Ding, Ding, Ding - We Have A Winner!

Well, we finally got there.  GDPNow from the Atlanta Fed puts the 3rd Quarter GDP now at 1.9% annualized rate, half of where they started the 3rd quarter forecast at 3.8 %, just as I anticipated when they first put out their 3.8% figure.  And the fun part is the forecasting (or retro-casting at this point) is not over with.  They will continue regular adjusting this month and then occasionally providing revised figures going forward.  All of which I suspect will make the now 1.9% forecast look optimistic.  Perhaps a 2% target is proving a tad too much for the Fed.  After all, we are following the Japan playbook which now for a few decades has proven itself highly flawed and incapable of delivering the results that Keynesian economists predict.  Not sure why such economists are unwilling or incapable of seeing what is slapping them in the face.

https://www.frbatlanta.org/-/media/Documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

But it gets better.  Apparently dear Janet is reportedly considering letting rates sit where they are despite the economy running "hot" - yes, you read that right - as inflation targets are not being met.

http://www.bloomberg.com/news/articles/2016-10-15/yellen-s-talk-of-hot-u-s-economy-extends-october-long-bond-rout

Has she seen corporate profits sinking for the past six quarters?  If that is a "hot" economy, I would hate to see a cold one, though I fear I will in the very near future.

But Perhaps I Am Wrong - 10/28/16 Update

It would seem that the economy had a bit of an uptick in the third quarter, as reported by Bloomberg:

http://www.bloomberg.com/news/articles/2016-10-28/u-s-economic-growth-rebounds-on-boost-from-exports-inventories

Indeed, GDP rose at an annualized 2.9% rate, well above the GDPNow current forecast and above analyst expectations of 2.6%.  I note that .6% of that is due to inventory build, which while supporting GDP this quarter may dampen it next if that inventory is not sold, but still a solid advance so far.  Looks like Janet will get to raise her rates after all.  Wagers still seem to favor December over November for when that should happen.

Binky Spurt

Just a quick note as this seems a bit entertaining to me.  The things you hear about gold prices are all over the place from it being the wisest investment on earth to gold being as worthless as coal these days.  Decide for yourself which is right for the long term.  One thing that is clear is that for the short term the price tends to swing widely, like over 3% down yesterday, in part tied to expectations on Fed rate hikes because rising rates lowers the price of gold.  And yes, oddly enough expectations recently have been growing for a December rate hike despite the GDP forecasts progressively going down for the U.S. and the world, whether you look at GDPNow as I recently did, or the IMF, which just slashed its 2016 GDP prediction for the U.S. from 2.2% down to a meager 1.6%. 

http://www.zerohedge.com/news/2016-10-04/imf-slahses-us-gdp-gowth-outlook

Not exactly the growth target the Fed is looking to achieve, yet expectations for a hike are on the upswing and gold is slumping in part because of it.

http://www.zerohedge.com/news/2016-10-04/gold-tumbles-below-1300-yen-crashes

Indeed, today Bloomberg carried an article on how the Deutsche Bank AG Chief Global Strategist believes the drop in gold will continue and it is 20 - 25% overpriced.  According to Binky - yes, his name is Binky - while rate hikes might have an impact, the real driver of a reduction in gold will be a recovery in global growth!  Yes, you heard that right, the economies of the world can prepare to rejoice as a growth spurt is on the way.  Let's officially name it the Binky Spurt!

http://www.bloomberg.com/news/articles/2016-10-05/gold-looks-25-overvalued-according-to-deutsche-bank-s-chief-global-strategist

And you can see why, with a chief global strategist like Binky, that Deutsche Bank is doing so well. Yep, time to sell any gold you might have.  Take that ring off your finger now and hawk it while it is still worth something.  After the Binky Spurt it will be too late. 

We'll see how this call works out for Binky.

