Tuesday, November 05, 2013 - Hey Guy, Remember the Fifth of November

Hey Guy, Remember the Fifth of November

by Sinclair Noe

DOW – 20 = 15618
SPX – 4 = 1762
NAS + 3 = 3939
10 YR YLD + .06 = 2.66%
OIL – 1.00 = 93.62
GOLD – 2.70 = 1312.90
SILV + .05 = 21.81

Today is election day in much of the country. In 1872, Susan B. Anthony was arrested for trying to vote. If you don't vote today, at least remember the people who tried to make sure you have the right to vote. Today is also Guy Fawkes Day. In 1605 Fawkes led the Gunpowder Plot, a plot to blow up the English Parliament. That didn't work and he was hanged. The plot is recognized with bonfires to this day, and those strange white masks with the smiling, mustachioed guy that have become popular with protesters from New York to Cairo. Also, the word “guy”, comes from Mr. Fawkes; nobody used the word before he came along. Hey guy, where you going with that mask on your face?

Stocks moved lower today but the Dow Industrials wiped out most of a 117 early morning decline; this followed two days of gains for the Dow and the S&P 500, while the Nasdaq stretched its winning streak to three sessions in a row.

Treasury prices pulled back for the fourth day of losses in the past 5 sessions. According to data released by CoreLogic Tuesday, home prices rose 0.2% in September as the annual pace hit 12%; that's the fastest annual pace since 2006. The Institute for Supply Management said its non-manufacturing survey rose to to a 55.4% reading last month from 54.4% in September, beating economist expectations of a 54% reading. A result over 50% indicates expansion. The strength of the ISM survey seems to indicate that the government shutdown might not have been a major hit to the economy, which in turn might mean that the Federal Reserve could be closer to tapering its bond buying program sooner rather than later.

There will be a couple of different research papers formally presented to the International Monetary Fund later this week and both papers are expected to suggest a dovish stance for the Fed; arguing for the Fed to lower the target for the jobless rate before consider changes to interest rate policy. Right now the Fed has a target of 6.5% unemployment and 2.5% inflation rate. The research from a half-dozen Fed economists maintains the the unemployment objective actually should be lowered to 6.0 percent or even 5.5 percent before it makes any moves. Models used in the reports show that the economy simply will perform better if the Fed holds off. But there also is a mix of market expectations and some unusual trends in the current labor situation that call for a less aggressive rate-hike schedule. Markets have grown accustomed to having the Fed firmly in place, so news of a delay in rate increases should be pleasant, but there is no guarantee the Fed will continue to provide easy money to the markets.

Remember the talk about how low energy prices would drive a renaissance in the US economy, manufacturing would return to America in a process called “re-shoring”. Well, we're still waiting for the shale revolution, and Goldman Sachs is writing about the not yet arrived revolution, saying: “There is little evidence of significant “induced” employment growth in downstream manufacturing industries. Similarly, cap-ex in energy intensive sectors that might be expected to benefit most from the shale boom has not outperformed cap-ex in other sectors during the recovery, although it did decline by less during the recession.”

This is not to say we haven't seen some activity. Oil and gas extraction has seen a pretty strong increase in employment but that's just a small part of the total labor force. The impact on GDP growth is estimated by Goldman Sachs to be 0.10 ppts in 2013.

It might be expected that the resulting decrease in natural gas prices will result in lower production prices, either through lower energy prices (GS sees little impact thus far) or lower feedstock prices. Certainly gas costs in the US are lower than overseas, although there is still a connection.

As Goldman Sachs notes:

“A core narrative in the US manufacturing renaissance theme is that low energy prices will directly support growth in downstream manufacturing industries. In past research we found scant evidence of a structural renaissance in US manufacturing in the incoming data―whether due to energy cost advantages, rising productivity, subdued labor costs, or other factors ... we now look at employment outcomes in downstream industries in particular.

“We define these downstream manufacturing industries relatively broadly, including the chemical, plastic and rubber products, and primary metal manufacturing industries.”

In addition, the share of manufacturing employment in total nonfarm payroll employment has stabilized, suggesting an arrest to the offshoring, but not a boom in re-shoring. Bottom line, the macroeconomic benefits of the shale revolution are positive but probably modest, at least for now. However, the reverse is not the case; in other words, if we took away the shale revolution and if gas prices jumped, that would likely be a catalyst for an economic downturn.

