Friday, August 01, 2014 - Jobs, Mainly

Jobs, Mainly

by Sinclair Noe

DOW – 69 = 16,493
SPX – 5 = 1925
NAS – 17 = 4352
10 YR YLD - .05 = 2.50%
OIL - .32 = 97.88
GOLD + 13.70 = 1295.20
SILV - .09 = 20.40

The first Friday of each month brings us what I consider one of the most important economic reports we can cover, the jobs report; and so we provide comprehensive (wonkish) coverage.

The economy added 209,000 net new jobs in July. The unemployment rate moved up to 6.2% from 6.1%. Even though the economy added jobs, more people joined the labor force, and that is why the unemployment rate moved higher. The 209,000 new jobs was below estimates of about 230,000. The report from June was revised from 288,000 to 298,000; the May report was revised from 224,000 to 229,000 for a net 15,000 in upward revisions.

Employment is up 2.57 million year over year. We have regained the jobs lost in the downturn, and total employment is 639,000 above the pre-recession peak. Total employment is up 9.35 million from the lows of the recession, and private employment is up almost 9.9 million from the lows; the difference reflects the job losses in government related jobs.

So far this year an average of 229,000 new jobs a month have been created. That’s a significantly higher pace than in 2010 when a mere 88,000 jobs a month on average were added. Since the start of the year the economy has added 1.6 million jobs.  At the current pace, the economy could add 2.75 million jobs this year, which would be the best year for total and private job growth since 1999.

This was the sixth month in a row with more than 200,000 jobs added, and that hasn’t happened since 1997. It was probably a bigger achievement 17 years ago, because the economy and the labor force was smaller back then, but the employment recovery has been chugging along through a first quarter that was frozen by the polar vortex and rebound in the second quarter. And the private sector has been adding jobs consistently since the first quarter of 2010.

The unemployment rate was up to 6.2%. The jobless rate can rise for both good reasons (more people looking for work) and bad reasons (fewer people having a job). This month, more people were looking for work. The Labor Force Participation Rate increased to 62.9% in July; this is a measure of how many people who are of working age are actually in the labor force and working or looking for work. The idea that the pool of labor is increasing is a positive; the idea is that some people who have been unemployed for a long time are now finding jobs. The trend in employment growth remains more than strong enough for the unemployment rate to keep trending down, even though the rate rose a tenth this month

Part of the decline in the participation rate was due to demographics; many older workers retired, whether they wanted to or not, while many younger workers stayed in school or returned to school. So, it’s helpful to look at people aged 25-54, in their prime working age; among this group, the participation rate declined slightly; this confirms that younger and older workers were jumping back into the labor pool.  Still, the employment to population rate, which measures the country’s population that reported having a job in July was unchanged at 59%, a number that was up only barely from its 58.7% level of a year ago.

There are still more than 3.1 million workers who have been unemployed more than half a year. And there are just over 7.5 million people working part-time for economic reasons. These workers are included in an alternate measure of unemployment known as the U-6, which includes unemployed and underutilized workers; U-6 increased from 12.1% to 12.2%.

Many people think the U-6 is a more accurate measure of the jobs market, but let’s dig a little deeper. There are 9.6 million people unemployed and actively looking for a job. There are more than 2 million people who have stopped looking for a job within the past year. When you start adding all the unemployed workers who want a job, plus involuntary part-time, plus discouraged workers, you come up with about 23 million people that could possibly move into the labor pool. There is still massive slack in the labor market, and it will take a long time to take up the slack. For now, it is a slow, steady slog.

Where is the job growth coming from? Professional and business services added 47,000 jobs. Retail employment gained 27,000 jobs. Manufacturing added 28,000 jobs last month but the sector has recovered only 30% of the jobs lost during the recession. Construction added 22,000 jobs. Leisure and hospitality gained 21,000. Education and health services added 17,000. Government added 11,000. State and local government employment is now up 151,000 from the bottom, but still nearly 600,000 below the peak. Federal government jobs have dropped by 22,000 since the start of the year. The loss of government jobs is one of the major factors in the slow jobs recovery. In previous downturns, government did not have layoffs, and sometimes increased hiring. In this downturn government jobs were cut in a wave of austerity measures.

Even though the economy has been adding jobs, it has not been enough to push a recovery in wages. In July, average hourly wages rose a penny to $24.45, a disappointing result after strong gains in June and May. In 23 of the past 24 months, the yearly increase in hourly pay has ranged from 1.9% to 2.2%, or about one-third less than usual during an economic recovery. The 12-month increase in wages as of July was just 2%; and inflation wiped out about three-fourths of that gain. There’s been no change since the start of 2014. While it might seem counterintuitive that wages are flat while jobs are being added, the likely reason is that there are a lot of poor paying jobs plus a few very good paying jobs. The average length of the workweek for private sector workers was unchanged at 34.5 hours.

Stronger than expected US growth figures on Wednesday showed second quarter GDP up 4% on an annualized basis, along with hawkish comments from US Federal Reserve board member Charles Plosser, it prompted fears that the central bank may increase the cost of borrowing sooner than expected. Today’s non-farm payroll numbers were just weak enough to ease concerns about possible tightening from the Fed, yet not so awful as to indicate a downturn. It still points to a job market and an economy that is improving, but there is no real wage pressure and nothing to indicate inflation is a concern.

