The “Greek Issue”

Fascinating flowchart from Deutsche Bank:

It is wrong to think that contagion stems only from Grexit. An excessive compromise with Greece could result in moral hazard, particularly in relation to structural reforms. This could undermine the medium-term stability of the euro area. The tail risk is that Greek politicians try to leverage too much the fear of Grexit “contagion risk”. We complete our analysis by looking at the vulnerability of other euro peripherals and the ex-post tools to limit contagion.


Source: Deutsche Bank, The Greek Issue

The Surging Yields Of Viacom

Summary Viacom continues to trade at yearly lows despite results that grew over last year. The company maintains the large stock buyback plan that will benefit the stock more after the recent declines. The current 15% Net Payout Yield is a strong buy signal. The stock of Viacom (NASDAQ:VIA) (NASDAQ:VIAB) remains in a major

Canada in Recession, US Will Follow in 2015

On January 21 when the Canadian Central Bank unexpected slashed interest rates, I wrote Canadian Recession Coming Up.

Following the rate cut, the yield curve in Canada inverted out to three years. Inversion means near-term interest rates are higher than long-term rates.

I saw no other person mention the inversion at the time. An inverted yield curve generally portends recession.

Nine days later, the Canadian yield curve is still inverted. Let's compare what I posted about the curve on January 21 vs. January 30.

Canadian Yield Curve January 21

  • 30-year: 2.044% (Today's Low 1.998%)
  • 10-Year: 1.426% (Today's Low 1.366%)
  • 05-Year: 0.791% (Down 19 basis points, an 18% decline)
  • 03-Year: 0.590% (Down 27 basis points, a 31% decline)
  • 02-Year: 0.560% (Down 29 basis points, a 34% decline)
  • 01-Year: 0.580% (Down 34 basis points, a 37% decline)
  • 01-Month: 0.640% (Down 22 basis points, a 26% decline)

Canadian Yield Curve January 30

  • 30-year: 1.834% (Down 21.0 basis points)
  • 10-Year: 1.250% (Down 17.6 basis points)
  • 05-Year: 0.603% (Down 18.8 basis points)
  • 03-Year: 0.386% (Down 20.4 basis points)
  • 02-Year: 0.392% (Down 16.8 basis points)
  • 01-Year: 0.490% (Down 9.0 basis points)
  • 01-Month: 0.580% (Down 6.0 basis points)

Not only did yields plunge across the board since then, the yield curve is still inverted all the way out to three years.

Recession Has Arrived

There is no point in waiting for further data. The Canadian recession has already arrived.

On Friday, the Financial Post reported Canada GDP Shrinks on Biggest Factory Drop in Six Years.
The Canadian dollar plunged below 79 cents US today after data showed Canada’s gross domestic product contracted in November as manufacturing dropped the most since January 2009 and on declines in mining and oil and gas extraction.

Output shrank by 0.2%, the most in 11 months, to an annualized $1.65 trillion, Statistics Canada said Friday in Ottawa. The median forecast in a Bloomberg economist survey was for output to be little changed.

Manufacturing declined by 1.9% in November, with losses ranging from machinery and equipment to plastics and rubber.

The Bank of Canada unexpectedly lowered borrowing costs last week for the first time since 2009, saying the move was meant to provide insurance as the slump in crude oil, the nation’s biggest export, weighed on the economy.


The Bank of Canada called the rate cut "insurance". Insurance from what? If they think it will halt a recession, it won't. The recession is here. There is no need to wait for another quarter of declining GDP to confirm. A Canadian recession is underway.

US Will Follow

I remain amused by all the pundits who think the US has "decoupled" from the global economy and will grow stronger in 2015.

Here's news: "It won't", just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time).

Mike "Mish" Shedlock

Schedule for Week of February 1, 2015

The key report this week is the January employment report on Friday.

Other key reports include the January ISM manufacturing index on Monday, January vehicle sales on Tuesday, the ISM non-manufacturing index on Wednesday, and the December Trade Deficit on Thursday.

----- Monday, February 2nd -----

8:30 AM ET: Personal Income and Outlays for December. The consensus is for a 0.2% increase in personal income, and for a 0.2% decrease in personal spending. And for the Core PCE price index to be unchanged.

ISM PMI10:00 AM: ISM Manufacturing Index for January. The consensus is for a decrease to 54.5 from 55.5 in December.

Here is a long term graph of the ISM manufacturing index.

The ISM manufacturing index indicated expansion in December at 55.5%. The employment index was at 56.8%, and the new orders index was at 57.3%

10:00 AM: Construction Spending for December. The consensus is for a 0.6% increase in construction spending.

----- Tuesday, February 3rd -----

Vehicle SalesAll day: Light vehicle sales for January. The consensus is for light vehicle sales to decrease to 16.6 million SAAR in January from 16.8 million in December (Seasonally Adjusted Annual Rate).

