Friday, August 08, 2014 - Rocky Relations

DOW + 185 = 16,553
SPX + 22 = 1931
NAS+ 35 = 4370
10 YR YLD - .01 = 2.41%
OIL + .01 = 97.35
GOLD – 3.90 = 1310.10
SILV - .03 = 20.02

The S&P and Dow both posted their best day since March. For the week, the Dow rose 0.4%, the S&P 500 gained 0.3%, and the Nasdaq rose 0.4%.

The Pentagon says US warplanes have dropped bombs on an ISIS artillery positon in northern Iraq, near Erbil, the Kurdish regional capital. US military planes have also carried out air drops of food and water to displaced refugees. Last night, President Obama announced the plan for assisting Iraqi religious refugees stranded on a hilltop in northern Iraq, and also authorizing limited airstrikes to protect US personnel in Erbil. The air strike is the first time the US has been directly involved in a military operation in Iraq since American troops withdrew in late 2011. No time limit has been set for air strikes.

In very short order, the Islamic State of Iraq and Syria, ISIS, captured one-third of Syria and about one-quarter of Iraq, and they continue to expand their frontiers. Just to put it in perspective, they now control a land mass larger than Great Britain, with a population bigger than Denmark. In northern Syria some 5,000 ISIS fighters are using tanks and artillery captured from the Iraqi army in Mosul to besiege half a million Kurds on the Turkish border. ISIS has also built a huge war chest by looting Iraqi banks of perhaps half a billion dollars, making ISIS the world's richest terrorist organization, by some estimates. And they have been gathering weapons, US weapons left behind by the Iraq army.

ISIS now controls most of Syria’s oil and gas production. In northern Iraq, ISIS now controls a 750 megawatt dam near the city of Mosul. The Mosul Dam is considered one of the most dangerous dams in the world; it was poorly constructed, leaks constantly, and requires near constant maintenance to avoid collapse. In addition to controlling the electric output of the dam, the militant group now has a real weapon of mass destruction, capable of extreme destruction along the Tigris River, including possibly flooding Baghdad under 15 feet of water.

The Iraq army shows no signs of recovering from its earlier defeats and has failed to launch a single successful counter-attack. The only large-scale counter-attack launched by the regular army and the newly raised Shia militia was a disastrous foray into Tikrit on 15 July that was ambushed and defeated with heavy losses. There is no sign that the dysfunctional nature of the Iraqi army has changed. Iraqi politicians have gone on playing political games as they move, ever-so-slowly, towards replacing the discredited prime minister, Nouri al-Maliki.

Iraq’s Shia majority seems to believe the present situation is not as dangerous as it looks. They argue that Iraq’s Sunnis have risen in revolt and ISIS fighters are only the shock troops of an uprising provoked by the anti-Sunni policies and actions of Maliki. Once he is replaced, as is almost certain, Baghdad will offer the Sunnis a new power-sharing agreement with regional autonomy similar to that enjoyed by the Kurds. Despite all signs to the contrary, Shia at all levels are putting faith in this myth.

The foster parents of ISIS and the other Sunni jihadi movements in Iraq and Syria are Saudi Arabia, the Gulf monarchies and Turkey. The rise of ISIS was crucially supported by outside Sunni powers. It’s unlikely the Sunni community as a whole in Iraq would have lined up behind Isis without the support Saudi Arabia gave directly or indirectly to many Sunni movements. The same is true of Syria. The Saudis now seem fearful of the monster they helped create, and they have pulled support from the jihadi opposition, but it may be too late. For the US, Britain and the Western powers, it makes for rocky relations with major oil suppliers. And then, to complicate matters further, Israel and Gaza resumed throwing bombs at each other after a nearly 3-day ceasefire.

You may remember that oil prices had spiked to $108 a barrel in June, but then ISIS failed to attack Baghdad, and ISIS did little that threatened oil infrastructure affecting deliveries outside Iraq, and oil prices slipped. The price at the pump is down 15 cents a gallon since July 4^th; down 35 cents per gallon since mid-June. And now that the US has re-entered the battle, it is widely anticipated that the craziness in Iraq will be defeated and oil prices will stabilize, but it would be foolish not to expect ISIS to retaliate against US aerial attacks.

