Tuesday, June 03, 2014 - Always Look on the Bright Side

Always Look on the Bright Side
by Sinclair Noe

DOW – 21 = 16,722
SPX – 0.73 = 1924
NAS – 3 = 4234
10 YR YLD + .06 = 2.59%
OIL + .37 = 102.84
GOLD + 1.40 = 1245.90
SILV + .05 = 18.91

Automakers reported strong sales of new cars in May, the strongest annual sales rate since before the 2008 financial crisis. Industry sales rose 11.3%. Chrysler and GM had their best month of May in 7 years. A record number of recalls at GM since the first of the year did not crimp demand for the automaker's new vehicles. Average transaction price for a new vehicle in May was $32,307, according to research firm Kelley Blue Book, which said average new-car prices were up $653 from a year ago, but down slightly from April.

The city council of Seattle Washington has voted to raise the city’s minimum wage to $15 an hour, the highest level of any major US city. Wages would begin to rise next year, ultimately reaching $15 from Washington state's minimum of $9.32 over three to seven years, depending on the business. Under the plan, firms with more than 500 employees nationally will be given at least three years to phase in the increase, those who provide health insurance subsidies would get four years and smaller businesses would be given seven years. US minimum wage is $7.25, although 38 states have set higher levels. The states of California, Connecticut and Maryland have recently passed laws increasing their respective wages to $10 or more in coming years.

Yesterday we heard the EPA proposal to cut power plant carbon emissions by 30% over the next 15 years. Even before the announcement we heard concerns about how that might affect jobs, most of it conjecture. In 2010 when the country was debating a clean energy bill aimed at cutting carbon emissions by 17%, the Congressional Budget Office predicted how destructive the law would be for American jobs. The CBO report concluded it wouldn’t be destructive at all, rather it would probably add more jobs than it killed.

The report found that overall, unemployment would probably increase in the short term. Workers may lose jobs by the thousands across industries that include coal mining, oil and gas extraction and transportation, the report said. And, it added, people who found new jobs by relocating or by learning new skills would probably be earning lower wages than before.

But the CBO report also said that, as polluting industries like coal mining shrink, industries with fewer carbon emissions would expand by as many as a half-million new jobs by 2025. States that are heavily coal-dependent will have to shift to some degree away from coal and to other, new resources; but the electricity has to come from somewhere, so there will be new facilities built to produce it.

In general, the debate about how environmental regulation will affect the economy is so polarized that studies end up with contradictory conclusions. In a 2012 review of more than two dozen such studies, a team of researchers at a New York University think tank found that studies commissioned by big energy companies usually found that regulations increase unemployment, while those by environmental groups found the opposite.

You’ve probably heard about the controversy surrounding the book Capital in the 21^st Century by Thomas Pikkety. A reporter from the Financial Times says some of Pikkety’s statistics are flawed. Pikkety responded by saying his research is solid. Now we have a new source to support Pikkety. According to a new report by stock market strategists at Bank of America Merrill Lynch, the rich are going to keep getting richer all over the world, pretty much just as French economist Thomas Piketty describes in his bestselling book.

And according to the folks at Merrill Lynch, this represents an opportunity for Merrill Lynch. They write: "We are aware of the controversy over Piketty’s math (see the FT Money Supply blog), but are generally comfortable with the thrust of his analysis, having read his 577-pager, looked at his (problematic) spreadsheets, and cross-checked his data with alternative, credible sources. His questionable assumptions do not detract from the power of his thesis."

Merrill pointed out that it has been predicting the rise of "plutonomies -- economies where economic growth is powered by and largely consumed by the wealthy few" -- for the past decade. While this might sound like a nightmare world for some of us, it is also a chance to make a bunch of money, for those mostly rich people with the means to invest in companies that most profit from the wealthy elite. This includes luxury goods makers, money managers and private banks.

Always look on the bright side.

For the past two years, European Central Bank President Mario Draghi has been saying “whatever it takes”, giving the impression the ECB was ready to take on a stimulus program, jawboning the markets with the hint of bold monetary action, right around the corner. Today, a report showed Eurozone inflation at just 0.5% in May. A separate report showed the Eurozone jobless rate at 11.7% in April, ticking down from 11.8% in March, but still more than 25% in Spain and Greece. For 2 years Draghi said “whatever it takes” and for 2 years he has done nothing. On Thursday, the ECB meets to determine monetary policy and Draghi is expected to do something, and it better be something worth the wait.

It is widely anticipated the ECB will cut its target on loans from one-quarter percent to 0.1%, maybe down to a flat zero; and they are expected to eliminate paying banks on their deposits, cutting that into negative territory, essentially charging the banks to park cash at the central bank. And if that’s all the ECB does, it will probably be considered a huge disappointment; cutting rates won’t change borrowing conditions materially for most companies and it won’t be enough to lift the Eurozone out of the deflationary cycle.

It’s time for another edition of banks behaving badly. This is really an ongoing saga but sometimes we turn our gaze away and focus on other important issues; you might think that means the banksters haven’t been misbehaving, but the truth is their transgressions are never-ending.

Last month, Credit Suisse agreed to plead guilty to criminal charges of helping tax cheats avoid paying US taxes. Credit Suisse was fined $2.6 billion, which is a hefty fine but the bank basically got off with punishment fitting a civil suit. Still, it sent a message.

The Treasury Department announced that more than 77,000 foreign banks from 70 countries have agreed to share information about US account holders as part of a crackdown on offshore tax evasion. Participating countries include all the world's financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas. Under the law, foreign banks that do not agree to share information with the IRS face steep penalties when doing business in the US. The law requires American banks to withhold 30% of certain payments to foreign banks that don't participate in the program. And if the US banks fail to withhold the tax, they would be liable for it themselves.

Next on the list is BNP Paribas; the Justice Department is looking into claims the French bank broke trade sanctions against Sudan, Iran, and Cuba between 2002 and 2009; essentially, international money laundering. BNP Paribas is facing possible criminal charges and possible penalties of $10 billion. In December 2012, HSBC faced similar charges that it breached US sanctions and laws against money laundering; HSBC agreed to pay $1.9 billion in civil penalties.

 Now, US authorities are seeking criminal charges and a stiffer fine, the equivalent of a year’s profit for the French bank. The precise amount of the fines and the conditions attached to them is still a matter of speculation and probably negotiation. The crimes of BNP are probably no more egregious than the wrongdoing of HSBC, but for a long time BNP refused to admit wrongdoing. If you’ve ever watched a cop show on TV, you know how that works; cooperate and the punishment will be more lenient.

President Obama is traveling to France on Thursday to commemorate the 70^th anniversary of D-Day, the landing at Normandy. And while the visit is supposed to be a celebration of the liberation of France by its allies, relations between France and the US are a bit rocky. Many in France are concerned that America lets its own banks off rather lightly and cracks down on foreign banks instead to appease voters’ hatred of the banksters. American rules sometimes differ from European rules, and criminalize behavior that might be legal in the banks’ home country. And two more French banks, Societe Generale and Credit Agricole, are also thought to be in the crosshairs of American authorities for allegedly breaking sanctions and money laundering.

