Friday, February 14, 2014 - Cold, Cold, Cold

Cold, Cold, Cold

by Sinclair Noe

DOW + 126 = 16,154
SPX + 8 = 1838
NAS + 3 = 4244
10 YR YLD + .01 = 2.74%
OIL - .05 = 100.30
GOLD + 16.30 = 1320.10
SILV + 1.02 = 21.61

The cold weather back East has left its frozen footprints all over a variety of economic reports from payrolls to new home sales to retail sales. Estimating the extent of the weather effect is a guess at best, and it is possible that consumer spending might have slowed even with more pleasant weather.

The best guesses from economists are that the snow, ice and bitter cold this winter will shave about 0.3 percentage point from economic growth; that works out to about $47 billion in lost productivity and about 76,000 jobs. Other estimates suggest fourth quarter GDP could be revised from 3.2% to as low as 2.2%(so maybe - $15 bln). Fortunately, a revision in GDP does not mean you have to write a refund check; whatever you made or lost in the fourth quarter is unchanged.

Schools closed, traffic non-existent, or massive traffic pile-ups, businesses closed, thousands of flights cancelled, electricity outages, the Great Lakes are 75% frozen over; it’s all a big frozen, expensive mess. The most recent storms, the ones going on right now in the East, could cost $20 to 40 billion.

The Federal Reserve reported this morning that manufacturing output fell 0.8% in January; they blamed the severe weather. At the same time, utility use jumped 4.1% last month, the biggest increase since March 2013. The Fed said the gain reflected “strong heating demand because of the extremely cold weather.” High heating bills mean less money in the purse for other possible purchases.  

The bad weather was blamed for a 0.4% drop in retail sales in January compared with December. The good news is that most people will still buy things, they’re just waiting for the weather to clear, and so sales could pick up in the second quarter. Pent-up demand should lead to a boost in second quarter growth of about 0.23 percentage point, reducing the total economic impact to about 0.3 percentage point.

Industrial production usually bounces back after a period of bad weather, as postponed orders are completed. With the weather having been lousy in December, January, and now February, we might not see a bounce back until March, or even April. But it will happen, eventually. The more lasting weather impact will be from the California drought. Snow and ice melt. Dust doesn’t melt.

Next week’s economic calendar will be slightly compressed; the markets are closed Monday for President’s Day. We’ll get a report on housing starts next Wednesday; expect a drop in the January numbers; some of that is weather related, some is related to higher mortgage rates. Two other economic series will offer guidance on the outlook for housing. Building permits are taken out before actual construction can begin. Economists think permits fell slightly last month after falling 2.6% in December. Builder confidence will be captured in the housing market index, out Tuesday. A reading about 50 means more builders think conditions are good than the number who see conditions as bad. The index has been above 50 for 8 consecutive months.

We’ll also see reports on inflation; the PPI, or Producer Price Index will report on wholesale level prices on Wednesday; the Consumer Price Index, or CPI, will report on retail level prices on Thursday. The Labor Department is changing how they calculate the PPI. The new index will include measures of services and construction. Instead of the old top-line label of “Finished Goods,” the headline PPI will now capture “Final Demand.” I’m not sure what that really means just yet. I’ll have to look into it, but economic indicators are always changing. You wouldn’t use a 1950s road map to plan a cross country drive.

Also next week, the Fed will release minutes of the January 28-29 FOMC meeting. Maybe we’ll learn more about the possible changes in the unemployment threshold of 6.5%.

Also, next week, I predict we will see; and this is not something that’s on any official calendar, but I predict we will see more wealthy people putting their feet in their mouths. It seems to be all the rage lately. This past week we had a couple of fine examples. John Mack, the former CEO of Morgan Stanley gave an interview to Bloomberg TV. In a discussion about executive pay, Mack said we're all being too rough on his fellow too-big-to-fail bank CEOs.

He would love, he said, "to see people stop beating up on Lloyd and Jamie," endearingly referring to Goldman chief Lloyd Blankfein and Chase chief Jamie Dimon by their first names (Mack must be in a bowling league with both men). He added: "I think that would make a lot of sense, and I'm in favor of that."

