Friday, May 31, 2013 - Economic Wallbanger

Economic Wallbanger

by Sinclair Noe

DOW – 208 = 15,115
SPX – 23 = 1630
NAS – 35 = 3455
10 YR YLD + .04 = 2.16%
OIL – 1.98 = 91.63

GOLD – 25.40 = 1389.30
SILV - .51 = 22.37

We finish the month of May with the Dow Industrials up 1.9% on the month; the S&P 500 posted a monthly gain of 2.1%, and the Nasdaq Composite added 3.8% for the month. With this week's declines, the MACD indicator for the Sell in May strategy, finally turned negative, just in case you had been waiting. The S&P 500 marked seventh monthly advance, its longest monthly winning streak since one ending in September 2009. The Dow industrials recorded their sixth straight monthly gain.

Treasury prices dropped again today to finish their worst monthly performance since December 2010; the yield on the 10-year note climbed 46 basis points on the month. At one point during today's trading, the yield topped 2.20%.

Next week, we'll see how the labor market is behaving. Today we found out that the unemployment rate for the 17 nation Eurozone has increased to 12.2%, the highest level since data has been compiled starting in 1995. Consumer price inflation was far below the ECB’s target of just below 2%, coming in at 1.4% in May, slightly above April’s 1.2% rate.

Price increases may quiet concerns about deflation, but the deepening unemployment crisis is a threat to the social fabric of the eurozone, with almost two-thirds of young Greeks unable to find work exemplifying southern Europe’s threat of creating a ‘lost generation’. In France, Europe’s second largest economy, the number of jobless rose to a record in April, while in Italy, the unemployment rate hit its highest level in at least 36 years, with 40% of young people out of work. Youth unemployment across the Eurozone came in at 24.4%, double the wider jobless rate and up from 24.3% in March.

In the past, the eurozone has needed economic growth of around 1.5% to create new jobs. With the Organisation for Economic Cooperation and Development forecasting this week that the eurozone economy would contract by 0.6% this year, unemployment is set to worsen long before it turns around.

The next formal meeting of the ECB is June 6. EU leaders are scheduled to meet in Brussels at the end of June. Rate cuts and quantitative easing might be on the agenda, but it will take much more than that. The main problem for the Eurozone economy is no longer market driven factors, but the possibility of social breakdown.

Several thousand protesters blocked the ECB offices in Frankurt today. The subway workers were on strike in Lisbon yesterday. Portuguese teachers are scheduled to strike next month. It is a similar story across large parts of the eurozone. There have been mass protests in Madrid, Dublin and Athens against policies designed to reduce budget deficits and bring about economic reform.

The European commission has told six countries – France, Spain, Portugal, Poland, the Netherlands and Slovenia – that they will have up to two extra years to put their public finances in order. In truth Brussels had little choice, because weak growth had reduced tax revenues and made it impossible for exacting budget targets to be met. The continued depression in parts of the Eurozone means that people think austerity on its own is a doomed strategy. And so the IMF, spurred on by an Obama regime deeply troubled by the depression in the Eurozone, has been advising member governments to ease up. Politically, austerity is no longer feasible. Of course, that doesn't mean that the Eurozone governments have adopted pro-growth policies; they haven't moved from a pro-cyclical fiscal stance to a neutral one, let alone a counter-cyclical position. There are still big differences between the French, Spanish, and Italians on one side and the Germans and a few other countries on the other side. For now it's a standoff, and not much is getting done. Eurozone austerity isn't dead, they just pressed the pause button.

Deficit reduction efforts in the rest of the world seem to clearly show that austerity efforts have been unsuccessful nearly always and everywhere in that their costs in economic damage have been far greater than any gains that have been made by nations purposefully pursuing these efforts. In the Eurozone, deficit reduction efforts have actually made debt problems worse than they were before austerity cuts were made, because their negative effects on national economies and employment have also reduced tax revenues by more than the savings achieved from cutting government programs.

Austerity in the US is far from dead. In the US, our cuts have been shallow but wide; meaning the cuts have been scheduled to be spread out over several years. Which means the economy has been improving, but not enough to reach solid, sustainable growth. Sometimes the absence of pain feels like pleasure. Today's economic reports are the case in point.

The final May reading of the University of Michigan and Thomson Reuters consumer-sentiment index jumped to 84.5 — the highest level since July 2007 — from 76.4 in April. That puts consumer-sentiment back to the level of 2007.

Meanwhile, the Commerce Department reports consumer spending fell 0.2% in April. Income growth was flat in April. Adjusted for inflation, disposable income declined by 0.1% last month. Disposable income is the money left after people pay taxes. Soft consumer spending in April points to a weaker reading on second quarter gross domestic product, barring a sharp uptick in May and June. GDP is expected to slow to 1.9% from 2.4% in the first quarter.

The personal savings rate has dropped to 2.5%, which means consumers have very little room to increase spending unless they get more income, or more wealth, or more debt. Most consumers don't want more debt or find it difficult to get more debt. The fiscal policy out of Washington has been pushing down income, as we're just starting to see the effects of sequester cuts. The Federal Reserve is finding there are limits to the possible benefits of the wealth effect to stimulate the economy.