The French are getting nervous. The French foreign minister says the fine against BNP would be unfair and it would hit BNP Paribas' funds and result in fewer loans for French businesses. They claim the US is using its position as the leading global financial market to bully their banks. So on Thursday, Presidents Obama and Hollande will get together for D-Day festivities and dinner and conversation. The banking fines will be a major topic, but there are other acrimonious subjects; France seems determined to continue military hardware sales to Russia, which might not violate the recently imposed sanctions but certainly violates the spirit of the sanctions.

The US has embarked on a new way of fighting, and it involves sanctions and economic weapons; it is certainly preferable to the battles waged 70 years ago in Europe, but it won’t work if the banksters put their greed ahead of other priorities. The French politicians might whine about the hardships, but they need to get their banks in order, and for that matter so does the US.

Monday, April 14, 2014 - Blood Moon and More

Blood Moon and More

by Sinclair Noe

DOW + 146 = 16,173
SPX + 14 = 1830
NAS + 22 = 4022
10 YR YLD + .02 = 2.64%
OIL - .11 = 103.63
GOLD + 8.20 = 1327.60
SILV un = 20.07

Here’s what you can expect; the Earth will eclipse the moon tonight about 10:58PM pacific time, adjust according to your time zone. The eclipse will take some time, a few hours. The moon will shift color from orange to blood red to brown, again depending on you locale and the weather. It should be interesting.

The stock markets started the day in positive territory and as trading dragged on, the major indices moved lower on the very cusp of turning red, almost as if they were being eclipsed, and then positive again, right at 3:15 PM eastern time, everything just picked up. Now, you might think the markets are rigged. You might.

A group of traders has sued CME Group Inc, accusing the operator of the world's largest derivatives exchange of selling market data to high frequency traders, cheating other investors who lacked such access. The suit says the CME and its Chicago Board of Trade unit have been giving high-frequency traders early access to buy and sell orders.  They said this deprived other investors of the transparent, real-time data on futures and interest rate contracts that they thought they were getting, and were paying for.

Volume was down from Friday; that’s a nasty trend, lighter volume on up days, heavier volume on down days.

The economic calendar includes the March Consumer Price Index tomorrow; Wednesday brings an update on housing starts and building permits, plus the Federal Reserve will release its Beige Book; Friday, the markets are closed for Good Friday.

This morning the Commerce Department reported retail sales increased 1.1% last month; February’s sales numbers were revised higher to 0.7% from a previously reported 0.3%. An important subset of the report showed retail inventories, excluding automobiles, rose 0.2% in February. You will recall that businesses accumulated too much inventory in the fourth quarter of last year, and we have seen fewer orders as the businesses work through unsold goods and try to clear their shelves. That has left the inventory to sales ratio at its highest level since September 2009. Now, it looks like the buyers are back.

A separate report from the New York Fed showed people grew more confident in the labor market last month, with younger workers in particular seeing a greater chance of finding work should they lose their current job.

Earnings reporting season continues with Citigroup posting better than expected net income under of $3.9 billion, or $1.23 per share, from $3.8 billion, or $1.23 per share. Citi Holdings, which holds the bank's portfolio of troubled assets left over from the financial crisis, posted a loss of $292 million, down from $798 million a year earlier. For all of Citigroup, adjusted revenue dropped 2% to $20.1 billion. Citi still has problems with its Mexican unit, which is accused of making fraudulent loans. Also, Citi flunked the recent Fed stress tests for capital reserves. So, here we are nearly 6 years after the financial meltdown and Citi is still cleaning up its books, still exhibiting signs of structural damage, and unable to put money to productive purpose.

The Congressional Budget office says the deficit isn’t as bad as they thought. For the fiscal year 2014 ending September 30, CBO said, the deficit would fall to $492 billion from a $514 billion February estimate - and nearly a third lower than last year's $680 billion deficit. And CBO lowered its cumulative deficit forecast for fiscal years 2015 through 2024 by $286 billion, to a mere $7.6 trillion; the reason for the lower deficits, is that subsidies for health care costs will be less than previously guesstimated.

Deficits will reach a low point of $469 billion, or 2.6% of US gross domestic product, in fiscal 2015, then gradually start to rise, topping $1 trillion again in 2023 and 2024, a level that would be near 4% of GDP.

Last week the IMF and the World Bank held their Spring Meeting in Washington DC. Here’s a snippet from a panel discussion featuring Federal Reserve Bank of Chicago President Charles Evans and Citigroup chief economist Willem Buiter.

Charles Evans said: “In the U.S. monetary policy is using the standard transmission mechanism. We’re trying to reduce financing costs. Auto rates are down and the auto sector is way back compared to where it was. Housing is better. Mortgage rates are down. And if you have the ability to refinance, or get a mortgage – it’s tougher these days because of the standards - then you can do that. So it’s the standard transmission mechanism. And we are indeed trying to get inflation up because we’re below target. What comes with that is wage increases, also up to where they ought to be. Wages are a symptom of inflation – using a lagging indicator – and they’re down around 2 to 2.25% right now. When they’re at a steady growth part of the cycle they ought to be about 3.5% - 1.5% productivity and 2% inflation target. So getting everything up – and getting inflation up to where it is supposed to be is an important part of all of this. So that benefits everybody.”

Citigroup chief economist Willem Buiter responded: “Monetary policy works with asset prices. By boosting equities, raising bond prices, weakening the currency and that’s exactly how it has happened. Not very effectively, because we have poor man’s monetary policy. Which is what unconventional monetary policy is. But it’s all we have. I would have preferred to see some additional measures on the fiscal side, which could have mitigated some of the income distributional consequences…”

Over the weekend we saw the investment game plan detailed on Sunday morning talk shows. Did you catch it? The climate is changing; we can still fix it; it will require massive investment. According to the most recent Intergovernmental Panel on Climate Change report, keeping global warming down to a level people can live with means cutting carbon emissions to "near zero" by the end of the century, even in an increasingly industrialized world. That may be doable, but it will take "substantial investments" in everything from planting more trees to replacing fossil fuels with low-carbon power sources like solar, wind and nuclear energy. The report clearly shows that the challenges to resolve the global common problem are huge, but also this report shows that there are some steps to resolve this issue.

And the longer we wait, the more expensive it becomes, and if we wait too long, the Earth and all of us who are too miserly to invest now, will cook.

Any hope will require more than tripling the share of electricity produced by renewable sources or nuclear power, along with refining the still-evolving technology of capturing carbon emissions and storing them underground. And it will take a coordinated global effort, likely including taxes on emissions. No direct price tag was attached to that scenario, but the IPCC authors indicate it would require "substantial investments," and more delays just drive up the expected cost. The impact could amount to shaving the projected average growth of the global economy by six-hundredths of a percentage point, from about 2% per year to 1.94%, over the coming century. The total global economy was about $72 trillion in 2012, according to World Bank figures.