10/7/16 Update

Since the initial post above, Binky seems right.  Gold has continued to drop, some economic news was pretty good and expectations of a Fed increase in rates were rising.  That is until today.  Today the BLS jobs number came in at 156K (below what the elite prognosticators were predicting) and the unemployment rate increased minimally to 5.0%.  So now the jury is out on what the Fed will do in December.

http://www.zerohedge.com/news/2016-10-07/payrolls-rise-156k-missing-expectations-unemployment-rate-rises-50

As one might expect, this is giving a bit of a bump to gold.

http://www.zerohedge.com/news/2016-10-07/gold-leads-bonds-bleed-jobs-miss-sends-rate-hike-odds-tumbling

Which may be due in part to our friends at Goldman saying that demand for gold remains high and intact, so a significant drop in gold prices seems unwarranted.

http://www.zerohedge.com/news/2016-10-07/golds-sharp-drop-strategic-buying-opportunity-goldman-sees-physical-demand-intact-ch

But I am sure Binky will stand firm in his convictions on this as the global economy is certainly ready for a spurt and all this other stuff is just noise. 

GDP Update

Back on August 9, I noted that the Atlanta Fed at their GDPNow site had given a preliminary forecast of third quarter GDP of 3.8% annualized.  I referred to it as Grossly Distorted Prediction and noted I would be surprised if the GDP was ultimately half that for the quarter, i.e. 1.9%.  Well, as of today, the Atlanta Fed is down to 2.4% and dropping fast.  They will continue to post third quarter numbers through October, so I might make my guesstimate after all.

https://www.frbatlanta.org/-/media/Documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

October 3 update

Now down to 2.2% after a dismal construction spending report today. 

October 7 update

2.1%

Gentelmen, Start Your . . . Lawsuits!

Well,  it was just a matter of time.  Tesla has been sued for a fatal crash in China allegedly involving its AutoPilot feature.

http://fortune.com/2016/09/15/tesla-autopilot-crash-china/

The lawsuit seeks very little monetarily and is reportedly designed primarily to just bring attention to the problems with the system.  Tesla claims there is no way to know if the AutoPilot was engaged due to the car being too damaged in the crash.  On the other hand, in the more recent fatal crash in the Netherlands, Tesla confirmed AutoPilot was not engaged and officials are not refuting it.

http://phys.org/news/2016-09-dutch-police-probe-fatal-tesla.html

Tesla agrees, however, that the fatal crash in Florida this year was with AutoPilot engaged, but asserts the driver was not using it properly.  Moreover, it claims to have now issued a software upgrade that eliminates the issue that resulted in that crash.

I have reported before on the likelihood of lawsuits over this.  Whether the China suit goes anywhere is anyone's guess.  Either way, others will follow.

I have read some commentators' views that lawsuits are not that likely as the legal liability is not that easy or cheap to prove.  Experts will be needed and will be expensive and state-of-the-art defenses may be available.  All true, but never underestimate the drive of the plaintiffs' bar or its resources.  Moreover, some expert will see the light and realize they can make a nice living testifying in these cases.

One might argue that different approaches being taken to autonomous cars provides plenty ammunition for an expert.  For example, Google is designing Level 4 cars with no steering wheel and no chance for human intervention.  It believes the interaction between a human driver and somewhat autonomous features can only lead to problems.  And just maybe Tesla is proving that to be true.

Now I understand that Tesla has plenty of warnings a driver has to go through to even engage AutoPilot, that the driver still has to touch the wheel occasionally, that they are regularly doing upgrades, yada, yada, yada . . . All these yadas probably add up to a nice defense against the driver of the Tesla who is injured or killed.  But what about the first time the Tesla plows into another car or people?  It will eventually happen.  Tesla will point the finger at the "driver" and the lawyers will point the finger at the deep pocket and the expert will say it is simply foolish to have the autonomous/human interaction as it creates too many variables.  Poof, there it is.  Mind you, these cars likely are safer than those with drivers in full control, but I still think Tesla is conducting a dangerous experiment.  No doubt in doing so they are collecting enormous amounts of data with which to tweak their software, which is perhaps enough economic incentive for Tesla to take this chance.  Only time will tell.

