Friday, September 11, 2015

High Tech "State of the Union", Mid 2015 Assessment - Part 3: What the Hell is Going On?

Claude-Joseph Vernet, "A Storm With a Shipwreck", 1754 (source:

Wise men ne'er sit and wail their loss,
But cheerly seek how to redress their harms. - Shakespeare, "Henry VI, Part 3"


Dear readers,

You've read the two previous installments of this editorial and can see with your own eyes the revenue trends of the 17 leading systems, chip and software houses in the technology industry. There's no point in beating around the bush - we are heading into an economic decline, both in general terms as well as within the High Technology market. Some supporting indicators:

1. The SIA/WSTS, ever the optimist, reported shrinking semiconductor growth thru most of the first half of the year and just announced year to year revenue declines of 2% in June and 4% in July.
2. DRAM prices continue to drop, as they have for much of the year. This is in stark contrast to price growth in the last two years.
3. Merger mania continues in semiconductors, with Pericom acquired in a $400M deal by Diodes Inc. Further M&A announcements are expected for the rest of the year by the likes of Qualcomm and Mediatek. Tsinghua Group's $23B bid for Micron, though at this point unlikely to be consummated, is almost certainly an indicator of Beijing's willingness to begin spending the $20B fund it set aside last October to develop a native semiconductor sector and greatly reduce (if not eliminate) China's dependence on chip imports.
4. Chinese premier Li Keqiang proclaimed in a press conference yesterday that China would not have a 'hard landing' this year with their deflating economy. I suspect most of you as you read this are hearing the same thing I am - echoes of the orchestra playing its last tune on the deck of the Titanic.

Various headlines only serve to reinforce the reality that, in our voyage to a safe harbor in the Gulf of Corinth, the global economy has been driven onto a reef by a sea storm that has been gathering for some time now:

The last link is quite revealing. Gartner, who started the year forecasting 3.4% growth and, under pressure, bumped it up quickly to 4.9%, has now lowered its forecast a second time to 2.2%. What this means is that the likely trajectory of chip sales will be downward thru the rest of the year. The industry broadly reinforced this, as most Technology companies - including ones that showed rather comforting growth last quarter such as the Carolingians - are providing negative outlooks for Q3 and beyond.

Well, we've at least made it to shore. Time for us to break out our broad brimmed hats and walking sticks and get on the well worn trail to the slopes of Mount Parnassus and Delphi.

Thomas Cole, "Mount Etna from Taormina", 1844 (source:

Cloud and Wind Signs

Forecasting by bureaucrats tends to be used for anxiety relief rather than for adequate policy making. - Nassim Taleb

Many of the indications that we were headed for a spell of rough weather this year were outlined in the Q1 2015 VF forecast. You can find the in-depth analysis here:

What we are experiencing now - extraordinary volatility in global equity markets, fears of a China meltdown, continually weakening consumer spending and widespread deflation in commodity prices - is no surprise to anyone who has been reading the blog regularly over the last 18 months. 

The proverbial chickens have come home to roost, folks. A combination of stupendously idiotic and rigidly doctrinaire policy wonks along with cynically self-serving rats in Washington DC and Wall Street have led us inexorably (and predictably) to this point. Following up the 2008 financial crisis triggered by the accumulation of too much cheap, low credit rating debt in both the private and public sectors worldwide with - amazingly - piling on even more debt that cannot hope to be paid off (with the additional sovereign debt and 'restructuring bailouts' of the PIIGS, China's provincial public sector financing leviathan and new subprime bubbles in America for autos and student loan debt added to the heap) has simply amounted to a wealth transfer from the consumer and the private sector to High Finance and a small number of weaselly chrony capitalists, happily facilitated by their Washington clients.

A good example of the confidence sting that has been perpetrated over the last 7 years is the statistical reporting of unemployment in the USA. Have a look at this, folks - all data from the BLS (Bureau of Labor Statistics:)

Let's analyze these numbers and see what they tell us.
The increase in workforce size (16.5M) minus the number of new people in the workforce (3M) leaves about 13.5M people who have entered the workforce in the past 6 1/2 years but have apparently not found a job. What this means is that the number of unemployed people is likely not 13.3M, but may actually be double that. Working thru the math, a maximum unemployment number from these figures (taking them at face value) would be....17%.

Now, some of you are undoubtedly thinking "Come on, baldie! You're even dumber than you look! All the baby boomers are retiring, so the actual unemployment numbers are lots better than Chicken Little types like you are saying!"

However, the BLS numbers suggest otherwise. According to their data, 13% of the total population (39.5M) was 65 or older in 2009. That increased to 15% (roughly 48M) by July 2015. This is an increase of 8.5M people old enough to retire.

There is plenty of anecdotal evidence that a considerable number of potential retirees are foregoing retirement and remaining in the workforce due to anxiety about the sanctity of their pensions in the current economic climate. But for simplicity's sake, let's assume that ALL of those 8.5M people have permanently left the workforce (and considering that not all of them were in the workforce to begin with, such a number is assuredly a gross overestimation.) This would provide an opportunity for the 13.5M new entrants in the labor pool to find work. It's a rather simple math exercise, however, to deduce that this leaves a minimum of 5M extra people still out of a job. Stated differently: in the VERY BEST CASE, the number of unemployed has remained static for the last 6 1/2 years.