Secretary of State John Kerry, who in February called the issue "the greatest challenge of our generation," said Sunday's report is an economic opportunity.

Kerry said in a written statement: "So many of the technologies that will help us fight climate change are far cheaper, more readily available, and better performing than they were when the last IPCC assessment was released less than a decade ago. These technologies can cut carbon pollution while growing economic opportunity at the same time. The global energy market represents a $6 trillion opportunity, with 6 billion users around the world."

Despite more than two decades of efforts to restrain carbon emissions, not only are emissions still going up, they're going up faster than ever. Though there's been an increased emphasis on generating power from renewable sources, the use of coal has gone up in the past 10 years.

The Washington Post and the Guardian captured coveted Pulitzer Prizes for public service for their revelations about the US government's massive surveillance programs. The newspapers' stories were based on thousands of secret documents obtained from Edward Snowden, the former National Security Agency contractor who is living in Russia after fleeing the United States. The Post also won a Pulitzer this year for explanatory reporting. The New York Times won two Pulitzers, both for photography. No award was handed out for feature writing. The Boston Globe won for breaking news for its coverage of the Boston Marathon bombing. Reuters won an award for its coverage on the persecution of a Muslim minority in Myanmar who in efforts to flee often fall into the hands of brutal human-trafficking networks. The prize for investigative reporting went to The Center for Public Integrity for reports on how some lawyers and doctors rigged a system to deny benefits to coal miners stricken with black lung disease. The prize for explanatory reporting went to the Washington Post for work on the prevalence of food stamps in post-recession America. The prize for local reporting went to the Tampa Bay Times for an investigation into squalid housing conditions for the city's homeless population. The prize for national reporting went to The Gazette in Colorado Springs, Colorado, for his examination of how wounded combat veterans are mistreated.

I know what you’re thinking; this is a shocking development. Who knew there were still newspapers?

Tuesday, February 18, 2014 - Econ Roundup

Econ Roundup

by Sinclair Noe

DOW – 23 = 16,130
SPX + 2 = 1840
NAS + 28 = 4272
10 YR YLD - .03 = 2.71%
OIL + 2.14 = 102.27
GOLD – 6.90 = 1323.30
SILV + .12 = 22.06

Homebuilders' confidence in the housing market declined sharply this month as the severe weather battering much of the nation keeps many would-be buyers at home. The National Association of Home Builders/Wells Fargo builder sentiment index dropped to 46. That's down from January's reading of 56 and is the lowest level since May. A reading of 50 is the tipping point between good and bad sales conditions.

Certainly one sector singing the blues over the cold weather has been the airlines. More than 500 flights were cancelled today; almost 1,400 flights cancelled yesterday for the Presidents’ Day holiday and more than 4,000 delayed. The big day for cancellations was last Thursday, when more than 7,500 flights were scrapped. That’s bound to have some effect on revenue and earnings.

Last week’s economic news was generally disappointing with weak payroll growth, mortgage applications slipping, retail sales dropping to the lowest growth rate of the recovery, and a sharp drop in manufacturing activity; that can’t all be blamed on bad weather. Several retailers didn’t even mention severe weather as they missed estimates for the holiday shopping season.

US auto dealers have about $100 billion worth of unsold cars and trucks sitting on their lots. That level is striking given that car makers have pledged not to overstock dealers the way they did in the run up to the financial crisis and the auto-sales collapse of 2008-2009.

Inventories soared last year to the highest level of the recovery and were mostly responsible for the uptick in GDP in the second half of 2013. Inventory builds in the face of decelerating demand is a potentially troubling economic development. It's been a long time since we experienced an inventory recession, but prior to the past two financial market-induced recessions, inventory recessions were the more common cause of economic contraction.

If there was material upward pressure on aggregate demand because of an increase in economic velocity, it should be exerting upward pressure on long-term interest rates. However, throughout the second half of 2013, both the 10-year and the 30-year Treasury yields have been trading sideways, and this week are in the exact same spot reached on the July 5 peak. There may be some pent-up demand for housing and consumer durables and such, and maybe things will pick up when the weather finally thaws out. Whether the economy does or does not warm up with the weather; either way, it will likely be reflected at the long end of the bond curve.

The Kauffman Foundation and Legal Zoom released a fourth quarter survey of new business founders; 91% of business owners are confident their companies will be more profitable in the next 12 months, up from 86% saying that in the third quarter. Readings on the outlook for the overall economy and consumer demand also improved. With more customers expected, start-up founders plan to add staff. According to the survey 43% of respondents plan to hire more employees, up from 36% saying that in the third quarter.

Generic drugmaker Actavis says it will buy Forest Laboratories for about $25 billion in cash and stock, expanding its portfolio of specialty pharmaceuticals for neurological and other disorders. The deal means a major payday for activist investor Carl Icahn, the second-largest shareholder at Forest Labs.

Commodities revenue at the top 10 investment banks dropped 18% in 2013 in a third year of declines. Revenue from commodities for top banks fell to $4.5 billion last year from $5.5 billion the previous year. The banks' 2013 commodities revenue is less than a third of the $14.1 billion they racked up in 2008 at the height of the commodities boom.

The Federal Reserve Bank of New York reports that consumer debt in the US rose last quarter by the most in more than 6 years. Household debt increased 2.1%, or $241 billion, to $11.5 trillion, the biggest gain since the third quarter of 2007. The level of debt last quarter was $180 billion higher than a year earlier. Total indebtedness remains 9.1% below the peak of $12.6 trillion in the third quarter of 2008. Americans borrowed to buy homes and cars and to pay for education. Mortgages top the list at more than $8 trillion; student loan debt has now topped $1 trillion.

Of the 12% overall rise in student debt, a third came from borrowers with the worst credit history, or those with credit scores of 620 or lower. About five percentage points came from those with scores between 621 and 680, and roughly two points was from those in the middle quintile; scores between 681 and 720. The data suggest more people with poor credit scores are going to school to gain new skills, which eventually could lead to better jobs and higher earnings. Other data show that those with college degrees are much less likely to be unemployed and earn far more than those with only high school diplomas. Delinquency rates are going up from about 8.5% two years ago to 11.5% delinquency in the fourth quarter.

The loan to deposit ratio in the US banking system recently hit a 35-year low, meaning banks now have more cash on their balance sheets and they aren’t loaning the money out. QE is the most likely reason for the shift from loans to cash. Both loans and cash are considered assets on a bank’s balance sheet, and most banks don’t want to hold excess cash reserves, but they clearly don’t want to lend when the interest rate charged does not compensate for the risk of the loan. Meanwhile, the Federal Reserve pays interest on excess reserves. That’s a no-brainer model for the banks. And we likely won’t see more lending until interest rates rise or the Fed cuts payments on excess reserves, or some combination of the two.

The non-partisan Congressional Budget Office has issued a report on the effects of raising the minimum wage. Over all, the budget office estimated that lifting the minimum wage to $10.10 and indexing it to inflation would reduce total employment by about 0.3 percent, or 500,000 workers. The CBO cautioned that its estimate was imprecise, maybe almost no impact, maybe more. On the positive side, increasing the minimum wage would bolster the earnings of about 16.5 million workers: $5 billion a year more for families living in poverty, $12 billion a year more for families earning from one to three times the poverty threshold.