In economic news today:
Wholesale inventories grew by 0.3% in June, while sales increased 0.2%.

Productivity in the second quarter increased 2.5%, compared with a revised 4.5% drop in the first quarter. Cold weather in the first quarter hurt output, but workers produced more in the spring, proving that 90% of the difference is just showing up. Unit-labor costs increased 0.6% in the second quarter, and inflation adjusted hourly wages were up just 0.1%.

White House economic officials say the labor market is about 80% back to the level before the financial crisis, an indication the economy is steadily healing. It just doesn’t feel that way for many Americans. As the US economy recovers, hirings increase and people are encouraged to look for jobs again; at least that’s how things are supposed to work.  Instead, the ratio of the adult population with jobs, or looking for one; what’s called the labor force participation rate, has been falling, standing at 62.9% in July 2014. This represents a 3 percentage point decline since the financial crisis and the lowest rate since 1978. Gains in participation rates between 1960 and 2000 were largely driven by sweeping social changes such as the post-war baby boom and the entry of women into the work force, but in the past 7 years half of those gains have been reversed; the equivalent of 7.5 million workers have been lost from the US labor force.

The shrinking pool of workers in the job market is due in part to demographic shifts as the boomer generation moves into retirement, but today the International Monetary Fund, the IMF said more needs to be done to strengthen the labor market, raise wages, and bring people back into the labor force. The IMF says up to one third of the post-2007 decline in participation rates is reversible and we need to look at economic policies to turn things around. Suggestions include better job training, employment search assistance programs, affordable child care, and immigration reform.

The Federal Reserve has released a nationwide survey, the first of its kind, designed to get a better understanding of how households view their own financial situation and economic well-being. The short answer is “not so good”. Just 30% of survey respondents described themselves as better off than they were in 2008, with 34% saying they were doing about the same and 34% saying they were worse off. Some 77% of respondents said they either didn't expect a raise in the next 12 months or expected their income to decline. About 30% of Americans said their household income for 2012 was lower than what they'd expect in a normal year.

About 40 million Americans have student loan debt totaling more than $1.3 trillion, and only 40% of them think the education was worth the cost. Some 35% of survey respondents who are paying back student loans said they had to cut spending by "a little" over the past year to keep up with their student debt payments, and another 11% said they had to cut back their spending by "a lot." One finding of the survey is that debt can affect your health. Some 44% of Americans with student debt said they avoided medical treatment because they couldn't afford it, while only 30% of Americans without student loans said the same thing.

Almost half the participants said they were not saving any portion of their income, and roughly one-fifth said they're spending more money than they are currently taking in. Only 39% of people reported having a rainy-day savings fund that would cover at least three months of expenses. A combined 25% of households who told the Fed they'd had savings prior to 2008 reported having used up "all" or "nearly all" of their savings as a result of the recession. And just 48% of people said they would be able to completely cover a $400 hypothetical emergency expense without selling something or borrowing money. Just under a third of non-retired households reported having no retirement savings or pension, including just under 20% of households aged 55 to 64. A quarter of the respondents said they had done no retirement planning at all.  Of those who have given some thought to retirement planning and plan to retire at some point, 25% didn’t know how they will pay their expenses in retirement.

Next week’s economic calendar includes a look at July retail sales on Wednesday. The recent drop in gas prices may actually dampen the real outlook for retail sales. On Tuesday we’ll get a look at the strength of the labor market in the JOLT report, the Job Openings and Labor Turnover survey measures workers who are quitting their jobs; the thinking is that when workers are confident about their job prospects they’re more willing to jump ship. The quit rate has edged up in the past couple of years but is still well below the rates posted in the last expansion. Another measure of strength in the labor market is hiring activity among small businesses. On Tuesday, we’ll get the Small Business Optimism survey. In June, 26% of small businesses surveyed said they had at least one job opening they could not fill.  On Thursday, the New York Fed will release its second-quarter Household Debt and Credit Report. The New York Fed reported that in the first quarter, households increased their total borrowings (including mortgages, credit cards, student loans and auto loans) for the third quarter in a row, led by gains in mortgages and student loan debt.