Show Me The Money

Now autonomous cars are coming whether you like it or not and some entities hope to make a lot of mullah off of them.  But there are several categories of companies where you have to scratch your head.  Car manufacturers, for example.  Sure, they will make these cars and sell them, but the obvious eventual plan here is that individuals will no longer own a car or at least no longer need to own one.  They will simply summon an autonomous car from Uber or Ford or whoever when they need it, specifying why they need it so an appropriate vehicle shows up.  They will then be taken to their destination and the car will proceed to its next pick-up.  Instead of sitting idle 95% of the time, the car will be in use the majority of time, perhaps getting maintenance and such during the slow nighttime shifts.  Overall, far fewer cars will be needed, perhaps only a third as many.

Let's conservatively assume the number of cars needed only goes down 50%.  Well, now you have 50% less for parts suppliers to supply, for manufacturers to build, for insurers to insure, etc.  Indeed, car retail will largely disappear as it will simply be large corporate fleets of autonomous vehicles serving the public, so say goodbye to your local car dealer.  That is a whole lot of missing jobs and dollars - and a whole lot of empty retail parking space that is no longer needed.

Let's say you are Ford.  Ford has indicated it is focusing on building autonomous cars for hire, not for private sale.  This makes a good bit of sense as it leaves control and upkeep of these sophisticated machines in the hands of a few companies that know what they are doing.  Now it is not clear to me if Ford is going to work with the likes of Uber or whether it may launch its own fleet.  The latter makes sense to me.

The approach of selling these autonomous cars to individuals seems financially unwise. The cars may cost more and have a higher per vehicle profit but if you are making half as many, your profits go down.  And liability - absent legislative intervention - is shifting largely to the manufacturer.  So you have lower sales profits with which to pay what will likely be enormous premiums for liability insurance.  Not per se a good business model.

So why not make your profit simply offering the cars you make for hire.  People sign up with Ford and get charged per trip.  Ford makes its money from this without ever selling a vehicle retail.  It has fewer factories to maintain, fewer workers to pay and a regular income stream moving people around.  Perhaps not the profits it is seeing from selling cars today, but it has to do something to fill the void that is coming.

And there will be voids for a lot of different businesses to fill if they can.  Any wonder that those national car insurers are now emphasizing in adds their other services like loans and such?  Perhaps they are seeing the writing on the wall.  After all, studies predict car insurance premiums are going to go down 60% over the next 15-20 years and 80% over the next 25.  We are talking about $200 billion in premiums, 80% of which might disappear in relatively short order.  Ouch!

http://www.latimes.com/business/la-fi-agenda-driverless-insurance-20160620-snap-story.html

These are interesting times my friends.  In an upcoming post I will endeavor to note some of the key benefits to autonomous cars beyond the safety benefits.  For example, that two car garage might make a nice playroom for the kids.

 

How's That Workin' Out For Ya?

Well the banks brought us the sub-prime housing debt crises a mere nine years ago so the government - after saving their collective arses - has effectively regulated and/or fined them to the point of no profit.  Just ask Deutsche Bank how that's working out for them.

http://www.zerohedge.com/news/2016-09-19/deutsche-bank-extends-losses-near-record-lows-significantly-undercapitalzied-even-wi

Given their stock is trading at around a tenth of what it was back then, I am thinking not so well.  The stockholders, i.e. investors who "benefited" from these loans are not doing so well either.

