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Saturday, January 31, 2015 7:02 PM

Diving Into the GDP Report - Some Ominous Trends - Yellen Yap - Decoupling or Not?

Yellen Yap

On Thursday, Fed Chair Janet Yellen met with Senate Democrats at a private luncheon. She told the Democrats that the U.S. Economy is Strong.

My first thought was "what the heck is Yellen doing holding a private lunch with Democrats only?" Had she met with Senate Republicans, I would have asked the same question.

Apparently this is common procedure for Yellen, so perhaps I am reading too much into it.

Yet, I cannot help wondering if the real purpose of the meeting was to persuade Democrats to block any "Audit the Fed" Initiatives.

Glowing Report

Regardless of the reason, Yellen had some pretty glowing things to say.

“She went through the issues of unemployment and inflation. Very positive. And economic growth numbers were good, have been good. There’s work to be done,” Sen. Richard Durbin (D-Ill.) said after the luncheon.

No Rate Hike Soon

Bloomberg reported Yellen Tells Senators No Rate Rise Soon Amid Concerns Abroad.

“Her message is that the economy’s getting better but there’s still a ways to go in terms of job creation,” New York Senator Charles Schumer said today in an interview on Capitol Hill. “That worry seems, in her mind, to be paramount and that’s why she is not going to raise rates immediately.”

The Fed upgraded its assessment of the U.S. economy in a statement on Wednesday after a meeting of its policy-setting committee, while adding a reference to “international developments” which investors took as a sign of mounting worry about weakness overseas.

Yellen shared “some concern about the foreign situation,” said Virginia Senator Tim Kaine, who said her comments were “pretty positive about the fundamentals here.”

Economists said the confident tone of the statement from the Federal Open Market Committee signals it is on track to raise interest rates this year, while making the point it is not ignoring the weaker performance of the global economy.
GDP Expectations Fall Short

On Friday 4th quarter GDP estimates came in below economist expectations. Bloomberg reported "The advance estimate for fourth quarter GDP growth disappointed with a 2.6 percent figure versus analysts' estimate of 3.2 percent and following 5.0 percent for the third quarter. Final sales of domestic product slowed to 1.8 percent, following a 5.0 percent jump in the third quarter. Final sales to domestic purchasers eased to 2.8 percent from 4.1 percent in the third quarter."

Diving Into the GDP Report

With that backdrop, lets dive into the BEA Fourth Quarter and Annual 2014 Advance GDP Estimate.

Change in Real GDP - Personal Consumption Expenditures

click on chart for sharper image

Several PCE items stand out. Is the 2.87% increase sustainable?

And what about health care? In the last three quarters, health care expenditures added 0.45, 0.52, and 0.51 percentage points to GDP. Wasn't Obamacare supposed to reduce costs?

Curiously, gasoline added 0.25 percentage points to GDP in spite of rapidly falling prices.

Motor vehicles and parts show rapidly slowing growth since second quarter. That's a trend I expect to continue.

I discussed autos on January 6 in Economists Upbeat Despite 4th Consecutive Decline in Factory Orders; Auto Orders vs. Expectations.

Autos are slowing and so will auto-related jobs. Yet economists believe "Auto sales are expected to reach their highest level in a decade this year, bolstered by strong job gains and cheap gas."

My take: Autos will soon subtract from GDP.

Change in Real GDP - Gross Private Investment, Exports

Growth in fixed investment is falling rapidly. Equipment, industrial equipment, and transportation equipment are already in contraction.

Inventories added 0.82 percentage points to fourth quarter GDP. Over time, this series trends to zero, so expect a pull back next quarter.

Rising imports subtract from GDP. Imports actually took 1.39 percentage points from GDP. If oil prices head back up, even modestly, this number could get worse.

Exports added 0.37 percentage points to fourth quarter GDP. But note the trend.

Because of the rising US dollar, export growth is dwindling. Will exports add or subtract to GDP next quarter?