According to figures released today by the Bloomberg New Energy Finance show, global spending on energy efficiency rose almost 5% in the past year to $14.9 billion. China spent about $4.3 billion; North American investment dropped 33% to $3.6 billion.

President Obama announced today that he is directing the Transportation Department and the EPA to draft new fuel economy standards for trucks by March 2015. Pollution from transportation is the nation’s second-largest source of greenhouse gas pollution. In 2011, the EPA issued its first round of fuel economy regulations for United States trucks and heavy-duty vehicles built in the model years 2014 to 2018, which the agency projects will reduce carbon pollution by 270 million metric tons, or the equivalent of taking 56 million passenger vehicles off the road for a year. Heavy-duty trucks represent just 4% of all vehicles on the highways but generate 20% of the carbon pollution produced by the transportation sector.

Three countries are experiencing civil unrest today: the Ukraine, Thailand, and Venezuela.

In Kiev, 5 people were killed in street protests and at least 150 more injured. The opposition is seeking to overturn constitutional changes that strengthened Russia-backed President Yanukovych’s powers and to put Ukraine on a path toward EU membership. The standoff began Nov. 21, when Yanukovych pulled out of a free-trade deal with the EU, opting instead for President Vladimir Putin’s offer of $15 billion of aid and cheaper gas.

Gun battles erupted in Bangkok and 4 people are reported killed with nearly 100 more wounded as authorities try to clear demonstrators from the streets. The government’s anti-corruption body announced it was filing charges against Prime Minister Yingluck Shinawatra for a rice subsidy scheme.

Last week, protests in Venezuela led to 3 deaths. Today, opposition leader Leopoldo Lopez surrendered to police and was arrested. Protesters planned more marches, while President Nicolas Maduro told oil workers to march in support of the government. The demonstrators are demanding Maduro's resignation and expressing a litany of complaints from inflation and crime to corruption and product shortages.

Twenty-three nations encompassing 40% of the world's population will go to the polls this year. When you exclude China, which never goes to the polls, that means well over half of eligible human voters can cast ballots this year; that includes some of the big emerging market players such as India and Brazil. Emerging market have been beaten down broadly speaking, but recovery will likely be unique and in part, a consequence of what happens in the ballot box.

BofA Merrill Lynch conducted a survey of 222 fund managers with nearly $600 billion collective in assets under management. The survey says investors now believe emerging markets are the biggest risk to global financial security. Five years ago emerging markets were considered relatively safe, and default risk and counterparty credit risk was considered toxic; now it’s considered no problem. In line with this thinking, fund managers have increased their portfolio allocations to global bank stocks to the highest level on record. Meanwhile, allocations to emerging markets have fallen to the lowest level on record. At least according to the survey.

Wednesday, February 05, 2014 - Another Perfect Day

Another Perfect Day

by Sinclair Noe

DOW – 5 = 15,440
SPX – 3 = 1751
NAS – 19 = 4011
10 YR YLD + .04 = 2.67%
OIL + .11 = 97.30
GOLD + 3.20 = 1258.60
SILV + .39 = 20.00

Yesterday on the Review we talked about the Congressional Budget office report. For a while this morning, the Internet was hopping with job-killing hype, when in fact the truth was vastly different. Obamacare’s impact, the CBO concluded, would lessen the supply of labor by encouraging certain folks not to work: “The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor, so it will appear almost entirely as a reduction in labor force participation and in hours worked. . . .”

That’s different than what most of the media was saying today. And then a funny thing happened; some reporters actually read the report, and the headlines changed just a little:

 Wall Street Journal earlier: Health-Care Law Expected to Take Greater Toll on Workforce

Wall Street Journal now: Health Law Seen Leading to Some Loss of Labor

Talk Radio News Service earlier: Obamacare Will Cost 2.5 Million Jobs: Report

Talk Radio News Service now: 2.5 Million Will Exit Work Force Because Of Obamacare

National Review earlier: The CBO Just Nuked Obamacare

National Review now: The CBO Just Nuked Obamacare

The CBO never, ever reported that Obamacare would somehow or other kill more than 2 million jobs. The CBO’s estimate is mostly the result of an analysis of the impact of the law on the supply of labor. That means how many people choose to participate in the work force. Some people might decide to work part-time, not full time, in order to keep getting health-care subsidies. Thus, they are reducing their supply of labor to the market. Other people near retirement age might decide they no longer need to hold onto their job just because it provides health insurance, and they also leave the work force. Still other people might leave the job they have now and start their own business.

The fastest growing demographic segment of the population currently starting new businesses is people age 65 and older. Why? Two reasons: one, nobody will hire them so they create their own work; two, they qualify for Medicare and so they aren’t locked into an existing job for health care coverage. They didn’t just develop an entrepreneurial urge overnight.

Under questioning today before the House Budget Committee, CBO director Douglas Elmendorf confirmed that in reality, his report suggests Obamacare will reduce unemployment: The CBO report found that Obamacare, through subsidizing health coverage, would reduce the amount of hours workers choose to work, to the equivalent of 2.5 million full-time workers over 10 years. This was widely spun by as a loss of 2.5 million jobs. Actually it lowers the participation rate and the unemployment rate.

Obamacare’s impact will be on labor demand, rather than supply. On page 124, the CBO report estimates that the ACA will “boost overall demand for goods and services over the next few years because the people who will benefit from the expansion of Medicaid and from access to the exchange subsidies are predominantly in lower-income households and thus are likely to spend a considerable fraction of their additional resources on goods and services.” This, the report says, “will in turn boost demand for labor over the next few years.”

Elmendorf testified that when you boost demand for labor in this kind of economy, you actually reduce the unemployment rate, because those people who are looking for work can find more work, and this would actually reduce unemployment. Later in his testimony, Elmendorf confirmed that the subsidies from Obamacare would reduce the incentive to work, and that this could reduce economic growth.

The CBO report raises a bunch of interesting questions and we’re not really certain of all the outcomes. If, as CBO predicts, the decline in work is driven almost entirely by a decline in labor supply, the upshot might actually be higher wages. Workers will choose to work fewer hours; since firms won't be any less interested in hiring, they'll have to pay more per hour to get those workers in the door. The positive wage effect should be concentrated among low-skill workers, who will face the greatest discouragement to work from Obamacare, and therefore will be able to command the greatest wage increases in order to keep working.

The CBO has been busy, and there are some interesting numbers they’ve run. For example, the CBO is projecting that the federal government will take in $16 billion from health plans that are essentially making a profit on the exchange, and will redistribute $8 billion to other insurers running a loss. That means $8 billion in net savings for the federal government. So any legislation that seeks to repeal the Obamacare bailout will need to be scored as increasing the deficit, and need to presumably include $8 billion in payouts to offset revenue loss.