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the December sales rate.

10:00 AM: Manufacturers' Shipments, Inventories and Orders (Factory Orders) for December. The consensus is for a 2.0 decrease in December orders.

----- Wednesday, February 4th -----

7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:15 AM: The ADP Employment Report for January. This report is for private payrolls only (no government). The consensus is for 220,000 payroll jobs added in January, down from 241,000 in December.

10:00 AM: ISM non-Manufacturing Index for January. The consensus is for a reading of 56.5, up from 56.2 in December. Note: Above 50 indicates expansion.

----- Thursday, February 5th -----

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 290 thousand from 265 thousand.

U.S. Trade Deficit8:30 AM: Trade Balance report for December from the Census Bureau.

This graph shows the U.S. trade deficit, with and without petroleum, through November. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

The consensus is for the U.S. trade deficit to be at $38.0 billion in December from $39.0 billion in November.

----- Friday, February 6th -----

8:30 AM: Employment Report for January. The consensus is for an increase of 230,000 non-farm payroll jobs added in January, down from the 252,000 non-farm payroll jobs added in December.

The consensus is for the unemployment rate to be unchanged at 5.6% in January from 5.6% the previous month.

Year-over-year change employmentThis graph shows the year-over-year change in total non-farm employment since 1968.

In December, the year-over-year change was 2.95 million jobs, and that should increase further in January.

As always, a key will be the change in real wages - and as the unemployment rate falls, wage growth should eventually start to pickup.

Notes: The annual benchmark revision will be released with the January report. The preliminary estimate was an additional 7,000 jobs as of March 2014.

Also, the new population controls will be used in the Current Population Survey (CPS) estimation process. It is important to note that "household survey data for January 2015 will not be directly comparable with data for December 2014 or earlier periods". Someone better alert Rick Santelli at CNBC!

3:00 PM: Consumer Credit for December from the Federal Reserve.  The consensus is for credit to increase $15.0 billion.

‚Bad Tayloring‘


Bad Tayloring: Since they aren’t currently able to demand a return to the gold standard — and maybe a ban on paper money? — Republicans are pushing to mandate that the Fed follow the so-called Taylor rule, which relates short-term interest rates to unemployment (and/or the output gap) and inflation. John Taylor, not surprisingly, likes this idea. But it’s a really terrible idea, and not just for the reasons Tony Yates describes. ...
The world has turned out to be a much more dangerous place than Taylor-rule enthusiasts imagined, so why impose a rule devised, we know now, by economists who completely misjudged the risks?
Now Taylor himself has an excuse and rationale: he claims that the whole financial crisis thing was because the Fed departed slightly from his version of the rule in the pre-crisis 2000s. But as Yates points out, this assigns an importance to monetary policy that is wildly at odds with the kind of modeling used to justify the rule in the first place. It also, as Yates does not point out, has the distinct whiff of someone inventing ever-more bizarre stories to avoid admitting having been wrong about something. This is not the kind of argument on which to base rules that permanently constrain policy.

Live from teh Roasterie: No: Jeb Bush Should Never Be President of Anything

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Michael Kruse: Jeb 'Put Me Through Hell’: "In June, the medical examiner released Terri Schiavo’s autopsy...

...which confirmed what the judges had ruled for years based on the testimony from doctors concerning her prognosis. Her limbs had atrophied, and her hands had clenched into claws, and her brain had started to disappear. It weighed barely more than a pound and a third, less than half the size it would have been under normal circumstances. ‘No remaining discernible neurons,’ the autopsy said. She couldn’t see. She couldn’t feel, not even pain. Forty-one years after her birth, 15 years after her collapse, Terri Schiavo was literally a shell of who she had been.

Bush read the autopsy—then wrote a letter to the top prosecutor in Pinellas County. He raised questions about Michael Schiavo’s involvement in her collapse and about the quickness of his response calling 911. ‘I urge you,’ the governor wrote to Bernie McCabe, ‘to take a fresh look at this case without any preconceptions as to the outcome.’

McCabe, a Republican, responded less than two weeks later, saying he and his staff ‘have attempted to follow this sound advice’--without any preconceptions:

unlike some pundits, some "experts", some email and Web-based correspondents, and even some institutions of government that have, in my view, reached conclusions regarding the controversy...

McCabe’s assessment: ‘all available records’ were ‘not indicative of criminal activity...’.

Today, looking back, what makes Felos, the attorney for Michael Schiavo, angriest about the case is Bush’s letter to McCabe. Even after 18 months of legal wrangling, even after her death, even after the autopsy—after all that—the governor asked a prosecutor to initiate a retroactive criminal investigation of his client. It struck Felos as “odd,” “bizarre”—“personal.”