All things considered, this GDP report is far more than a simple snapback from the rapid expansion last quarter.

Canada in Recession, US Will Follow in 2015

Earlier today in Canada in Recession, US Will Follow in 2015, I stated "A Canadian recession is underway. US will follow."

Decoupling or Not?

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

Let's return to a question I asked above: Will exports add or subtract to GDP next quarter?

I suggest the answer is subtract. Not only are US exports getting more expensive relative to Europe and Japan, the entire rest of the global economy is slowing rapidly. Our biggest trading partner is Canada and Canada is in recession, with a rapidly sinking loonie (Canadian dollar) on top of it.

US Recession

The US won't decouple, just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time).

Indeed, now that virtually no economist expects a US recession, I believe we are finally on the cusp of one, just as the Fed seems committed to hike.

Mike "Mish" Shedlock

2:14 PM

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

Friday, January 30, 2015 6:27 PM

Greece Will Not Accept Bailout Extension or Deal With "Rottenly Constructed" Troika; Mish's Game Theory Math

Greece Will No Longer Deal with ‘Troika’

It now strongly appears as if Greece, Germany, and the nannycrats in Brussels are all on one hell of a collision course. Both sides have dug in, and the war of words has escalated in all corners.

For example, please consider Greece Will No Longer Deal with ‘Troika’, Yanis Varoufakis Says

Greece will no longer co-operate with the “troika” of international lenders that has overseen its four-year bailout programme, the country’s finance minister said.

Yanis Varoufakis also said Greece would not accept an extension of its EU bailout, which expires at the end of February, and without which Greek banks could be shut off from European Central Bank funding.

“This position enabled us to win the trust of the Greek people,” Mr Varoufakis said during a joint news conference with Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, who was visiting Athens for the first time since a leftwing government came to power this week.

He also blasted the deeply unpopular bailout monitors from the European Commission, IMF and ECB, also known as “ the troika”, saying: “We are not going to co-operate with a rottenly constructed committee.”
Germany Prepared for Negotiation But Won't Negotiate

The position of Germany and Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, is equally one-sided.
Mr Dijsselbloem warned the new government against taking unilateral steps or ignoring arrangements with lenders, saying “the problems of the Greek economy have not disappeared overnight with the elections.”

Wolfgang Schäuble, German finance minister, warned Athens on Friday against trying to “blackmail” Germany with its financial demands.

Mr Schäuble said Germany was ready to co-operate but only on the basis of current agreements. “We’re prepared for any discussions at any time but the basis can’t be changed,” he said. “Beyond that, it is hard to blackmail us.” 

Martin Jäger, the German finance ministry spokesman, said any request for an extension of the existing financing programme would only be acceptable when it was “tied with a clear readiness of Greece to implement the agreed reforms”.
Gaming Theory

Everyone is willing to negotiate, but only on their terms. Realistically, no one is willing to negotiate. Moreover, the Troika has its hands full with Yanis Varoufakis, an expert who wrote a Book on Game Theory.

I suspect prime minister Alexis Tsipras picked Varoufakis precisely because of his skills at game theory.

New Game to Play

Please consider a few snips from Yanis Varoufakis: From Accidental Economist to Finance Minister by  Tony Aspromourgos, Professor at University of Sydney.
Varoufakis was a gifted and popular university teacher in Sydney. I know because I taught side-by-side with him for a number of years. He was also a thoughtful and productive researcher.

His research was first focused primarily upon game theory. But he also developed an expansive intellectual reach across what may be called “political economy” in the generic sense, particularly focused on the evolution of capitalism as a global system.

Hesitant politician

Varoufakis has described himself as an “accidental economist”. He is perhaps even more an accidental finance minister.

There is no reason to doubt the sincerity of his earlier expressed ambivalence about entering politics and the party-political fray. It is the vacuum created by the failure of the mainstream parties of the centre-left and centre-right that calls forth this participation.

