Tuesday, January 15, 2013 - It's Better Than Nothing

It's Better Than Nothing

by Sinclair Noe

DOW + 27 = 13,534
SPX + 1 = 1472
NAS – 6 = 3110
10 YR YLD - .03 = 1.83%
OIL - .71 = 93.43
GOLD + 12.10 = 1680.90
SILV + .29 = 31.47

Let's start with some economic reports. Consumer spending rose 0.5% in December and sales for October and November were revised slightly higher. It was a pretty good holiday shopping season, but the pace of spending in 2012 failed to equal the gain in the previous year. Retail spending rose an unadjusted 5.2%, down from 7.9% in 2011. And the pace of spending might slow as workers adjust to lower take-home pay as a result of a 2% hike in the payroll tax.

We already know that the expiration of the payroll tax cuts was an especially damaging outcome of the fiscal cliff negotiations. It will total approximately $125bn less in wage-earners’ pockets, and is showing up immediately in reduced paychecks. Average weekly earnings of all employees on private nonfarm payrolls: $818.69 in December. The 2% payroll tax increase clips $16.37 a week from take-home pay. And if weekly earnings held steady in January, at the December level, workers would feel like they earned $802.32 instead. That’s the equivalent of losing all the 2012 gain in weekly earnings in one month.” As a percentage of income it hits the middle class hardest because it applies only to the first roughly $113,000 in wages, effectively a regressive measure that takes money from the people most likely to spend it.

Meanwhile, producer prices, or prices at the wholesale level fell 0.2% on a seasonally adjusted basis. Core producer prices, which exclude the volatile categories of food and energy, rose 0.1% last month, led by cigarettes. So, if you smoke, quit. Food prices at the wholesale level fell 0.9% in December after a 1.3% gain in the prior month that was due, in part, to a severe drought. December’s decline in producer prices for food is the first decrease since May. Meanwhile, energy prices fell 0.3% in December, led lower by gasoline. For all of 2012, wholesale prices increased 1.3%, the smallest growth in a calendar year since 2008. Tomorrow, we'll find out how that equates to prices at the consumer or retail level.

The Census Bureau reports more working families are slipping into poverty; 200,000 more working families, or the working poor, fell into poverty in 2011 compared to 2010. Although many people are returning to work, they are often taking jobs with lower wages and less job security. This means that nearly a third of all working families may not have enough money to meet basic needs. Now, you'll recall that the recession officially ended in the second half of 2009. Maybe we need a better way to measure recessions because the reality that we weren't in a recession, we have been in a small “d” depression, and we haven't really pulled out of it. For many Americans, there hasn't been a real recovery. And for people who have experienced the recovery, it has been concentrated; the top 20 percent received 48 percent of all income while those in the bottom 20 percent got less than 5 percent.

States in the South, such as Georgia and South Carolina, and those in the West, such as Arizona and Nevada, had the greatest increase in the number of working poor. The increase was slower in the Mid-Atlantic and Northeast. In 2011, roughly 23.5 million, or 37 percent, of U.S. children lived in working poor families compared with about 21 million, or 33 percent, in 2007. About 10.4 million such families - or 47.5 million Americans - now live near poverty, defined as earning less than 200 percent of the official poverty rate, which is $22,811 for a family of four. Again, these are working families; people who have jobs but for many families, working hard just isn't enough. They are cashiers and clerks, nursing assistants and lab technicians, truck drivers and waiters. Either they are unable to find good, full-time jobs, or their incomes are inadequate and their prospects for advancement are poor. In many cases, low-wage workers are involuntarily working part-time – often in multiple, temporary jobs. If it remains unaddressed, the trend is likely to continue, pushing more families into economic uncertainty, fueling greater income inequality and dampening national economic growth.

Work is better than not working, a fact that has hit home hard for many veterans. The unemployment rate for veterans of the recent wars has remained stubbornly above that for nonveterans, though it has been falling steadily, dropping to just below 10 percent for all of 2012. That was down from 12.1 percent the year before. The year-end unemployment rate for nonveterans was 7.9 percent in 2012. Today, some good news from Wal-Mart. They will hire veterans, any veteran who wants a job, provided the veterans have left the military in the previous year and did not receive a dishonorable discharge. This represents the largest hiring commitment for veterans in history.