Mack went on to say that the debate over compensation was healthy, just not always warranted. "As long as shareholders reward performance," he said, "we can argue." But, he added, "The last time I checked, this business is still a business that pays people extremely well."

It's already funny that of all the injustices in the world, this was the one Mack decided to worry about on TV: the criticism of poor Jamie Dimon's 74 percent raise. But more to the point: If we really did live in a world where shareholders rewarded performance, would a CEO who just oversaw a record $20 billion in regulatory penalties even have a job, much less be getting a raise?

Mack had stones enough to be whining about people "beating up" on Jamie Dimon, given the year Chase just had. But to do so and simultaneously scold us that high compensation on Wall Street is just "shareholders rewarding performance," that’s just a bit more than bravado. It’s more like lunacy.

John Mack was the CEO of Morgan Stanley from 2005 to 2009. He was paid well. Morgan Stanley received bailouts. So, it just seems strange when he talks about “shareholders rewarding performance”.

Meanwhile, Tom Perkins is desperately trying to extend his 15 minutes of infamy. Perkins told an audience in San Francisco Thursday that people who pay more money in taxes should get more votes. Perkins said: "The Tom Perkins system is: You don't get to vote unless you pay a dollar of taxes, but what I really think is, it should be like a corporation. You pay a million dollars in taxes, you get a million votes. How's that?"

The audience laughed. But it isn’t so funny. After all, that’s not really how democracy works. Unfortunately, Perkins wasn’t joking around. Perkins is no stranger to outrage, and it seems like he’s starting to kind of like it that way. The Internet freaked out last month after he argued in a letter to the Wall Street Journal that there are parallels between progressive activists’ “war on the American one percent” and Nazi Germany’s persecution of Jews. Even the venture capital firm he co-founded, Kleiner Perkins Caufield & Byers, was quick to distance itself from his controversial comments.

“This is a very dangerous drift in our American thinking,” Perkins wrote in the letter. “Kristallnacht was unthinkable in 1930; is its descendant ‘progressive’ radicalism unthinkable now?” Perkins later apologized for that remark, or at least the specific reference to Kristallnacht. Even with the controversy, Perkins picked up some followers. Rich guys from real estate mogul Sam Zell to billionaire Wilbur Ross piled on, claiming the one percent is getting picked on unfairly.

Not all rich guys have jumped on the Perkins bandwagon; former AT&T Broadband CEO Leo Hindrey says executive pay has gotten so out of hand that it has caused a "structural breakdown of the meritocracy of our nation." You can blame the stagnant economy on a "handful of women and men" who run the country's largest companies. And that's according to a man who used to be one of those people. Hindery pointed out that, even as CEO pay has skyrocketed in recent decades, it has not "trickled down" to workers, who must increasingly borrow money to finance their spending. That dynamic helped set the stage for the most recent recession and helps explain today's sluggish recovery.

Fortune 500 CEOs now make more than 200 times what their average workers make, according to Bloomberg data. That ratio has increased by 1,000 percent since 1950. Hindery says that as CEO pay has exploded, worker pay has stagnated: Workers have not had a real cost-of-living increase since the 1960s. And these CEOs are not exactly earning their exorbitant pay.

Hindery describes says: "It's a fraud. It's born out of cronyism."  That cronyism is demonstrated in a new analysis of executive-pay data showing the compliance of corporate boards in approving CEO pay, regardless of corporate performance. Those directors are themselves well-paid for their vigorous rubber-stamping.

The problem, Hindery said, isn't just that the rich are getting richer. The tragedy, he said, is the rise of the low-wage workforce. Half of the jobs created in the past three years have been low-paying while the wealthiest Americans continue to capture record earnings.  The federal minimum wage, which stands at $7.25, is worth much less today than was in 1968. And all recent efforts to raise it have been stalled by Congress.

It's no wonder most of us are feeling entirely fed up. Two-third of Americans think CEO pay is out of hand.  Hindery would agree. After all, rising income inequality is putting a damper on the economy as a whole. "The only time the U.S. economy and any of the developed economies prosper is when there's a vibrant middle class that grows from the bottom up," he said. "We've trashed that whole principle."