Monday, April 08, 2013 - Cat Food Futures Soar on Chained CPI

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Cat Food Futures Soar on Chained CPI

by Sinclair Noe

DOW + 48 = 14,613
SPX + 9 = 1563
NAS + 18 = 3222
10 YR YLD + .04 = 1.79%
OIL +.82 = 93.52
GOLD – 9.60 = 1573.70
SILV - .05 = 27.40

The S&P 500 fell 1 percent last week as US payrolls had the smallest gain in nine months in March. The economy added 88,000 jobs in March, even though prior month job gains were revised higher; the unemployment rate dipped to 7.6%, mainly because more people left the labor market and are no longer counted for one reason or another. The idea is that some people just retire, or other people just can't find a job, so they drop out of the workforce.

One reason that so many people are just dropping out of the workforce now is the shortening of the period of extended unemployment benefits. As long as people are receiving unemployment insurance they have to be looking for work. When their period of eligibility ends, most people just drop out of the labor force. The period of extended benefits was shortened in most states at the end of 2012. As a result, many people went from being classified as unemployed (no job, but looking for work) to being out of the labor force (no job and not looking for work). They are still unemployed; they still need a job; most of them would still like to get a job; some of them have moved into an underground economy; but you know, we just stop counting some people.

There are a large number of people who do not respond to the Bureau of Labor Statistics' Current Population Survey (CPS), the standard survey used to measure labor force participation. In recent years the non-response rate overall has been close to 12 percent, as opposed to just 5 percent three decades ago. The non-response rate varies hugely by demographic group. For older white men and women it is 1-2 percent. By contrast, for young African American men it is close to one-third.

The Bureau of Labor Statistics effectively assumes that the people who don't get picked up in the CPS are just like the people who do. This assumption may not be plausible. The people who don't respond may be more transient or may have legal issues that make them less willing to speak to a government survey taker. For these reasons they may be less likely to be employed than the people who do respond to the survey.

The earnings reporting season kicks off today; it needs to be strong to support the recent run-up in the equities market. Alcoa kicks off the earnings reporting season, alphabetically it leads the pack among the Dow Industrial stocks. After the close, Alcoa reported an increase in quarterly profit , but revenue fell short, and share prices dipped in after hours trade.

JPMorgan, Wells Fargo, and Bed Bath & Beyond are among nine companies in the S&P 500 scheduled to report earnings this week. Analysts project profits at S&P 500 companies fell 1.8 percent in the latest quarter, which would the first year-over-year drop since 2009. Analysts had predicted a 1.2 percent increase when surveyed in January. They'll revised estimates even more, and probably downward.

Meanwhile, President Obama is sending his budget to Congress on Wednesday. We know that the controversial part of the budget includes a reformulation of the way Social Security payments are calculated. In general, the chained CPI would lower the cost of living adjustment increases for Social Security recipients. The way chained CPI works, is when inflation increases, the government figures that the American people are mighty clever, and we'll just roll with the flow and we'll adjust our spending.

For example: if you used to spend $3 for a hamburger and french fries, but the price goes up to $5, you might not be able to afford that, so you'll switch to a hot dog and chips; if the price of gasoline goes up, you'll start riding a bicycle; of the price of your medications goes up, you'll either get healthy or maybe you'll die – in which case you Social Security payment is completely eliminated. The chained CPI would result in about 3% less benefits for Social Security beneficiaries, and that is each year going forward. A little quick math and we see that in 24 years, there won't be any payouts, and Social Security will be saved. Brilliant! Cat food futures are soaring on this news.

Obama's budget also calls for cuts in Medicare by reducing payments to health-care providers and drug companies and imposing more costs on high-income beneficiaries. While the White House hasn’t yet released specific dollar figures for the budget, administration officials said the plan puts the country on a path toward lower deficits, cutting the gap by $1.8 trillion over the next 10 years.

In exchange for cutting Social Security and Medicare, Obama is calling for tax increases; the quid pro quo is being called the Grand Bargain. Among the tax proposals: a limit of $3 million in an IRA or 401k or other qualified retirement account, a new tax on cigarettes and other tobacco products, a cap value of itemized deductions. Normally a taxpayer multiplies their top tax rate by the amount of a deduction to calculate the taxes saved. But Obama would cap that rate at 28%, which is below the top two income tax rates. Also, Obama is calling for an increased tax rate on investment fund manager income: Managers of private equity, venture capital and hedge funds are taxed 20% on the portion of their compensation known as carried interest, essentially paying the long-term capital gain rate. Obama would like carried interest to be treated as ordinary income, which means those managers would pay a rate as high as 39.6%, or more than 2.5 times the rate they pay now. And the other idea is to close loopholes, which sounds good but we don't have details on that yet.

How this all plays out will be fun to watch. South Carolina Senator Lindsey Graham on Sunday became the first prominent Republican to publicly praise the budget proposal. Actually, Graham said the plan is overall bad for the economy, but "there are nuggets of his budget that... are optimistic."

On Friday, House Speaker Boehner said: “If the President believes these modest entitlement savings are needed to help shore up these programs, there's no reason they should be held hostage for more tax hikes.”

Meanwhile, the Democrats hate the entitlement cuts offered up. There is a chance nobody will vote for the budget. So, when Obama's budget hits Congress on Wednesday, the fun part will be to see which side shreds it first.

Meanwhile, last week we told you about the Japanese monetary stimulus plan. You recall that Japan has been dealing with a banking crisis since the 1990's, its economy stuck in a generation of economic stagnation and low-level but persistent deflation.

A new government took office the day after Christmas, led by prime minister Shinzo Abe, pledging to, in effect, go whole-hog on the Keynesian remedies for Japan’s long recession, particularly by pushing for a combination of fiscal stimulus on a mass scale, and, through appointment of Haruhiko Kuroda as governor of the Bank of Japan; he has pledged to do “whatever it takes” to get annual inflation to 2 percent in a country where inflation has averaged -0.3 percent since 2000. The Japanese stock market is on a tear and the yen has been falling steeply on currency markets, exactly the kind of reaction the BOJ hopes to see.

If everything works as planned, Japan’s industries will rebound on the back of a weaker yen, an improving economy will improve its deficit picture, and the nation will soon have a seamlessly balanced economy of prices rising about 2 percent a year and debt to GDP levels coming down. If things go bad, we could soon be staring at the mother of all sovereign debt crises. Whatever path the Japanese economy takes, it is one that will have lessons and implications for all of us.

Meanwhile, on the continent of Europe, austerity impoverished countries aren't waiting for the results from Japan. Spanish prime minister Mariano Rajoy has called for the European Central Bank to follow other central banks with extra stimulus measures. Portugal's constitutional court rejected part's of the country's austerity budget and issued a ruling that recent deficit cuts to payments for pensioners, civil servants and unemployment benefits were unlawful and should be reversed. US treasury secretary Jack Lew used a visit to Brussels to urge top officials to relax austerity programs and drive growth. Two of Greece's biggest banks risk being nationalized after admitting they were unlikely to raise enough cash from private investors and seeing their merger blocked by the country's international lenders. Greek government officials have said deposits in the banks will not be touched; this is a big concern in light of the recent Cyprus Bank Heist; where the banks robbed the depositors.

Plenty to watch and it's just Monday.