About 100,000 of Wal-Mart’s 1.4 million employees in the United States are veterans. It's pretty simple, Wal-Mart realizes that hiring veterans is a smart move. Veterans are leaders with discipline, training, a dedication to service, a sense of hierarchy, and a willingness to make a commitment to the organization they are in.

Now, it might surprise you to learn that Wal-Mart is taking some flack for this announcement. After all, most of these jobs will not be high paying and Wal-Mart is not known for a great benefits package; some of these veterans will end up among the working poor. Still, a job at Wal-Mart is better than no job; maybe they would like to extend the job offers to veterans who didn't leave the military within the past year. What about the longer-term unemployed vets? Wal-Mart is far from perfect but today I think Wal-Mart should be commended. That doesn't mean we should skip over the concerns, especially while there's a debate raging in Washington about spending. How about making sure the GI Bill is used to educate our veterans and prepare them for better jobs and a better way of life? Since when is the motto of America "it's better than nothing?"

The debt ceiling debate rages, despite the fact that it is an artificial construct. Republicans see the debt-ceiling vote as a way to extract some spending cuts out of Obama. Yesterday, Obama said he would not play that game. Assisting Obama was Fed Chairman Ben Bernanke, who compared refusal to raise the debt ceiling to a family refusing to pay its credit card bill. Bernanke warned: “Default would increase our borrowing costs and damage economic growth and therefore add to future budget deficits, not decrease them.” Republicans probably won't listen to Obama or Bernanke or Tim Geithner, for that matter; yes, Geithner issued his own debt ceiling warning. They might listen to corporate leaders who are growing weary of the political contention following the fiscal cliff fight. The Chamber of Commerce is warning Republicans not to push their luck with the debt ceiling.

Bernanke's analogy of a family not paying its credit card bill might not be the best comparison. Americans have been defaulting at record rates. During the last five years, U.S. individuals have walked away from a staggering $585 billion in mortgages, credit card debts and other personal loans. That works out at about $6,000 per household.

And if the numbers are to be believed, there is probably a lot more to come.

Turn on any news program devoted to the economy and you will doubtless hear some Wall Street blowhard telling you that American households have been “repairing their balance sheets” and paying down their debts. They make it sound so virtuous, and they often then segue into sneering remarks about those degenerate Greeks and other Europeans who don’t behave in the same responsible way.

The truth is very different. According to the Federal Reserve, U.S. household debts peaked five years ago at a gigantic $13.8 trillion. Since then it has declined to $12.9 trillion – a decline of about 7%. To put that in context, household debts today still exceed those seen at the end of 2006, near the peak of the bubble. They are three times what they were in 1998. The total debt reduction from the peak, says the Fed, is $954 billion. Loan write-offs, at $585 billion, account for 60% of that. In other words,  in the last five years Americans have walked away from $3 in debt for every $2 they’ve paid off.In the first quarter of 2010 alone about 13% of all credit card debt was just written off. Households weren’t alone. Corporations have defaulted on $35 billion to $40 billion in debt per year in recent years. It seems individuals have learned a valuable lesson from corporations.

The number of American homeowners who are underwater fell from 12 million to just 7 million; and by underwater, we don't mean Hurricane Sandy underwater, rather they owe more than their house is worth; and when we say just 7 million – well, yes, that is still an absurd number. And that number could fall to just 4 million in a couple of years. According to an analyst with Blackstone: "The housing market is rebounding faster than anyone thought possible," then again, Blackstone would say that: It is aggressively buying single-family houses to try and profit on a housing rebound.

Meanwhile, Facebook CEO Mark Zuckerberg announce something today; the company's first major product launch since it's IPO last Spring. It's a graph search; which basically would allow Facebook users to tailor their searches, such as by specifying music and restaurants that their friends like, or their favorite dentist. The reverse is also possible, such as discovering friends who have an interest in a particular topic. As always, there are privacy concerns. The world's largest online social network, with more than one billion users, Facebook is moving to regain Wall Street's confidence in the wake of a rocky IPO and concerns about its long-term money-making prospects. Central to its efforts is devising new ways to make money from users who are migrating to mobile devices. Unfortunately, they haven't figured out how the graph search will raise revenue.