The Divergence Between ‘Hard’ & ‘Soft’ Data Explained (And Republican Bulls Won’t Like It)

Another dataset, another head-scratching disparity between ostensibly fulsome confidence and evidently sluggish activity.  While markets get whipsawed reacting to divergent hard and soft data points, the question that traders need to ask is whether this gap makes any sense.

Bloomberg’s Macro Strategist Cameron Crise may have the answer… If you’re willing to believe that survey respondents allow their political beliefs to color their answers, then it very well might.

I modeled U.S. economic growth since 1975 using the softest of the soft data releases: consumer confidence and the small business optimism survey. I omitted the ISM because it includes factual questions, i.e. are orders increasing?  The fit is actually pretty good for such a simple model, with an r-squared of 0.51.  As you can see, the model is now pretty upbeat.

 

 

I then disaggregated the data and compared the model forecast to actual economic growth for each president since Gerald Ford. The results were fascinating.

  • Under Republican presidencies, average annual growth has been 2.7%…but the model has forecast it at 3%.
  • Under Democrats, growth has been a little higher, at 2.8%…but the model has forecast growth of just 2.3%.

 

 

In fact, the model slightly underestimated growth during the Ford and Reagan years. Since George HW Bush, however, the trend is pretty pronounced: survey respondents have been optimistic relative to underlying growth for GOP presidents and pessimistic relative to growth for their Democratic counterparts.

 

It seems likely that at least some of the recent boost to confidence is evidence of the same phenomenon manifesting itself.  That being said, the model currently projects growth of nearly 3.5%, so even if we were to knock off the usual half a percent for a post-Reagan GOP presidency that would still imply a marked uptick over the post-crisis run rate.

 

Of course, achieving that growth will probably be contingent on the government enacting some of its more business-friendly campaign promises such as tax reform or deregulation. If they don’t, then the “optimism gap” may close, and not in a way that the White House might like.

 

Either way, traders will need to keep an eye on government policy and its implications. The efficacy of the Trump administration may not matter on a day-to-day basis for bond markets, but in the long run it probably will.

A glance at the last 20 years or so of ‘soft’ and ‘hard’ data also helps confirm this over-confidence… it’s the hope that pumps… then dumps… and never the reality that jumps…

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How Chicago’s Largest Pension May Run Out Of Cash In As Little As 4 Years

Chicago’s pension funds, along with several other large public pensions around the country, are in serious trouble (we recently discussed the destruction awaiting our financial markets here: “Are Collapsing Pensions “About To Bring Hell To America”?”)….

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McCaskill To Oppose Gorsuch, Virtually Assuring Use Of “Nuclear Option”

Senator Claire McCaskill said she will join the Democrats attempted filibuster of Supreme Court nominee Neil Gorsuch and will not vote for him, making it almost certain that Republicans will have to trigger the “nuclear option” to confirm President Trump’s first Supreme Court nominee.

The Missouri Democrat announced Friday in a post on Medium, faulting the nominee for “a stunning lack of humanity.”

“While I have come to the conclusion that I can’t support Neil Gorsuch for the Supreme Court ?- ?and will vote no on the procedural vote and his confirmation? – ?I remain very worried about our polarized politics and what the future will bring, since I’m certain we will have a Senate rule change that will usher in more extreme judges in the future,” McCaskill wrote in a post on Medium.

She said the nomination of Gorsuch goes against the grain of Trump’s promise to help working-class Americans because he is “a judge who can’t even see them.” McCaskill also raised concerns about Gorsuch’s refusal during his confirmation hearing to say how he viewed the constitutionality of campaign fundraising regulations, which were limited by the landmark case Citizens United v. Federal Election Commission in 2010.

“I cannot support Judge Gorsuch because a study of his opinions reveal a rigid ideology that always puts the little guy under the boot of corporations,” she said adding “I cannot and will not support a nominee that allows dark and dirty anonymous money to continue to flood unchecked into our elections.”

What makes McCaskill’s opposition unique is that she is the first Democrat facing reelection next year in a state President Trump carried by double digits to come out against Gorsuch, a move which will likely force other “on the fence” Democrats to follow in her footsteps.

The political press is divided over what her no vote means: according to Axios: “Gorsuch just got the last “no” it needed so the Democrats can meet the vote threshold to filibuster his nomination. Republicans will now have to get rid of the 60-vote filibuster threshold for judges, or allow Gorsuch’s nomination to fail.”

A less definitive conclusion comes from the Hill, according to which her “no” vote shrinks the pool of Democrats who have undecided or unclear positions on Gorsuch to nine. Gorsuch’s nomination needs the backing of eight Democrats or Independents, along with all 52 Republicans, to break a filibuster.

Only two Democrats have so far said they will vote to end a filibuster of Gorsuch and support his final confirmation, according to The Hill’s Whip List. Both of them, Sens. Joe Manchin (W.Va.) and Heidi Heitkamp (N.D.), represent states Trump won overwhelmingly in November.

Meanwhile, Senate Leader Mitch McConnell has vowed that Gorsuch will be confirmed and has told colleagues to expect a vote to change the rules to lower the threshold for ending a filibuster to a simple majority, i.e. the “nuclear option”.

As The Hill adds, to avoid a showdown over the rules, it now becomes crucial for Gorsuch to pick up the support of the two remaining undecided Democrats who face reelection next year in strongly pro-Trump states: Sen. Jon Tester (Mont.) and Sen. Joe Donnelly (Ind.).

Gorsuch would likely also need the support of senior Democrats such as Sen. Dianne Feinstein (Calif.), the ranking member on the Judiciary Committee, and Sen. Patrick Leahy (Vt.), who might be concerned about preserving their power to filibuster for the next vacancy on the court.