And when we have semi-decent economic reports, like today, it just worries the market that the Fed will take away the stimulus and cut the $85 billion per month in bond purchases. If the absence of pain starts to feel too pleasurable, just bang your head against the wall for a while.

And now, the latest on Monsanto. Last month an Oregon farmer sprayed one of his fields with Roundup weed killer, only to find that several wheat plants survived. He had the wheat tested, and the Department of Agriculture determined that the plants were an unapproved genetically modified strain made by the biotech giant Monsanto. So-called “Roundup Ready” modifications allow farmers to apply much higher levels of pesticides without harming crops, and are common in soy and corn; the thinking is that those plants are used more for animal feed; of course, humans then feed on the animals, but don't let that stop you. Wheat is ingested directly, and most people aren't ready to go there. No GM wheat is currently approved for sale or production in the US, or anywhere else in the world.

The wheat is probably not harmful to humans—although since testing was never completed, we can’t be sure.  Nevertheless, most of Asia (not to mention Europe and a certain portion of the United States) is firmly opposed to GM crops made for human consumption. Where did the wheat come from? Well, in the 1990s Monsanto conducted field tests of wheat in 16 states. Monsanto dropped the wheat project. It never asked for government approval, and it ended its field trials of wheat in 2005. The last field test in Oregon stopped in 2001. The reality of GM testing a product in open fields is that it’s quite easy for cross-contamination. It’s like the dinosaurs in “Jurassic Park”—no matter how well-designed the safeguards, life always finds a way to jump the fence.

Japan has canceled its imports of some types of US wheat. Japan imports around five million tons of wheat a year, 60 percent of which is from the US, making it one of the largest importers of the crop. It does not allow GM wheat. Imports make up 90 percent of the wheat the country consumes.

China, South Korea and the Philippines have all said that they are monitoring the ongoing US investigation, and the European Union said it was stepping up testing. The US supplies about 20% of the global supplies of wheat.

Extra Notes: 

The financial crisis destroyed some $16 trillion in household wealth. Americans have only recovered 45 percent of that amount, according to the Fed report. But when you break down that wealth recovery by income level, it gets worse. The Fed estimates that 62 percent of that wealth people have regained since the depths of the recession has come in the form of higher stock prices. And 80 percent of stock wealth is held by people in the top 10 percent of the income distribution. "Recent gains in the stock market mean that the recovery of wealth is nearly complete for white and Asian households and older Americans,"

But many families have not experienced any recovery at all, and some are still losing wealth, William Emmons, chief economist for at the St. Louis Fed’s Center for Household Financial Stability, told the Post. "The families that lost homes are not the families making money off stocks," Mui notes. Though the number of foreclosures has dropped off a lot, it is still more than double what it was pre-crisis.

The report found that the most vulnerable households tended to be either relatively young and/or black or Hispanic, and not well-educated. Those families had low savings and high debt and had gained most of their wealth through their homes.

It gets worse. Because the housing market is improving overall, there is less of an incentive for the government to push any new measures to help underwater homeowners. Prominent economists say that allowing initiatives that would reduce borrowers' loan principle balances is the single most important thing the administration could do to help the Americans who lost all that home wealth. But for more than a year, the head of the Federal Housing Finance Agency (FHFA), which oversees the government-backed home-loan giants Fannie Mae and Freddie Mac, blocked initiatives that would have done just that. President Barack Obama has nominated a new FHFA director, but as a report released Friday by the Progressive Policy Institute notes, it might be too late: "US housing markets have come roaring back to life, and while that's great news, it has probably closed the window for principal reduction."

The wealthiest 1 percent now control 39 percent of the world's wealth, and their share is likely to grow in the coming years, according to a new report.

The world's total private wealth grew 7.8 percent last year to $135 trillion, according to the Boston Consulting Group's Global Wealth report. The top 1 percent control $52.8 trillion, and those worth $5 million or more control nearly a quarter of the world's wealth.

That concentration is likely to increase in the coming years as the wealth of the wealthy grows faster than overall global wealth. The number of millionaires in the world surged by 10 percent year, reaching 13.8 million. The study predicts that global wealth will grow around 4.8 percent a year over the next five years-though millionaires will see their wealth grow nearly twice as fast.

Those worth $5 million or more will see their wealth grow 8 percent, while those worth more than $100 million will see their wealth grow 9.2 percent. The $100-million-plus group will see their share of global wealth grow to 6.8 percent in 2017 from the current 5.5 percent.

What's driving the wealth of the wealthy? It depends on the country. In the developed world-the U.S. and Europe- it's mainly stocks. And stocks have been on a tear this year in the U.S., which has mainly benefited the top 5 percent, who own 60 percent of all individually held stocks.

In developing markets, the main wealth creator is economic growth and savings. Yet the amount of wealth held in stocks and in offshore wealth (again mainly held by the wealthy) in developing countries is also growing. The amount of wealth held in equities in Asia (excluding Japan) surged by 21.9 percent in 2012.