, he said.
“The U.S. economy has good momentum…even with what is a rather large appreciation of the U.S. dollar,” Mr. Williams said."

So this guy really seems to be buying his own "story" or, as they say, drinking his own Kool-Aid.  The problem with this Kool-Aid, however, is they drink it and we are the ones that suffer.

For more on some of the other Fedspeak, here is link to a nice article that discusses the less than spectacular employment data out today, which includes a worthy collection of recent Fed quotes on the economy, including those I noted above.

http://economistsview.typepad.com/economistsview/2015/04/fed-watch-air-pocket.html

Add to this some former Fed Fedspeak from Bernanke's new blog on how the Fed does not create bubbles or distort markets, and you will have a nice laugh for the weekend.

http://globaleconomicanalysis.blogspot.com/2015/04/thrown-under-bus-another-look-at-self.html

These guys (and gals) really crack me up. 

Would You Like That GDP on Flat Bread

Well, we are officially at ground zero.  The Atlanta Fed at its GDP Now site has today lowered its GDP forecast for Q1 for the U.S.  On February 2, the 2015 forecast stood at a respectable 1.9%.  The economic reports in the two months since have led to a steady decline and today they lowered the forecast to zero, zip, nada, nix, nothing, zilch, zippo, goose egg, naught, nil, nuttin' honey.  Apparently they did not like the ISM Manufacturing Index numbers out today, which still showed some growth at 51.5%, but a good bit lower than February at 52.9%:


http://www.ism.ws/ismreport/mfgrob.cfm


Any number over 50% shows more companies growing than shrinking, so we are just barely there.  Now this month was less than February and February was less than January and January was less than December and . . . well, you get the picture.  Lowest number for this index in almost two years and . . . I must be reading this wrong . . . apparently it was "well short of Wall Street's forecast."


http://www.marketwatch.com/story/ism-manufacturing-index-falls-in-march-to-lowest-rate-since-may-2013-2015-04-01


Oh dear.  Oh dear, oh dear, oh dear.  Wall Street forecasts were overly optimistic - really?  I'm shocked, shocked to find that forecasts have gone wrong here. If you cannot trust Wall Street, who can you trust.  At least the ISM index number has got to be reliable as it is based on a survey of manufacturing executives and they would never fib about how well business is doing.  Yes, you can take those numbers to the bank - though I would avoid taking them to Greek banks at the moment.

P.S.

The above was originally posted by me yesterday. Today, 4/2/15, the Atlanta Fed reversed course a bit and raised the Q1 GDP forecast back to .1%.  Not huge, but an increase nonetheless.  The reason for it is a tad curious in my book.  It is tied to a foreign trade report that came out this morning.  The report showed a nice decrease in our trade deficit, which is viewed as a good thing, but both exports and imports were down from January.  It is just that the decrease in imports, which went down $10.2 billion, exceeded the decrease in exports, which only went down $3.0 billion.  Thus, the deficit was less.  So the question I have to ask is whether decreases in both export and import activity are a good sign for the economy?  Doesn't this reflect that we are both buying less from others and selling less to others?  Am I missing something?  Obviously I am missing a lot, but that is another discussion.


http://globaleconomicanalysis.blogspot.com/2015/04/trade-deficit-shrinks-first-quarter-gdp_2.html

Lot's of Company

I just posted the other day about the EU not surviving in its current form.  Not an uncommon thought these days.  Even the head of PIMCO agrees:


http://globaleconomicanalysis.blogspot.com/2015/03/can-eurozone-survive-not-in-its-current.html

The EU Plan - It's All Greek to Me

I have been saying this for a while - like for nearly six freakin' years already - and I am standing by it; the EU is not going to survive this economic mess in its current form. 

http://financialspiltmilk.blogspot.com/2011/09/eu_25.html

I got a lot of flack from various readers in the EU when I said this six years ago, so let's see how they react to this prediction today with Greece on the precipice.  More on that later . . .

