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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[$$] Stock Surge in First Quarter of 2017 Rides the Tech Wave

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Venezuela’s National Assembly Snubs Maduro, Rips Oil Control Resolution

Julio Borges, the head of Venezuela’s National Assembly, ripped up a resolution on Thursday that would have allowed President Nicolas Maduro to approve oil ventures without congressional oversight. The resolution had been designed to increase foreign investment in the country’s struggling oil industry. The last 2.5 years of low oil prices have slashed government revenues, causing mass shortages of day-to-day products and medical supplies, all of which were imported using energy profits in the past. Now even gasoline is running low in…

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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”?“). 

The problem is that the pending doom surrounding these massive public pension obligations often get clouded over by complicated actuarial math with a plan’s funded status heavily influenced by discount rates applied to future liability streams. 

Take Chicago’s largest pension fund, the Municipal Employees Annuity and Benefit Fund of Chicago (MEABF), as an example.  Most people focus on a funds ‘net funded status’, which for the MEABF is a paltry 20.3%.  But the problem with focusing on ‘funded status’ is that it can be easily manipulated by pension administrators who get to simply pick the rate at which they discount future liabilities out of thin air.

 

So, rather than lend any credence to some made up pension math, we prefer to focus on actual pension cash flows which can’t be manipulated quite so easily. 

And a quick look at MEABF’s cash flows quickly reveals the ponzi-ish nature of the fund.  In both 2015 and 2014, the fund didn’t even come close to generating enough cash flow from investment returns and contributions to cover it’s $800mm in annual benefit payments…which basically means they’re slowing liquidating assets to pay out liabilities.

 

Of course, like all ponzi schemes, liquidating assets to pay current claims can only go on for so long before you simply run out of assets. 

So we decided to take a look at when Chicago’s largest pension fund would likely run out of money.

On the expense side, annual benefit payments are currently just over $800 million and are growing at a fairly consistent pace due to an increasing number of retirees and inflation adjustments guaranteed to workers.  Assuming payouts continue to grow at the same pace observed over the past 15 years, the fund will be making annual cash payments to retirees of around $1.3 billion by 2023.

 

Investment returns, on the other hand, are much more volatile but have averaged 5.5% over the past 15 years.  That said, the fund took big hits in 2002 (-9.3%) and 2008 (-27.1%) following the dotcom and housing bubble crashes. 

But, just to keep it simple, lets assume that today’s market is not a massive fed-induced bubble and that the MEABF is able to produce consistent 5.5% (their 15-year average) returns every year in perpetuity.  Even then, the fund will only generate roughly $500mm per year in income compared to benefit payments growing to $1.3 billion…see the problem?

 

Which, of course, means that the fund has likely just entered a period of perpetual cash outflows which will not stop until either (i) the city decides to cut back retiree payments or (ii) the fund runs out of money.

 

And, putting it all together, even if Chicago’s largest pension generates consistent positive returns for the foreseeable future, it will literally run out of cash in roughly 6 years.

 

And while we hate to be pessimistic, lets just take a look at what happens if, by some small chance, today’s market gets exposed as a massive bubble and we have another big correction in 2018.

Such a correction would force the fund to liquidate over $1.5 billion in assets in 2018 alone….

 

….and the system would run out of cash completely within 4 years.

 

The risk associated with America’s pension ponzi schemes have largely been overlooked by investors to date because so long as they can meet annual benefit payments then plan administrators can just continue to ‘kick the can down the road’ and pretend that nothing is wrong.   

Of course, that strategy ceases to work when the pensions actually run out of cash…which could happen sooner than you think…and when it does, America’s retirees will suddenly find themselves about $5 trillion poorer than they thought they were.

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DGAP-Ad hoc: Marenave Schiffahrts AG

DGAP-Adhoc: Marenave Schiffahrts AG: Abschluss der maßgeblichen Verträge für eine Enthaftung der Marenave

DGAP-Ad-hoc: Marenave Schiffahrts AG / Schlagwort(e): …

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DGAP-Ad hoc: Marenave Schiffahrts AG

DGAP-Adhoc: Marenave Schiffahrts AG: Conclusion of definitive agreements for the release of Marenave from liability

DGAP-Ad-hoc: Marenave Schiffahrts AG / Key …

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DGAP-Adhoc: Zapf Creation AG: Öffentliches Übernahmeangebot an die Aktionäre der Zapf Creation AG

Zapf Creation AG: Öffentliches Übernahmeangebot an die Aktionäre der Zapf Creation AG^DGAP-Ad-hoc: Zapf Creation AG / Schlagwort(e): Fusionen & ÜbernahmenZapf Creation AG: Öffentliches Übernahmeangebot an die Aktionäre der ZapfCreation …

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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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DGAP-Ad hoc: Zapf Creation AG

DGAP-Adhoc: Zapf Creation AG: Öffentliches Übernahmeangebot an die Aktionäre der Zapf Creation AG

DGAP-Ad-hoc: Zapf Creation AG / Schlagwort(e): Fusionen Übernahmen

Zapf …

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