As I said yesterday, make your adjustments based upon whatever reality you choose.

Who knows? That’s why I find this economics stuff so much fun. Here’s another example from an article by Edward Hadas, writing about deflation; Christine Lagarde, the IMF Director, says deflation is an “ogre which must be fought decisively.” Lagarde did not explain why she thought deflation was so dangerous. Most likely, she had three commonly-made arguments in mind.

First, deflation might make a tragic debt cycle more likely. The fear is not totally irrational; a generalized price decrease can lead to economic disaster: prices fall, debts go bad, banks collapse, businesses fail, desperate workers take pay cuts and then companies cut prices even more. The downward spiral lasts until something happens – war, anarchy or a new monetary order.

The second purported reason to worry about deflation is the prospect that gently falling prices might reduce consumption. Rational people, economists say, will hold onto a dollar until the eagle grins as they wait for even lower prices. Maybe, but consider the sharp, predictable declines in the price of electronic goods. They have not noticeably hurt sales. Mild deflation might lead a few canny shoppers to delay some purchases, but the prospect of paying 1-2 percent less a year down the road is a pretty weak motivation for restraint.

Finally, Lagarde might be concerned that deflation limits the ability of central bankers to provide helpful stimulus. After all, policy interest rates cannot easily go below zero, as theory would dictate they should when the economy under-performs while prices are falling. In reality, the policy interest rate is rarely powerful and never the only available tool.

Of course, some rate moves can change the economic balance, but the statistical evidence suggests that monetary policy is less important than many other financial and economic forces. The economist Edward Prescott, a Nobel prize winner, even claims that “it is an established scientific fact” that the Federal Reserve’s monetary policy has had “virtually no effect on output and employment.”

That’s probably not quite accurate; the Fed has had an effect, just not a positive effect that extends to Main Street. In any case the authorities have other ways to influence the economy. They can print new money, as the Fed is doing. Alternatively, they can change financial regulations, taxes or government spending. At worst, mild deflation would force central bankers and their political masters to be more creative.

Why are we even talking about deflation? Two reasons; first is the domestic story. The acceleration in US GDP growth seen during the second half of 2013 has given support to FOMC and market expectations of stronger growth in 2014. As currently reported, annualized GDP growth has risen from a sub-par 1.8% in the first half of 2013 to a decidedly above-trend 3.7% for the second half of 2013. If sustained, such a growth pace would not only argue for a rapid end to the tapering process, but also initial steps towards raising interest rates.  The problem is that the acceleration in growth experienced through 2013 has not come about from domestic end demand (on which the US typically depends), but rather the accumulation of inventories and, to a lesser extent, a contribution from net exports.

The impact of inventory accrual was most obvious in Q3 when it contributed 1.7ppts to the 4.1% annualized headline. This was followed by a further 0.4ppt contribution in Q4 as stocks were accumulated at an even faster clip into year end. Periods of rapid inventory accumulation are almost always fleeting, with end demand and supply inevitably brought back into line, one way or another.

The other reason to consider the effects of deflation come from Europe. Eurozone inflation eased to 0.7 percent in January, from 0.8 percent in December. Disinflation, caused by stagnating consumer demand, saps growth and weakens the currency by reducing the appeal of euro-denominated assets; at least that’s the theory. The European Central Bank meets tomorrow and there’s speculation President Mario Draghi will either cut rates to near zero or announce alternative measures such as bond purchases. Or he might just say he’ll do “whatever it takes” but he’ll say it louder.

Yesterday, Microsoft announce they were promoting Satya Nadella, a veteran company insider, as its new CEO. Along with Nadella's new role, Microsoft also announced that co-founder Bill Gates had quit his job as chairman of the board and would serve as Nadella's advisor on technology and product selection issues. Apparently Bill Gates’ first day on the job in his new role as a technology advisor got off to a rough start as Nadella and Gates spent several tense hours behind closed doors trying to install the Windows 8.1 update. 

Tuesday, February 04, 2014 - Adjust Accordingly

Adjust Accordingly

by Sinclair Noe

DOW + 72 = 15,445
SPX + 13 = 1755
NAS + 34 = 4031
10 YR YLD + .04 = 2.62%
OIL + 1.16 = 97.59
GOLD – 2.70 = 1255.40
SILV + .17 = 19.61

Here come the bears; they tend to come out of the woods when the Dow has a day like yesterday, and they tend to growl. The latest noise is in the form of a couple of projections and predictions that the market will drop 40%. Perhaps we’re just going through a period of pricing discovery as the markets digest information. Maybe this will pass or maybe not. The typical bear market lasts 2 to 4 years and the average drop is about 40%, so it isn’t unreasonable to guess. And bear markets come around with regularity. The median duration for a bull market is 50 months and the average duration for a bull market is 67 months. The current bull market dates back to March 2009, which is right at 58 months. The idea of a bear coming along right about now should not shock anybody. We’re not there yet; a bear market would be a 20% correction; so we’re not there yet. Of course you might not want to just sit around and wait to get mauled by a bear.

So, let’s consider where we are right now. Here’s the rundown:

China’s GDP is slowing and their manufacturing sector is contracting and their shadow banking system may be harboring a few entities on the verge of default;

emerging markets are hemorrhaging and that includes Argentina with runaway inflation, Brazil with export problems, Turkey which just raised short term rates to 12%, Ukraine with street protests, and Russia hosting the Olympics;

the Eurozone still hasn’t recovered and the PIGS – Portugal, Italy, Greece, and Spain – are essentially experiencing depression and the northern countries are experiencing double dip recession, and ECB Pres Mario Draghi  has said he’ll do whatever it takes but he hasn’t done it;

US economic data has been a string of disappointments including durable goods, auto sales, the ISM manufacturing report which included a nasty new orders index, the December jobs report, and a polar vortex, and a drought;

and Congress still hasn’t figured out the debt ceiling hike, and the Federal Reserve still seems bent on tapering, and NYSE margin debt is at high levels reminiscent of 2000 and 2007 which foreshadowed downturns, and PE ratios are a bit lofty;

and for all my technically oriented friends, the Dow Industrial Average has dipped  below its 200 day moving average and the S&P 500 has dropped below the 50 day MA.

Now, does this mean we’re in a bear market? No. Does this mean you should be complacent? No.

Maybe things are better than we think. It’s important to remember that good things happen all the time, every day. Go out for dinner tonight, if you want to. When things get tough, don’t get in a tither, and remember to look on the bright side of life. That is the new motto of the Federal Reserve Bank of New York: look on the bright side and adjust your data accordingly.

You will recall that last month, when the December jobs report was released, we learned that the economy had only added 74,000 net new jobs and at the same time the unemployment rate dropped from 7% to 6.7% because people were leaving the labor pool, dropping out of the labor force. The thinking was that many of the dropouts were discouraged workers who had given up on job prospects, or had simply been meeting with disappointment for so long that the government stopped counting them.

