Wednesday, September 5, 2012 - Just Waiting and Being Productive

Just Waiting and Being Productive

-by Sinclair Noe

DOW + 11 = 13,047
SPX – 1 = 1403
NAS – 5 = 3069
10 YR YLD +.01 = 1.59%
OIL +.44 = 97.72
GOLD – 2.80 = 1694.40
SILV - .09 = 32.37
PLAT + 2.00 = 1577.00

We wait for the ECB and as we wait we try to remain productive.  Three months ago, George Soros said the powers that be in the euro-zone, which is another way of saying Germany, could still correct their mistakes and reverse the trend and make things right, and they had a three month window to get their act together. Soros delivered the speech on June 2^nd.

The European Central Bank meets tomorrow and there is a rumor floating around that that ECB President Mario Draghi is ready to announce a plan to buy unlimited sovereign debt of countries that formally request assistance and agree to be bound to fiscal compliance.  So far, it is just a rumor but we have seen Italian and Spanish bond yields have dropped sharply. The German Constitutional Court is ruling on whether the ESM is constitutional, and German manufacturing is contracting; so the timing presents some challenges. The German Finance Minister today said people should lower their expectations. I don’t know what that means. Maybe Draghi has managed to cobble a deal to allow unlimited bond purchases; we won’t know until Thursday night, Friday morning; if a deal is in place it is a big deal. If a deal is not announced, it won’t be a case of  diminished expectations, it will be nasty.

The Euro-crisis has seen the private sector losing big and making big transfers of capitals to try to protect what they have left; money is bleeding out of the periphery countries and that results in a loss of demand, and business slows and that destroys the ability to support new borrowing.  The government then goes into deficit to offset the decline in private credit creation and the downturn in business activity.  As GDP declines, the fiscal response has been to shrink the economy which just makes debt servicing more and more impossible, absent massive write-downs or massive expansion of the ECB’s balance sheet.

Here’s an example; it will require some imagination on a sultry summer day, but imagine it is the dead of winter and you are in a cabin on a snowy mountainside. You have no heat but you have a fireplace  and some matches but you have no firewood; so you burn the chair; then you burn the table; then another table; then the cabinets. And finally, you are in an empty shell of a building and the only thing left to burn is the door. If the fire goes out, you will freeze. If you burn the door, there will be no protection from the cold and you will freeze.

This is the problem with the European periphery countries. As austerity has been imposed, the economies have destabilized, and have only served to dry up demand and slow business and drive capital out of the periphery countries, and the result has been a downward spiral.

Basic choices about the structure of the currency union have yet to be made, as advocates for centralized control over bank regulation and government tax and spending policies clash with skeptics who fear the loss of sovereignty in the euro zone’s 17 member nations. Major resources, including those of the European Central Bank, remain at least partially sidelined as officials continue to debate the guidelines for using that money to help rescue flagging governments.

 There may be no good solution. But Draghi has promised to do whatever is needed, which sounds a bit more ominous than promising. Still, we should expect something out of the ECB meetings.

After all, it’s been three months.

If the ECB disappoints, then the Federal Reserve is standing by, and judging from the most recent minutes of the last FOMC meeting and the speech from Fed head Bernanke at Jackson Hole last Friday, it seems the Fed is ready to provide an accommodative monetary policy.  Here’s the part of Bernanke’s speech that got everybody convinced the Fed is going to take action:

“As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”

The Fed doesn’t use language like “grave concern” without being ready to address the grave concern; still, it’s not a done deal till the fat lady sings.

The biggest political news this week will be Friday’s jobs report.  If the economy added a whole bunch of jobs and the unemployment rate drops, the Fed might postpone quantitative easing and that would disappoint the traders. It’s a strange world full of pretzel logic.

VP nominee Paul Ryan is saying that Obama's record is like Jimmy Carter's record. When it comes to employment we should hope so. During Carter's four years in office payroll employment expanded some 10 million, or 12.5%.  or at an average annual rate of 3.1%   This is the second best employment record of any post WW II Presidential administration.  It is almost a full percentage point stronger than Reagan's average gain of 2.2%.

I would think the better comparison would be against Bush where over eight years payroll employment only expanded some 308,000.  Interestingly, in three and a half years under Obama payroll employment has expanded more than it did over eight years under Bush.  In modern times every Democratic presidential administration left office with a lower unemployment rate than when they took office.  But only one Republican Administration has managed this accomplishment.

The Treasury Department has a Bureau of Public Debt; these are the folks that watch as the government debt topped $16 trillion over the past few days. The Bureau of Public Debt would like for you to suggest ways to reduce the debt. You can email your suggestions to debt.management@treasury.gov. 

Over the years, they’ve received a lot of ideas; some people even send money; last year they  took in more than $7 million in gifts to help pay down the debt. Last summer a sheet metal worker donated some money with this note saying: “We just got a contract raise, which doesn’t make any sense with the current state of the economy.  I can’t speak for anyone else, but I would’ve been willing to have part of that money directed to keep the country from going under.”

Someone else offered this email suggestion: “In one action, we could bring some equality to our social system and at the same time wipe out our national debt. How to do this? Just simple, confiscate the wealth of the top one percent of the wealthiest people in the country.”  A retired military officer recommended a “comprehensive communications strategy” to educate citizens on “U.S. Treasury bills, notes and especially bonds.” Perhaps the most drastic suggestion was that the government should only pass laws that are fully paid for. 

The Labor Department reported this morning that the productivity of US workers rebounded more than initially estimated in the second quarter as employers tried to protect profits. The measure of employee output per hour climbed at a 2.2 percent annual rate, after a 0.5 percent drop in the prior three months. Companies did a good job on productivity during the crisis, and they will continue to try to increase productivity to boost profits, but it’s not so easy to do that from here. The biggest gains in productivity during the current expansion have probably already occurred as companies find they need to boost staff to further increase output and as investment in new equipment cools. At the same time, a weakening global economy is already hurting earnings, indicating businesses will continue to look for ways to operate more efficiently. The potential for increasing profits by cutting costs has come down quite a bit.