But fear not, where banks fear to travel today (or are barred from doing so), others are happy to fill in the void.  I mean, with a third of the world's sovereign debt with negative-yields and stock markets at lofty valuations, where else is a hedge fund going to get any returns to justify their exorbitant fees than to step in where others will not go.  And so they are steering their clients' money into fun-filled commercial real estate loans.  Nope, no risk there.

http://www.bloomberg.com/news/articles/2016-09-19/shadow-lenders-step-in-for-banks-facing-u-s-property-warnings

Or high yield corporate debt is the place you oughta' be, so they loaded up the debt and move to Beverly.

https://mishtalk.com/2016/09/18/credit-spreads-widen/

Looks like there are going to be a lot more arses in need of help.  But if we bail them out too, who is the arse then?  Here we are folks, different debt, same old problem. 

September 20 Update

Just passing on a bit more about Deutsche Bank that I just ran across from Mish Shedlock.  More of the same:

https://mishtalk.com/2016/09/20/is-deutsche-bank-cooking-its-derivatives-book-to-hide-huge-losses/

Coming Up Roses!

So everyone seems to be wondering whether the Fed will raise rates when it meets September 20-21.  The "official" data points have been mixed as of late, but the Fed thinks things are going pretty well.  Indeed, Janet at J-Hole noted that the economy is "nearing the Federal Reserve's statutory goals of maximum employment and price stability."  Yeah!

Of course good news is bad news as the thought of the Fed perhaps raising rates this month is not what the market wants, especially on the heals of Draghi and the ECB doing nothing this week.  And thus, the market dropped a tad on Friday, like a little over 2% tad.  Mind you, not because the economy sucks, but because, as Bloomberg puts it, "central banks signaled reluctance to extend stimulus." 

http://www.bloomberg.com/news/articles/2016-09-09/no-stimulus-no-peace-as-stocks-end-two-month-snooze-with-plunge

You see, everyone knows the economy sucks even it if it not catching the headlines daily but they are willing to ignore that as long as the Fed is serving up drinks and catching the tab.  But the Fed is likely second guessing things a bit and wants to raise rates, knowing it needs a buffer to play with in the next recession, but it cannot justify a rate increase if the economy sucks.  So according to the Fed, it does not suck and everything is coming up roses.  The true irony here is the market is bombing because the Fed might raise rates when the market should be bombing because the economy sucks, yet the excuse for the Fed possibly raising rates is that the economy is just honky dory.  Got that?

Now you won't hear that the economy sucks from Hillary who needs to ride Obama's coattails, but on this I have to agree with Trump who has been pointing the finger at the Fed for propping up the economy.  Now he says it is to make Obama look good and sway the election. I do not think they are per se doing it to sway the election or to make Obama look good; they are doing it to make themselves look good and they refuse to admit the utter failure of their policies.  They refuse to admit the economy is on Fed life support and nothing they have done has improved it fundamentally.  Indeed, the fundamentals are disastrous.  Don't believe me, look at the stats, many of which you can find in this nice article from Bloomberg:

http://www.bloomberg.com/news/articles/2016-09-06/buyback-addiction-getting-costly-for-s-p-500-ceos-burning-cash

The focus of the article is on the cash position of many companies worsening significantly the past couple of years, suggesting the share buybacks and dividends that have propped up share prices on failing companies are coming to an end.  As the article notes, the top 10% of the S&P 500 has plenty of cash, but that lower 90% not so much.  And it is shrinking fast - down from $447 billion at the end of 2015 to a mere $385 billion at the end of the second quarter.  If my math is right, that is nearly a 14% drop in half a year.  Oops.

But the article has a host of other nasties in it, like:

• S&P companies have posted negative growth for the past six quarters;
• Earnings in the last quarter were the worst since 2011;
• Dividends and stock buybacks equaled 128% of earnings this past year;
• New stock buyback announcements are down $115 billion this year;
• Median debt in the S&P 500 is $5.43 billion, it's highest eeeevaaar; and
• The debt to earnings ratio is at its highest since 2003.

Debt to me is a major issue.  Easy credit exists at the moment due to central banks and investors having no place to earn a decent return without turning to the corporate debt market.  But if rates go up, creditworthiness goes down and liquidity dries up, there are going to be a lot of companies unable to roll-over their debt.  Time is approaching to give the devil his due.