Michael Schiavo at home. "He should be ashamed," Schiavo said of Jeb Bush. "To bring as much pain as he did, to me and my family, that should be an issue."

“It was such an abuse of authority,” Felos said. “I think that really raises red flags about his character and his fitness to be president. Jeb didn’t get his way in the Schiavo case. I think he tried to take it out on Michael.”

That, Michael Schiavo said this month, is what makes Jeb Bush “vindictive.” “Knowing that he had no standing in this, he made it worse for everybody,” he said. “He made life, for a lot of people—the nursing home people, the local police, lawyers—he made everybody miserable.”

What makes him “untrustworthy,” he said, is that he fought the courts as long as he did just because he didn’t like the decisions they kept making. “I wouldn’t trust him in any type of political office,” he said....

[Jeb Bush] has been portrayed as a cerebral policy wonk in contrast to his father, the solicitous writer of thank you notes, and his brother, the clownin’-around worker of rooms. This.. ignores the intensity, the vehemence, the practically gladiatorial certitude with which he pursued what he wanted in the Schiavo case, and more generally the fervid way in which he believes in what he believes—that “absolute truth” he talked about in his speech in Savannah, two months after the death of Terri Schiavo, and one month before he asked the prosecutor to investigate her husband.

Morning Must-Read: Paul Krugman: I See Very Serious Dead People

Theo The Major P002 Patriotic cushion Engage the enemy more closely 12 30cm square cotton cushion

Let me (surprise, surprise!) back up Paul here: There is no doubt that, technocratically, reflation is the low-hanging fruit to boosting equitable growth. Successfully returning to full employment would boost real GDP in the North Atlantic by 10% today, would boost future economic growth substantially as well, and would lift all economic classes more-or-less equally. No plausible policy shifts to produce "structural reform"--save possibly the "structural reform" of raising the price level in Germany and Holland relative to Italy and Spain by 20%--promises North Atlantic-wide benefits even a fifth as much.

But for many, suppose you were to endorse Keynesian fiscal of Friedmanite monetary régime-change policies right now...

They think that, once you start admitting that the Keynesian fiscal and Friedmanite monetary régime-change policies are the ones that pick the low-hanging fruit, you have put yourself in opposition to the German Ordoliberals and the British Conservatives and the American Republicans (all save James Pethokoukis, Scott Sumner, and Ramesh Ponnuru). And to say that the leftist fringe of European and British politics and the Elizabeth Warren wing of the Democratic Party in America are right and deserve support--well, that appears to disqualify you from being taken seriously as a sensible centrist, or even as a sensible moderate left-of-center establishment thinker these days.

It makes you... shrill...

A couple of years ago the fact that Olivier Blanchard's shop at the IMF and that Jan Hatzius's shop at Goldman Sachs are willing to hoist signal flags 1 and 6 together and point out what the macroeconomic evidence and theory suggested would be good policies gave me hope then for rational policy. And right now Syriza begs for less pointless, destructive austerity, Larry Summers continues his long campaign (with some IMF help) for large-scale publicly-funded infrastructure investment, Christina Romer continues to argue for monetary régime change, and there are others--but we are many, many fewer than we should be. And for what? for Wales?...

Paul Krugman: I See Very Serious Dead People: "[I am] annoyed... [at] the constant efforts on the part of Very Serious People... turn discussions away from monetary and fiscal policy, recessions and sluggish recoveries, to the supposedly more fundamental issues of structural reform and long-term growth. Rattner dismisses the austerity/stimulus debate as ‘simplistic’; Jeff Sachs calls Keynesian concerns ‘crude’; many... are eager to get away from all this deflation stuff and talk about how what they imagine to be, or wish were, the really important issues like Big Data and a world that’s even flatter. There were people like that during the Great Depression too....

So.... First, we’re now in year eight of a massive setback to economic growth, to living standards.... Technology hasn’t retrogressed; institutions haven’t suddenly gotten far worse. This is about the business cycle, and about business cycle policy. If you want to ignore all that... you’re exactly the kind of person Keynes was mocking.... Second... Keynesian macroeconomics... has worked very well in this long slump. While people were very seriously intoning that it was simplistic and crude to think that those little models could be of any use in a changing world yada yada, macroeconomists were making remarkable, counterintuitive predictions... that came true.... Third, what’s really striking about all the talk about... structural issues... is how fuzzy the thinking is.... The Very Serious seem remarkably casual about thinking things through.

Finally, I know that people who airily dismiss the austerity debate and all that and demand that we focus on the long run think they’re taking a brave stand; but you know, they aren’t.... Face it, stimulus and austerity, QE or not, are politically charged issues where taking any kind of stand will get you attacked. And since they are also important issues, pretending that they aren’t is a form of moral cowardice.

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