But the New York Fed says it’s just a bunch of Baby Boomers retiring. If these economists are right, then that means the recent swift drop in the official unemployment rate is a real sign of job-market health and not a function of people giving up on finding work. It also means that "slack" in the labor market could disappear more quickly than anybody expects. That could cause inflation pressures to rise suddenly, forcing Fed policy makers to raise interest rates to cool down the economy much sooner than they expected.

Certainly part of the reason is because Baby Boomers are retiring. Boomers have always had an outsized impact on the economy and as they slip into retirement that will be felt economically, but it seems optimistic to imagine that the jobs situation is really great. So let’s dig into some numbers, specifically the labor force participation rate and the employment population ratio.

The participation rate refers to the percentage of working-age Americans either working or looking for work. Participation peaked out in 1999 and then fell off sharply in the 2001 downturn and the 2008 downturn, and is now at the lowest level since 1978. So, it seems pretty clear that a big reason for the big drop in the labor force was a weak recovery and a lack of good job opportunities. Labor-force participation is trending down anyway because of Baby Boomer retirements, sure, but clearly something else happened after the recession.

So let’s look at the Civilian Employment Population Ratio, which is exactly what it sounds like: the ratio of employed civilians to the total population. It stands right around 58%, which is the lowest it’s been since the early 80s. Again, this ratio peaked in the late 90s and took a sharp dive in 2001 and a really big dive in 2008.  The employment population ratio tends to fall during a recession and then climb back during a recovery, but following 2008, the ratio did not recover, it just went sideways.

The New York Fed economists think the ratio has gone sideways because it doesn’t account for the mass retirements of the Baby Boomers, and so they made some adjustments. There is a little problem with the adjustment. More young people lost jobs in the downturn and over the past few years than older workers. Americans 55 and older didn’t lose their jobs during the recession to the extent that younger ones did. In fact, the proportion of older Americans with a job is higher now than in 2006, partly because it is harder to retire than in the past when asset prices were high and rising. The Boomers can’t retire and the younger workers can’t get a job.

And then today the Congressional Budget Office, the CBO, the nonpartisan numbers crunchers for Congress issued a report saying the labor force could shrink by the equivalent of 2.5 million full time workers due to the Affordable Care Act, or ObamaCare. They give two big reasons for this shrinkage.

First, the health reform law offers subsidies to low-income Americans that decline as their income goes up. It also offers expanded access to Medicaid benefits for the poorest workers, which is similarly tied to income. That means that for some people, it may make sense to earn less money through work so they can get a bigger break when buying health insurance. In other words, some workers will decide that having subsidized health coverage is more valuable to them than having more money to spend on goods and services.

Second, for some Americans the subsidies will essentially function as an increase in income because they won't be paying as much for their health care, allowing them to work less and still maintain the same standard of living.

The report states: "The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses' demand for labor.”

According to the CBO most full-time workers will probably decide that it doesn't make sense to reduce their own hours or leave their jobs to qualify for coverage. The people most likely to make that choice are low-wage workers, who either don't get company health benefits or are making so little that they would be close to qualifying for Medicaid or the subsidies.

In a somewhat unusual disclaimer, the CBO report says their “estimate of the ACA's impact on labor markets is subject to substantial uncertainty." One reason for the uncertainty is simply that the changes that will result from the health care law are going to take place on an unprecedented scale. Another reason is that there are a variety of ways Obamacare could affect workers: Some provisions may incentivize Americans to work more and some could push them to work less, resulting in the net loss of labor supply over a decade.

The White House issued a statement today in response to the CBO report, and they think the people most likely to reduce their hours or stop working are those who have a job mainly to get affordable health coverage -- people like second wage earners in a household, potential entrepreneurs or workers close to retirement. This is a phenomenon known as “job lock” where a worker stays on a job just for the insurance and it is generally considered a labor market inefficiency.

The White House statement reads: "Individuals will be empowered to make choices about their own lives and livelihoods, like retiring on time rather than working into their elderly years or choosing to spend more time with their families."

The CBO report says ObamaCare could incentivize hiring or decentivize employers to hire.  The law will require companies with at least 50 full-time workers to offer health benefits to anyone who works more than 30 hours per week starting next year. That may in turn give employers a reason to hire fewer people or more part-time workers to keep their labor costs down.  At the same time, the health care law could indirectly spur companies to hire. With lower-income families spending less for their health care, they would have more money to spend on goods and services, and companies would have to hire to meet the increased demand.

Always look on the bright side and adjust based on whatever reality you choose.

Wednesday, June 19, 2016 - Don't Fight It

Don't Fight It

by Sinclair Noe

DOW – 206 = 15,112
SPX – 22 = 1628
NAS – 38 = 3443
10 YR YLD + .13 = 2.31%
OIL - .52 = 98.15
GOLD – 17.00 = 1352.30
SILV - .34 = 21.45

One of the best known adages in the financial world is “Don't fight the Fed”. Marty Zweig is credited with that sage wisdom. Zweig was a professor of finance, and a financial analyst; he went on to become a hedge fund manager and he wrote a newsletter. He famously bet that the market would go down in 1987, and by October of that year he was short the market and made a big profit while most other money managers were getting clobbered.

“Don’t fight the Fed”; that meant, according to Zweig’s theory, that if interest rates were going down, stocks would go up, and vice versa. He also claimed the way to make money was to be risk-averse, rather than taking chances on the upside. He said he was a big poker player while at Wharton, but had stopped playing when he became a money manager because he hated losing.

In addition to “Don't fight the Fed”, Zweig is credited with the adage, “Don't fight the tape”; in other words, the market will have the last word, and complaining that the market is wrong is an excellent way to lose money. Zweig had a third rule: “Never relax”.

Today the Federal Reserve concluded their Federal Open Market Committee meeting; they issued a formal statement and then they issued their quarterly economic projections and then Fed Chairman Bernanke held a press conference.

The formal statement was almost identical to the statement from the FOMC meeting in March. No real change in interest rate targets. No real change in their purchases of securities to prop up the markets. No real change in outlook. No real change in targets. No real change in anything. No talk of taper. We'll go through that statement in a moment.

The economic projections showed a very, very, very slight improvement in the economy; a tiny improvement in GDP growth, a slight improvement in unemployment, and just a hint more inflation; it was not a cause for optimism.

Then Bernanke held a press conference. Bernanke said job gains and housing markets had increased consumer confidence; most FOMC participants do not favor selling agency debt; he reiterated that thresholds aren't triggers on rates; the Fed's monetary policy will continue to support recovery; the Fed may vary it's purchases based upon economic data; the Fed may moderate the pace of purchases later this year; the Fed may stop purchases by the middle of next year; and the Fed will ease QE if the economy improves.

And then Bernanke tried to soften the blow by saying: “If you draw the conclusion that I've just said that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy."

And then Bernanke tried to reassure market participants that any change in the bond purchase program would “be akin to easing off the gas pedal rather than putting on the brake,” and that the Fed is able and willing to adjust its purchases back upward if its forecasts turn out to be too optimistic.

Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy,” and he said he was a “little puzzled by that” and it couldn't be explained by “Monetary policy”. Well, he can believe that if he wants but if it looks like a duck, and quacks like a duck.