The media’s referring to the new Greek government as “far left” or “radical left” is just an intellectually lazy acquiescence in the language of the European political and policy establishment.

In truth, the position of Syriza is not so way out. Syriza is merely left-wing, whereas the mainstream European parties supposedly of the centre-left are no longer left-wing at all.

New Game to Play

I mentioned above that Varoufakis’s earliest academic research was concerned with game theory, albeit from a rather critical standpoint. He has already broken down the realities of one Greek election using game analogies.

Game theory as a method of research in the social sciences is first and foremost about the logic of strategic interaction between players. The situation that is being played out now, between Greece (as well as others of the “south”) and the political establishment in Europe, is without doubt a strategic situation. It is a game of high-stakes policy poker with the players on both sides, perhaps engaged in an element of bluff.

It is interesting that a game theory expert should find himself, now, at the centre of this situation. There is a great deal at stake, for the welfare of the people of Greece, the other high-debt States and Europe as a whole, as well as for the viability of the European Union and the euro.
Nobody's Right If Everybody's Wrong

What if they are all wrong?

While pondering that philosophical question I offer another musical tribute.

link if video does not play: Buffalo Springfield - For What It's Worth 1967

There's battle lines being drawn
Nobody's right if everybody's wrong
Young people speakin' their minds
A gettin' so much resistance from behind
Time we stop, hey, what's that sound?
Everybody look what's going down

Olive Branch Smashed

Greece's refusal of a bailout extension puts a time limit on matters. The existing bailout agreement expires late-February, less than a month from now.

Interesting, the refusal to accept an extension comes on this olive branch just a few hours ago: Europe Hints at Greek Bailout Extension.

Grexit in the Cards?

Unless cooler heads prevail, Grexit is in the cards.

Right now it appears as if neither side will back down. Calling the Troika "Rottenly Constructed" surely sets the tone for Greece.

"We’re prepared for any discussions at any time but the basis can’t be changed" sets the tone for Germany.

I wonder if the Greek position is on purpose.

Tsipras' claim that he wants Greece to stay on the euro. That helped get him elected. Is that how he really feels?

If not, then unless he gets nearly everything he wants, Grexit is all but assured. And if no agreement is reached, Tsipras has an easy fallback plan: Blame it on Germany and the much hated Troika.

Mish's Game Theory Math

  • Greece will be severely disadvantaged in the short term if it exits. But it will also recover faster.
  • If Greece stays in the eurozone, on Germany's terms, it will bleed to death for another decade or more.
  • Germany and the Eurozone have more to lose than Greece.
  • If Greece exits, the entire eurozone will blow sky high simply because of "exit math"

Exit Math

I wrote about exit math twice recently.

If Germany and the eurozone does not bend significantly, Greece may very well come to the conclusion it has little to lose and everything to gain in the long haul by telling the Troika to go to hell.

And that is a position I endorse even though I disagree with many of the overall policies of SYRIZA.

In the end, my analysis says the eurozone has far more to lose than Greece if a Grexit occurs. However, I highly doubt Germany realizes that.

Even if Germany does, it takes unanimous agreement from all 19 eurozone countries to revise the agreement. That's part of the math.

Place your bets.

In the meantime I once again repeat my warning to Greek citizens: Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold


In regards to "rottenly constructed", reader Lefteris emailed ... The minute I heard Varoufakis say “σαθρή”, I figured it would be badly translated. It’s not a very common word. In context, this word correctly translates as “weak”, “not cohesive”. A more negative translation is “flimsy”, but that’s not what Vafourakis meant.

I made a correction above, changing the word "ruined" to "severely damaged" in this sentence:  Greece will be severely disadvantaged in the short term if it exits. But it will also recover faster. That said, hyperinflation is a possibility, and if that happens, the currency would indeed be ruined. The country itself wouldn't.

Mike "Mish" Shedlock

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