I fail to comprehend how this constitutes a 'recovery.'

This data collection and analysis took me about 3 hours of work a couple of weeks ago. Someone at the BLS could have done it more quickly, I'm sure. Checking the validity of government numbers has nonetheless proven to be child's play. Since the leadership of the BLS is by political appointment, I'm sure it comes as no surprise to any of you that the credibility of numbers released for public consumption has been revealed by this basic analysis to be woefully wanting. In the end, it seems obvious that the folks in Washington DC either think lying is preferable to speaking the truth and facing facts squarely, or they believe that we are all contemptibly stupid.

Let's take a look at some of my old favorites - the Baltic Dry Index (BDI), which gauges shipping rates at the leading ports around the globe, and the Consumer Relations Board (CRB) index that is used to measure pricing for a basket of industrial, textile and agricultural commodities, unsullied by the 'seasonal adjustments' and other trickery that pollute the CPI.

First, the BDI:


The above chart starts January 1, 2007, capturing the historic 11,800 peak in mid-2008 as well as the financial crisis in the 2nd half of that year to today. There was a major worldwide retirement of older shipping capacity in 2013, led in particular by the Chinese merchant marine, which had a corresponding effect to the upside on pricing. 

Let me draw your attention to three things:
1. Each year, there are multiple spikes and troughs in shipping rates. Q1 spikes are from raw materials shipping to factories, midyear peaks from those components turning into finished goods and end Q3/early Q4 highs from shipping sending final products to retail shelves for the holiday season.

2. Earlier this year, the BDI reached an all time low of 509. Going into the holiday season, it is 818 today and shows no sign of ramping up. The next 4 weeks will be decisive.

3. I'm having a bit of difficulty spotting the 'recovery trend' from when the 'great recession' was proclaimed to have ended in early it just me? ;-)

Now, the CRB. First is the classic version, composed of burlap, butter, cocoa, copper scrap, corn, cotton, hides, hogs, lard, lead scrap, print cloth, rosin, rubber, soybean oil, steel scrap, steers (cattle), sugar, tallow, tin, Minneapolis wheat, Kansas City wheat, wool and zinc.


Below is the Reuters-Jefferies variant, going back to January 1, 2007. It is comprised of 19 items: aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, live cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas and wheat.


The indexes tell essentially the same story. Talk of recovery has been illusory and deceptive and the global economy is spiraling down once again.

Vapors and Revelations

Eugene Delacroix, "Lycurgus Consults the Pythia", fresco, 1843, Library Palais-Bourbon (source:

Legend tells of Apollo pursuing the dragon Python to its lair on the slopes of Parnassus, where he slew the beast, its body falling into a chasm. The temple built over the site is where we are now, after delivering our offering. The Pythia is seated on a three legged stool, gazing into a dish of clear spring water as the pneuma emanating from the rotting corpse of the dragon rises from the fractured ground beneath her, bringing about the trance that allows Apollo to speak thru his High Priestess.

We first ask Apollo, "What is going on?"

In response, the Pythia puts the dish down on her lap and opens a book written by Thucydides the Athenian. Flipping thru the text, she pauses and then reads aloud:

For the love of gain would reconcile the weaker to the dominion of the stronger, and the possession of capital enabled the more powerful to reduce the smaller cities to subjection.

Not waiting to fully absorb the complete intent and meaning of the answer, we push on to the next question: "What is going to happen to us?"

Eyes a-flutter, the Pythia responds with a far-away voice:

In practice we always base our preparations against an enemy on the assumption that his plans are good; indeed, it is right to rest our hopes not on a belief in his blunders, but on the soundness of our provisions. Nor ought we to believe that there is much difference between man and man, but to think that the superiority lies with him who is reared in the severest school.

Again, succumbing to impatience and anxiety, one of us blurts on behalf of the rest: "What should we plan on doing to best prepare the future?"

A little smile appears on the Pythia's visage as she says:

Abstinence from all injustice to other first-rate powers is a greater tower of strength than anything that can be gained by the sacrifice of permanent tranquillity for an apparent temporary advantage.

Finally, someone amongst us lacking the patience to carefully consider all the answers given bursts out with "Well, what are we supposed to do NOW?"

The priestess turns the pages one last time, then closes the book and places it on her lap. She lifts her head to gaze at the gathered supplicants and quietly, almost whispering, she breathes out her response:

There is, however, no advantage in reflections on the past further than may be of service to the present. For the future we must provide by maintaining what the present gives us and redoubling our efforts; it is hereditary to us to win virtue as the fruit of labour, and you must not change the habit, even though you should have a slight advantage in wealth and resources; for it is not right that what was won in want should be lost in plenty.

All the answers to your questions await you in the prophecy, dear readers. If you think you've figured it out, leave your interpretation in the comments section.


p.s. Bonus points for anyone who can guess why I posted the "Swan Lake" video....
p.p.s. If any of you suspect that on occasion I deliberately phrase statements in order to have an excuse to post a particularly interesting picture I've found, your suspicions are correct. ;-)