Let me think, what else did I say several years ago?  Oh yeah, I remember, I said Iceland did the right thing in letting its banks fail and getting the pain behind it. 

http://financialspiltmilk.blogspot.com/2011/11/take-your-medicine.html

Now admittedly Iceland was dealing with banks defaulting and Greece is also dealing with government debt woes, but the approach in principle is the same.  Let's see how that worked out.  Hmm, Greece "chose" the austerity package route so it could stay in the EU and Iceland chose the "get it over with" route.  Greece has unemployment around 25%, billions of Euros leaving its banks, is borrowing from public entities to meet its current debts, has no ability to meet debt obligation beyond a few more weeks without kissing Merkel's butt and has absolutely no end in sight.  Iceland is looking at - did I read that right - a 4% unemployment rate!

http://www.bloomberg.com/news/articles/2014-01-27/let-banks-fail-becomes-iceland-mantra-as-2-joblessness-in-sight

Wow, who would have ever seen that coming.  Bloomberg notes the IMF has praised Iceland for what it did.  I guess I missed the IMF announcement praising Greece or the rest of the EU's wonderful handling of this crisis.

And focusing on Greece in particular, I said four years ago it needed to follow Iceland's lead:

http://financialspiltmilk.blogspot.com/2011/11/put-fork-in-it-greece-seems-to-be-done.html

Of course it did not follow my advice.  I think they were too busy eating their yogurt.  I must admit, however, it has managed to survive and flail around a lot longer than I suspected.  Back four years ago I did predict the voters would get tired of austerity and vote in someone who wouldn't take it any more.  Tsipras was supposed to be the guy, but he has not really shown it much yet.  The next week will tell whether he is or not as he has to respond to some ultimatums from the EU.

http://globaleconomicanalysis.blogspot.com/2015/03/screws-tighten-on-greece-ecb-forbids.html

Either way, other countries have voters fed up as well and anti-EU austerity parties are getting a good bit of traction these days.  Time will tell.  I am sticking by my EU prediction.  It is poorly structured union and cannot survive the test of time. 

And while things are better here in the U.S., I would not be throwing any parties just yet to celebrate.  The last several bundles of economic data have been less than uplifting.  So much so that the Atlanta Fed has reduced its GDP Now forecast for Q1 to .2% GDP growth.  That is down from a forecast just two months ago of 1.9%.  The nice thing about the Atlanta Fed's GDP Now site is that it provides updated forecasts frequently with all major data releases and it ties each change to the data in a nice chart.  Kind of a nice roadmap to the economic reports the past couple of months and whether they were the old thumbs up or down in terms of GDP impact.  Pretty much all thumbs down the past few months apparently.  Go here and check out their recent forecast and see what caused the respective decreases. 

https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm

Won't take but a couple more ticks down before we are in negative territory.  This would be what they call "negative growth,"  an oxymoron if I have ever heard one.  Sounds like something a guy would say to his date "Err, well, that's just a bit of negative growth.  It's really getting bigger but it just does not look like it." 

I've Got A Pin . . .

Anybody got a bubble?

Well, according to Bloomberg, global markets just had their best weekly rally in nearly two years!!  Yeah!!http://www.bloomberg.com/news/articles/2015-03-19/most-asian-futures-down-with-oil-dollar-holds-rebound 

Germany and the U.S. are trading at or near record levels and most markets are certainly at the highest levels they have seen since 2007.  Every thing is just honky dory.  Everything except . .

Factory Orders -

Down six months in a row.  Last time that happened was like 2008.  Remind me, what happened in 2008?