In his prepared remarks Bernanke referred to the newly released economic projections: "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year. And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year."

Let's review the key points of the formal statement:

… economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline... The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

... the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.

The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

So, we got a combination of official statement saying “no taper”, then Bernanke saying “taper”. And the bottom line here is that traders in the financial sector are terribly afraid of losing free money from the Fed; and the most obvious rationale behind the fear is that the economy is not strong enough to support valuations.

Elsewhere.

The Congressional Budget Office just released their analysis of the fiscal impact of the immigration reform legislation from the Senate and it turns out that the bill is expected to lower the budget deficit by $197 billion over the next decade. The CBOs guesstimate of the bill's impact over its second decade (2024-2033) is $690 billion in deficit reduction. 

What's going on here is that the budget agency expects immigration to generate more costs but even more revenues. Between health programs, entitlements, SNAP, etc., they expect spending to go up about $260 billion over the next ten years. But they estimate revenues to go up about $460 billion. The net difference, about $200 billion, is the projected impact on the deficit.

Deloitte Financial Advisory Services settled with New York's banking regulator over its consulting work for Standard Chartered Bank on money-laundering issues. In August, the agency said Deloitte consultants hid details from regulators about Standard Chartered Bank's transactions with Iranian clients.

Under the agreement, the consulting firm affiliate of Deloitte & Touche agreed to pay $10 million, to implement reforms designed to address conflicts of interest, and to a one-year suspension from consulting work at financial institutions regulated by New York's Department of Financial Services.

Remember the $25 billion settlement last year with the five biggest mortgage lenders? The mortgage settlement came after the housing crash led to a wave of foreclosures across the country and after widespread improprieties in mortgage lending and in the foreclosure process were uncovered. The Big Five were supposed to change their evil ways. A report has now been issued to see if the lenders are getting better and the answer is “sort of”, but four of the five have yet to meet their commitment to end the maze of frustrations that borrowers must navigate to modify their loans.

The new chair of the Securities and Exchange Commission, Mary Jo White, in an interview with the Murdoch Street Journal said the agency was no longer going to just settle all of its fraud and abuse cases by letting the accused get away without admitting or denying wrongdoing. In some cases, she said, the SEC will actually try to force some admissions of wrongdoing.

White said: "We are going to, in certain cases, be seeking admissions going forward. Public accountability in particular kinds of cases can be quite important." But she went on to say that settling is quicker and not as risky, and it gets money to investors faster, and settling without admitting guilt is still a major tool in the arsenal. White said the SEC will decide case-by-case when to seek admission, depending on "how much harm has been done to investors, how egregious is the fraud." In other words, don't hold your breath waiting for a perp walk.

Meanwhile, Britain's Commission on Banking Standards has just issued a 500 page report calling for a new criminal offense for “senior persons” who run banks in a “reckless manner”, as well as much more stringent clawback rules that could see managers being stripped of several years’ worth of pay. The Commission warned that bankers had escaped “personal responsibility” for their actions, and said that drastic reforms were the only way to restore trust in banks. The report also said the bailout of the Royal Bank of Scotland had hurt the broader economy and the bank should be broken up.

Tuesday, May 14, 2013 -

Booms

by Sinclair Noe

DOW + 123 = 15,215
SPX + 16 = 1650
NAS + 23 = 3462
10 YR YLD + .03 = 1.95%
OIL - .94 = 94.23
GOLD – 5.00 = 1426.80
SILV - .24 = 23.51

So, we have record highs. I went back to check some of the earlier in the year predictions. Last December, Goldman Sachs was predicting the S&P 500 would hit 1625; sounded good, even a little bold back then. Of course, in the past week, we've blown past those numbers. Many experts are calling for a correction here. Maybe, maybe not. If your memory is still sharp, you'll recall a few weeks back I was talking about the “Sell in May” strategy; and if you're really sharp, you'll recall I said the way to play that strategy was to wait for a MACD sell signal for an exit, rather than just an arbitrary date on the calendar. We still haven't had the exit signal.

The market is in full melt-up mode, extending further above its longer-term moving averages every single day. The riskier stocks helped pushed the market higher over the past week or so. Technology names blasted higher. Materials broke out and helped lead the market to record heights. This shows that we are finally seeing investors beginning to believe in the market again.

In a recent Gallup survey, only 52% of folks said that they or their spouse own any stocks (that includes mutual funds). That's a jaw-dropping number if only for the fact that the S&P 500 has more than doubled since its 2009 bottom. The data shows that, left to their own devices, most individual investors sold into that 2009 bottom, and they kept selling stocks as the market recovered and pushed to new highs. So, there is a lot of money on the sidelines. If we do get a correction, it will probably happen right after Mom and Pop investor jump in.

The Congressional Budget Office just did a new series of baseline budget deficit projections and they're a lot lower than the old ones. The short-term deficit, in particular, is way lower; $200 billion lower; or a $643 billion deficit for 2013 rather than an $845 billion deficit. That's about half higher-than-expected tax revenues and about half higher-than-expected payouts from Fannie Mae and Freddie Mac. A big reason for the smaller-than-expected deficit is stronger economic growth.

The CBO is also revising the 10-year deficit forecast down by $618 billion, primarily because of the slowdown in health care spending. This doesn't mean the deficit problem is completely fixed. The current projection has the deficit shrinking for the next couple of years and then growing again. So, things will get better before they get worse, but that leaves us with a manageable 2024 deficit. The problem is that it's trending upward, and nothing in this revised projection changes that fact. There's no need to panic about the 2024 deficit, or for that matter, no need to strike a grand bargain. It is possible that we could start to control health care costs and do more to boost economic growth, and ten years from now, we might not have much of a problem at all. Key here is economic growth.

The Department of Labor reports US import prices fell in April due to a drop in oil costs, a positive sign for household finances that also pointed to benign inflation pressures. Import prices slipped 0.5 percent last month, the biggest decline since December. March's data was revised to show a 0.2 percent decline instead of the previously reported 0.5 percent drop. Stripping out petroleum, import prices dipped 0.1 percent.

The tame inflation environment should allow the Federal Reserve to stay on its ultra-easy monetary policy; so this flies directly in the face of those who are worried about the Fed “tapering off” of QE. At its policy meeting earlier this month the central bank decided to continue buying $85 billion worth of bonds every month to push long-term interest rates downward. At the same time, the economy has lately shown signs of resilience despite austerity measures.

The National Federation of Independent Business reports its gauge of confidence for small U.S. businesses rose in April to its highest in six months. Lower oil prices are also helping household finances. The United States imports much of the fuel it consumes. Last month, imported petroleum prices fell 1.9 percent. The Labor Department report also showed export prices fell 0.7 percent last month, the largest decline since June.

Meanwhile, there is a boom in North American energy that may be one of the biggest stories in the global economy, even though we haven't really felt the positive impact in the US; not yet anyway. The boom is related to the shale exploration in the US and the oil sands fields in Canada.