But other than all that, Janet is right, everything is coming up roses!

Feeling the Pinch(ion)

While it gets a fair amount of press, the financial woes of the nations pensions do not seem to get as much attention as they should from the government and the Fed.  Let me qualify that.  The pension issue is not getting enough attention other than from those politicians that are in jurisdictions that can no longer ignore these obligations and kick them down the road.  Illinois and Chicago in particular are nice poster children for the problems that are gradually being visited upon more jurisdictions.  There are a host of reasons for the issue with the principal one being politicians knowingly not funding pensions and using the tax money for more immediate needs.  After all, if you are in office four, six or eight years, why take the pain yourself when you can hoist it upon some politician down the road. 

Another reason for the underfunding is that pensions regularly rely on getting unworldly returns on their investments.  Expectations of 7%, 8% and higher are common.  Guess what happens when those expectations are not met or are lowered?  Well, the Governor of Illinois just found out:

http://www.zerohedge.com/news/2016-08-27/illinois-taxes-rise-500-million-after-teachers-pension-fund-cuts-returns-assumption-

Just a reduction in expected return from 7.5% to 7.0% has given him a whopping half a billion dollar shortfall that taxpayers of Illinois now need to make up next year.  Let's clarify that; it is one that the remaining taxpayers will have to make up next year.  You see, it seems Illinois and Chicago are losing some taxpayers.  Last year Chicago lost more than any other metropolitan area in the U.S.

http://www.chicagotribune.com/news/local/breaking/ct-chicago-population-record-loss-met-20160324-story.html

And as Illinois as a state is losing them left and right - at a rate of 1 resident every 10 minutes.

https://www.illinoispolicy.org/press-releases/illinois-losing-residents-at-a-rate-of-1-person-every-10-minutes-new-report-from-il-policy-institute/

Which means there are going to be fewer folks to pay that bill, which means the incentive for more to leave just increased, and so forth and so on.  For more details on the woes of Chicago and Illinois, I recommend Mish Shedlock who lives there and follows it closely.

https://mishtalk.com/

But Illinois is not alone.  With an aging population of baby boomers, this is a common issue throughout the U.S.  It is also one that low interest rates are not helping in the least.  Pensions have no safe alternatives for a decent return (thank you Fed) and are forced to take unnecessary risks with their investments.  These risks over the past 8 years have not been too painful as the markets, at least in the U.S., have continued to grow.  But what happens when the inevitable happens and the markets finally revert?  Those 8% or 7% return rates go up in smoke.  Indeed, a 40% or more correction as many (like Buffett, Ichan, Soros, Gross, Rogers) are now predicting would wipe out these expected returns for many years.  As John Hussman, Ph. D. notes, this overdue reversion to mean likely will lead to an overall return over the next decade of 0%. 

http://www.hussman.net/wmc/wmc160815.htm

Last I checked, that is a tad below the lowered 7% expectation for Illinois.  Let's see, if half a percent means half a billion in increased taxes then another 7% reduction means . . . time to move.

But where do I go, how will I live?  The U.S. as a whole has roughly a nice trillion in unfunded public pensions just waiting to go bust.  But not every state is in the same (sinking) boat.  Illinois, Connecticut, Kentucky, Alaska and my fine state of New Hampshire lead the list in the percentage of unfunded obligations, but there are states like Wisconsin and South Dakota that are 100% funded and a few warmer states close behind, like North Carolina and Tennessee. 

http://money.cnn.com/2015/07/14/retirement/worst-state-pensions/

All this leads to more bad news for our good friend Janet.  She wants to raise rates, she needs to raise rates, but doing so - especially when other countries are going in the opposite direction - is darn near impossible.  I have no sympathy for her situation as she made her own mess and now has to live with it.  My problem is that we all have to live with it.