GDP 4th Quarter Actual and Forecasts - 

Recently released estimates for the fourth quarter GDP dropped to 2.2%, which is down from a GDP of 5.0% in the third quarter.  And this estimate is lower than the preliminary estimate.  Now my guestimate on the estimate that followed the preliminary estimate is that it will be wrong to the upside too.  .http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm 

And don't look for a lot of improvement this year.  The 2015 forecast put out by the Atlanta Fed has been falling like a rock the past few weeks.  At the beginning of February it was forecast at a 1.9% increase and now is at a meager 0.3%.  Not a pretty picture.   https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm 

Now the good news is the GDP forecast for Europe this year is a whopping 1.3%, but then again that is their Winter 2015 report that was done in January and came out in February, when the U.S. forecast was somewhat rosier, so who knows.  The next one is due out there in May.  http://ec.europa.eu/economy_finance/eu/forecasts/2015_winter_forecast_en.htm 

I note that if this forecast is accurate the European GDP will increase this year the most since 2010.  Let's just say that is a tad surprising when various countries there are squarely in deflation and most are still struggling.  But hey, why be a pessimist about it.  There has to be a reason why Germany's stock market is not only setting new records regularly but is leaving records of 2007 in the dust.  Really, there has to be a reason doesn't there?  Please, please tell me there is a reason the DAX is trading around 50% higher than it was then.  In the famous words of Sargent Schultz: "I know nothing, I hear nothing, I see nothing."

Wholesale Sales and Inventories

Hey, of these two one is up and one is down - that's at least neutral right?  I wish it worked that way.  Alas, the sales are down and the inventories are up in the U.S. 

http://www.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Not wholly surprising given the rapid rise of the dollar against most currencies.  Imports are cheaper every day, so U.S. manufacturers are feeling the pain and will likely do so for a quite some time to come.

Along the same lines, it is worth noting that the factory order numbers in the U.S. were down in January for the sixth straight month, despite consensus forecasts for a slight rise.  Again, the rising dollar could be partly to blame or possibly, just maybe, perhaps, it is a slowing U.S. economy.  Never mind, forget I even said that.  It could never happen.

China to the Rescue!?

The big China economic engine should help salvage some of the abysmal numbers around the globe, right?  After all, it is the second largest economy after the U.S.  Now I did note last month that internal government forecasts on economic growth in China were recently reduced but still - at 7% - better than pretty much anywhere else.  Not so bad.  Well, not so bad if you believe the Chinese government.

I know it is shocking, but I am a smidge skeptical about government forecasts in general and when it comes to China am in pretty much total disbelief.  My point last month was simply that even the Chinese cannot fully hide that it is getting worse there.  If you dig deeper on China, and some very respectable people have, you will see it is heading for a very hard landing.  Certainly the government there will do everything it can to avert it but efforts to date have simply made the ultimate problem worse.

Mish, whose blog I highly recommend, notes that the debt in China is in the $30 US trillion range, which is about 300% of GDP, meaning GDP growth will need to be 21% just to service debt, and that ain't happening. 

http://globaleconomicanalysis.blogspot.com/2015/03/reality-check-how-fast-is-china-growing.html

To give perspective, the debt to GDP ratio in China is above the ratio in Japan (around 227%) and we all know what has been happening there for decades.  It is close to thrice (I love that word) the U.S. ratio, which is around 100%, and we all read regularly how bad that is.  Now I could go through how their numbers are terrible on every front but Mish does that well in the linked article.  Bottom line is that China, in my view, is heading for more than a recession and something a good bit worse than what we experienced here in 2008.  More akin to Japan, one might say, and Mish does.  This will not be pretty and it will not help the global picture.

P.S.

Following my post above the Mish pointed out a recent presentation by the Vice Premier of China, admitting that their economy is slowing and the growth of the past is "unsustainable" BUT there are bright spots.  With all these bright spots, one has to question why the government plans on spending more and generating the largest deficit (like it is not already way too big) this year than any other year since the beginning of the global crisis began. 

http://www.reuters.com/article/2015/03/22/us-china-economy-idUSKBN0MI01920150322

Then again, I could be all full of doo-doo.  You figure it out.