A new report from the International Energy Agency, the IEA, discusses the consequences of the boom, and they are looking at this as a boom. The report describes the US supply "shock" as that is sending "ripples" throughout the world, affecting every aspect of the market.

Here's the key part from the press release announcing the report:

The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15, the International Energy Agency (IEA) said in its annual Medium-Term Oil Market Report (MTOMR) released today. The shift will not only cause oil companies to overhaul their global investment strategies, but also reshape the way oil is transported, stored and refined.

According to the MTOMR, the effects of continued growth in North American supply – led by US light, tight oil (LTO) and Canadian oil sands – will cascade through the global oil market. Although shale oil development outside North America may not be a large-scale reality during the report’s five-year timeframe, the technologies responsible for the boom will increase production from mature, conventional fields – causing companies to reconsider investments in higher-risk areas.

In virtually every other aspect of the market, developing economies are in the driver’s seat. This quarter, for the first time, non-OECD economies will overtake OECD nations in oil demand. At the same time, massive refinery capacity increases in non-OECD economies are accelerating a broad restructuring of the global refining industry and oil trading patterns. European refiners will see no let-up from the squeeze caused by increasing US product exports and the new Asian and Middle Eastern refining titans.

“The good news is that this is helping to ease a market that was relatively tight for several years. The technology that unlocked the bonanza in places like North Dakota can and will be applied elsewhere, potentially leading to a broad reassessment of reserves. But as companies rethink their strategies, and as emerging economies become the leading players in the refining and demand sectors, not everyone will be a winner.”

While geopolitical risks abound, market fundamentals suggest a more comfortable global oil supply/demand balance over the next five years. The MTOMR forecasts North American supply to grow by 3.9 million barrels per day (mb/d) from 2012 to 2018, or nearly two-thirds of total forecast non-OPEC supply growth of 6 mb/d. World liquid production capacity is expected to grow by 8.4 mb/d – significantly faster than demand – which is projected to expand by 6.9 mb/d. Global refining capacity will post even steeper growth, surging by 9.5 mb/d, led by China and the Middle East.

Now, when you look at this energy boom, you might think this would be a real positive for US manufacturing. We just haven't seen it yet, and we might not. There has been talk about a renaissance in US manufacturing, and factory output continues to rise, but the truth is that manufacturing has dropped to just 9% of jobs, and in the last month, there were no new manufacturing jobs added. For every $1 of manufacturing output in a community, there’s another $1.48 of wealth created. And there has been a push for new manufacturing jobs which unfortunately has been hampered by austerity measures out of Congress. Any strength we've seen in manufacturing is probably just a short-term bounce reflecting more the relative weakness of Europe and Japan. Lower energy prices might help, but not yet. The ability to make things is fundamental to the ability to innovate things over the long term. When you give up making products you lose a lot of the added value.

Maybe we are on the leading edge of a new oil and natural gas boom in this country, but one thing we'll need to get there is water.

Water and energy are inextricably linked.

Power plants are the largest users of water in the United States, while substantial amounts of energy are needed to supply fresh water to homes, farms and factories and treat waste water prior to safe disposal.

Rising water consumption for hydraulic fracturing and production of biofuels, coupled with severe droughts across more than 60 percent of the continental United States in 2012, have propelled that link up the policymakers' agenda.

The threat to hydroelectric generation is obvious. But in 2007-2009, drought put the water supplies of 24 of the nation's 104 reactors at nuclear plants at risk.

The United States withdrew 410 billion gallons of water from aquifers, rivers and the ocean every day in 2005, of which 350 billion gallons were fresh water and 60 billion gallons were saline or brackish.

Cooling systems for nuclear plants and power plants that burned coal, gas and oil accounted for 41 percent of fresh water withdrawals and 49 percent of all water withdrawals. That put them ahead of irrigation (31 percent) and public supply to homes and offices (11 percent). The remaining uses including industry, mining, livestock and aquaculture accounted for less than 10 percent combined.

In addition to power plants, water used in growing crops for biofuels as well as for drilling and fracking oil and gas wells accounts for a rapidly increasing amount of total consumption.

The broader energy sector has been the fastest growing water consumer in the United States in recent years and is projected to account for 85 percent of the growth in domestic water consumption for the next 20 years.

Environmentalists and community groups cite water scarcity as one reason to ban or restrict fracking. Even in Texas, water conservation districts say they are considering introducing restrictions if reservoirs and the water table drop too low.

Most of the water employed in thermoelectric power stations is in the cooling system. In once-through cooling (OTC) systems, water is withdrawn from a source, normally a river or coastal location, circulated through heat exchangers, then returned to the surface water body. OTC systems withdraw large amounts of water but use comparatively little, returning most to the source.

Most thermal plants in the United States employ OTC systems. Net water consumption is therefore only 3 percent of the total, compared with gross withdrawals of almost 50 percent. The distinction between withdrawals and consumption is crucial. Water that is consumed cannot readily be used for another purpose.

Power plants need sufficient water at a low enough temperature to operate efficiently. Most states impose restrictions on the temperature at which water can be discharged back into rivers and the sea to prevent the animals and plants in the waterway from being cooked. If there is insufficient water or it is too hot, power plants may be forced to close or cut output.

In August 2012, the Illinois Environmental Protection Agency waived the normal environmental restrictions and allowed four coal-fired and four nuclear power stations to release hundreds of millions of gallons of hot water at nearly 100 degrees Fahrenheit into state lakes and rivers to keep the lights on.

On other occasions, low water levels forced power plants to turn down. During the 2003 heat wave in France, which was responsible for more than 10,000 deaths, nuclear plants had to reduce their output, worsening the crisis.

Nuclear and coal-fired power plants with OTC systems are especially vulnerable to droughts and heat waves because they rely on by far the largest volume of water withdrawals. Combined-cycle gas plants are much more efficient. And gas turbines, solar and wind generators use negligible quantities.

Options for reducing the power sector's vulnerability include switching the type of fuel from nuclear and coal to gas, solar or wind; switching to recirculating or dry and hybrid wet-dry cooling systems; or switching the water source from fresh water to saline or waste water.

The drawback is the capital cost and reduced efficiency of the plant.

Oil and gas extraction uses prodigious quantities of fresh water and produces large amounts of brackish waste water, which is normally reinjected far below the drinking water table. Drilling a conventional well uses relatively small quantities of water for drilling mud. Fracking uses vast amounts of water. A typical well drilled and fracked in the Eagle Ford uses 4.3 million gallons.

Pressure to reduce the amount of fresh water used in fracturing operations has led to interest in switching to saline or waste water, recycling water, or fracking with diesel or hydrocarbon gels, though all these systems are less efficient and remain experimental, and represent the threat of contamination to acquifers.

Biofuels present another problem. Huge amounts of water are being used to grow crops to produce ethanol.

Because biofuels need so much water for their growth, they are particularly vulnerable to droughts. Just as traditional agricultural crops are hindered in times of drought, so are energy crops.

We may be looking at a boom in energy production in this country, but it comes at a price.