 

Other Democrats up in the air are centrist Sens. Mark Warner (Va.) and Chris Coons (Del.), along with Independent Sen. Angus King (Maine), who praised Gorsuch earlier this year as “exceedingly independent.”

Assuming Axios’ whip list is the correct one, and McCaskill’s vote was the tiebreaker, forcing the “nuclear option”, the likely outcome is to make the already deep split between Republicans and Democrats even more polarized, further complicating the passage of any future Trump legislative proposals.

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Nigeria’s <b>crude oil</b> supply drops as Shell shuts Bonny Light oil export line

The Nigerian subsidiary of Royal Dutch Shell Plc said it had shut down the Nembe Creek Trunk Line, which exports Bonny Light crude oil, in order to …

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Do The Roots Of Rising Inequality Go All The Way Back To The 1980s?

Authored by Charles Hugh-Smith via OfTwoMinds blog,

Unless we change the fundamental structure of the economy so that actually producing goods and services and hiring people is more profitable than playing financial games with phantom assets, the end-game of financialization is financial collapse.

I presented this chart of rising wealth inequality a number of times over the past year. Do you notice something peculiar about the inflection points in the 1980s?

Correspondent W.S. noted that the inflection point for the top .1% (late 1970s) preceded the inflection point of the bottom 90% (around 1986): both increased their share of household wealth from 1978 to 1986, and then the share of the top .1% took off, essentially tripling from 8% to over 22%, while the share of the bottom fell precipitously from 36% to 23%.

(Note that the data stops at 2012; if we extend the trends to the present, the lines have certainly crossed and the share of the .1% now exceeds that of the bottom 90%.)

So what happened between 1978 and 1986? The first phase of the financialization of the U.S. economy. What is financialization? In a financialized economy, speculating with highly leveraged debt and exotic financial instruments is far more profitable than producing goods and services.

Financialization hollows out the productive assets of an economy by incentivizing leverage, debt, opacity, speculation, financial fraud, collusion and the perfection of crony capitalism, i.e. financial Elites’ ownership of the government’s regulatory and legislative bodies.

Here is another less pungent description via Wikipedia: “Financial leverage overrides capital (equity) and financial markets dominate traditional industrial economy and agricultural economics.”

Here is my more formal definition:

Financialization is the mass commodification of debt and debt-based financial instruments collaterized by previously low-risk assets, a pyramiding of risk and speculative gains that is only possible in a massive expansion of low-cost credit and leverage.

Another way to describe the same dynamics is: financialization results when leverage and information asymmetry replace innovation and productive investment as the source of wealth creation.

I describe the dynamics in What’s the Primary Cause of Wealth Inequality? Financialization (March 24, 2014)

Correspondent W.S. submitted commentary and references this 2005 book Financialization and the World Economy:

In the US “total credit market debt divided by GDP was about 1.5 from 1961 to 1981. It accelerated rapidly in the decade of the 1980s – from 1.6 in 1981 to 2.3 in 1989 – as the federal budget deficit soared, hostile takeovers and leveraged buyouts loaded corporations with debt, and household borrowing increased. Corporate and household borrowing raised indebtedness further in the 1990s; by 2001 the debt to GDP ratio was 2.8, almost double the ratio in the Golden Age. Moreover, average real interest rates have been much higher in the neoliberal era than they were in the three decades that preceeded it.

W.S. Also referenced FINANCIALIZATION OF THE ECONOMY and added this commentary:

While “bloated” conglomerates were linked by some to the sluggish performance of the American economy in the 1970s, for corporate raiders they presented a get rich quick opportunity via the “market for corporate control” (Manne 1965). Outsiders could buy the firm from its existing shareholders, fire its managers, and sell off the parts for a quick profit.

After the election of Ronald Reagan in 1980, this became possible on a grand scale due to relaxed antitrust guidelines, changes in state antitakeover laws, and financial innovations that enabled raiders to get relatively short-term financing on a large scale (Davis & Stout 1992). Within a decade, nearly one-third of the Fortune 500 largest industrial firms had been acquired or merged, often resulting in spinoffs of unrelated parts, and by 1990 American corporations were far less diversified than they had been a decade before (Davis et al 1994).

The other thing that happened in the mid-1980s was computer technology became cheap enough and powerful enough to start replacing human labor on a wider scale. Spreadsheets such as Excel became accessible to small business, and the desktop publishing combo of the Apple Macintosh and laserprinters revolutionized the cost structure of marketing.

The rise of the Internet (coupled with cheap memory and processing power) further fueled the productive expansion of digital technologies. As I describe in my book Get a Job, Build a Real Career and Defy a Bewildering Economy, these tools– which are now ubiquitous and inexpensive–enable one person today to equal the output of what once took four people to produce in the late 1980s.

In effect, labor entered an era of dynamic over-supply just as healthcare costs began to rise, making it more costly to hire workers. Some skills and trades remain scarce and thus well-paid, but as a generalization it became cheaper and more efficient to replace increasingly expensive human labor with increasingly inexpensive and powerful software and digital tools.

Unless we change the fundamental structure of the economy so that actually producing goods and services and maximizing opportunities for people is more profitable than playing financial games with phantom assets, the end-game of financialization is financial collapse.

Recent podcasts/video programs:

Deep State Fractures Under Populist Revolution (TruNews, 37:27)

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U.s. Mint American Eagle Silver Coin Sales in March rise 32.9 Pct to 1.62 Mln Oz

U.S. MINT AMERICAN EAGLE SILVER COIN SALES IN MARCH RISE 32.9 PCT TO 1.62 MLN OZThe material has been provided by InstaForex Company – www.instaforex.com

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