On Thursday, the European Central Bank is expected to keep rates on hold, but there are some expectations for a hint they will cut rates in the not-so-distant future. The European Commission has cut the economic growth forecast for 2014 and raised its joblessness predictions and they're blaming the US, and emerging markets. Ollie Rehn, the EU economic chief says:

“While growth in the U.S. is expected to accelerate over the forecast horizon, with the elevated level of public debt at 105% of GDP, navigating around the next fiscal cliff in February 2014 will require very decisive action by U.S. policymakers to avoid another train wreck that could damage growth both in the U.S. and global economy,” he said.

“Moreover, the eventual phasing-out of monetary stimulus, likely to start in the U.S. in line with the Fed’s revised forward guidance, will call for careful calibration and communication to avoid ramifications to growth,” he added.

Then he pointed the finger at emerging-market economies:

“Not only growth in emerging-market economies has slowed down, but also the growth models of some countries may have reached their limits,” the commissioner said.

“More broadly, the lack of will or ability to deliver reforms that are necessary to strengthen economic fundamentals is a major risk in some emerging-market economies.”

“Renewed capital-flow volatility, particularly related to the phasing-out of monetary stimulus, could aggravate uncertainly and weigh on growth in the world economy, and thus also on Europe.”

Meanwhile, checking in on Cyprus, the chairman of the Independent Commission on the Future of the Cyprus Banking Sector says Cyprus needs to start preparing to attract foreign lenders to the island, and t he government should start putting in place a new attractive regulatory framework so it’s ready for the moment when it can go out and get new banks. Translation: the Troika blew up the old banks so now the Cypriots have to rely on the kindness of strangers.

nearly 40 percent of Americans between the ages of 25 and 60 will experience at least one year below the official poverty line during that period ($23,492 for a family of four), and 54 percent will spend a year in poverty or near poverty (below 150 percent of the poverty line).

Even more astounding, if we add in related conditions like welfare use, near-poverty and unemployment, four out of five Americans will encounter one or more of these events. In addition, half of all American children will at some point during their childhood reside in a household that uses food stamps for a period of time.

Put simply, poverty is a mainstream event experienced by a majority of Americans. For most of us, the question is not whether we will experience poverty, but when.

But while poverty strikes a majority of the population, the average time most people spend in poverty is relatively short. The standard image of the poor has been that of an entrenched underclass, impoverished for years at a time. While this captures a small and important slice of poverty, it is also a highly misleading picture of its more widespread and dynamic nature.

The typical pattern is for an individual to experience poverty for a year or two, get above the poverty line for an extended period of time, and then perhaps encounter another spell at some later point. Events like losing a job, having work hours cut back, experiencing a family split or developing a serious medical problem all have the potential to throw households into poverty.

Just as poverty is widely dispersed with respect to time, it is also widely dispersed with respect to place. Only approximately 10 percent of those in poverty live in extremely poor urban neighborhoods. Households in poverty can be found throughout a variety of urban and suburban landscapes, as well as in small towns and communities across rural America. This dispersion of poverty has been increasing over the past 20 years, particularly within suburban areas.

Along with the image of inner-city poverty, there is also a widespread perception that most individuals in poverty are nonwhite. This is another myth: According to the latest Census Bureau numbers, two-thirds of those below the poverty line identified themselves as white — a number that has held rather steady over the past several decades.

What about the generous assistance we provide to the poor? Turns out the safety net is extremely weak and filled with gaping holes.

We currently expend among the fewest resources within the industrialized countries in terms of pulling families out of poverty and protecting them from falling into it. And the United States is one of the few developed nations that does not provide universal health care, affordable child care, or reasonably priced low-income housing. As a result, our poverty rate is approximately twice the European average.

Whether we examine childhood poverty, poverty among working-age adults, poverty within single-parent families or overall rates of poverty, the story is much the same — the United States has exceedingly high levels of impoverishment. The many who find themselves in poverty are often shocked at how little assistance the government actually provides to help them through tough times.

The solutions to poverty are to be found in what is important for the health of any family — having a job that pays a decent wage, having the support of good health and child care and having access to a first-rate education. Yet these policies will become a reality only when we begin to truly understand that poverty is an issue of us, rather than an issue of them.