We had a couple more economic reports today. The Institute for Supply Management said its index of national factory activity rose to 57.1 in July, the highest since April 2011, from 55.3 in June. A reading above 50 indicates expansion in the manufacturing sector.

The Thomson Reuters/University of Michigan's final July reading on the overall index on consumer sentiment came in at 81.8, down from the final June reading of 82.5. The surveyors report that consumers’ attention has been dominated by jobs and income growth.

For the week, the S&P 500 fell 2.7%, its biggest weekly percentage loss since the week ending June 1, 2012, while the Nasdaq fell 2.2%. The Dow ended down 2.8% for the week. The Dow's losses dragged it further into negative territory for the year. For the year-to-date, it is down 0.5%.

Markets have suffered a turbulent few days, hit by a combination of interest rate concerns and growing geopolitical worries. The violence in Gaza also added to the sense of events escalating out of control; a proposed 72 hour cease fire didn’t last one day. An Israeli soldier was captured, and it looks like violence will escalate over the weekend. The week saw Argentina defaulting for the second time in 12 years, while continuing tensions with Russia over the Ukraine led to the imposition of further sanctions which could hit businesses and put the brakes on global growth.

It was a big week for US economic activity, with jobs and GDP statistics and a Fed meeting, but it was European equity markets that took a real tumble. Portugal was a big loser, as Banco Espírito Santo reported the largest-ever loss for a Portuguese company, sending its shares spiraling and prompting probes into possible accounting fraud at the bank.

Portugal’s major stock index dropped 10% for the week. German stocks were hit following stepped up sanctions against Russia, a major supplier of natural gas to Germany; the DAX index slipped 4.5%. Greece, Austria, Spain, UK, and France all saw declines of 3% or more. The major Russian index dropped about 1%.

Europe posted its own jobs report. Eurozone unemployment dropped to 11.5%, which is absolutely horrible, but getting better. Meanwhile, the region continues to flirt with the prospect of deflation, with euro zone wide prices rising a scant 0.4% in July from the prior year. So, there is still plenty the ECB can do to stimulate the economy over there.

Meanwhile, Congress is calling a 5 week recess, an extended summer vacation, which even Europeans think is excessive. They managed to get a few things done before running away. They passed a $16 billion VA bill to help deal with extensive treatment delays and a recent record-keeping scandal. They cobbled together a patch for highway funding, just a temporary patch. This Congress has only managed to pass 142 bills into law, which puts the legislative branch on pace for its least productive session in modern history. And now they’re heading out for a 5 week vacation. Maybe we’ll get lucky and they won’t come back.

Thursday, April 24, 2014 - The Bridge From Bubbles to Prosperity

The Bridge From Bubbles to Prosperity

by Sinclair Noe

DOW unchanged 16,501
SPX + 3 = 1878
NAS + 21 = 4148
10 YR YLD unchanged 2.69%
OIL + .46 = 101.90
GOLD + 10.20 = 1294.90
SILV + .20 = 19.75

The Dow closed unchanged. That is just one of those freaky things that happens every few years. I remember it happened in 2008, and 1998 and 1996. I’m fairly sure there were other days where the Dow closed unchanged. I don’t know if there is any particular significance.

Orders to factories for durable goods rose 2.6%, adding to the 2.1% rise in February. The back-to-back gains followed two big declines in December and January, which had raised concerns about possible weakness in manufacturing. The earlier declines, however, were likely tied to bad winter weather.

On the jobs front, the number of people seeking unemployment benefits jumped 24,000 to a seasonally adjusted 329,000 last week. The four-week average of weekly unemployment claims decreased to 316,750, which puts us back to 2007 levels.

The big earnings report today was Microsoft, which posted income of $5.6 billion, or 68 cents per share, compared with $6 billion, or 72 cents, in the year-ago quarter. They beat estimates of 63 cents per share, but take it with a grain of salt; the estimates started the quarter around 80 cents per share.

Yesterday we talked about a tech bubble, and whether we were in one or not, and we looked at comments from Greenlight Capital manager David Einhorn; he says there is a bubble but it doesn’t necessarily mean the bubble will pop any time soon.

Today, Warren Buffet weighed in on whether stocks are too frothy. Buffett says, “we’re in a range, and it's a big zone always of reasonableness." He went on that "Stocks will become worth more decade after decade, not in any precise manner, not in an even manner or anything of the sort, but 10 years, 20 years, 30 years from now, stocks will be worth more than they are today."

A friend stopped by this morning and asked about bubbles; apparently this is a hot topic these days. How do you know you’re in a bubble? The most obvious answer is when it pops, but there are more helpful ways to address the issue.

The first indicator is that prices spike; a parabolic increase in prices. From March 1999 to March 2000, the Nasdaq rose 110%. Think of an airplane that climbs too fast; it stalls out, rolls over and plummets to the ground; same thing in most markets.

The next thing to watch is valuation. Prices can go up very fast, and if valuations also go up fast, we call that “growth”. When prices go up but valuations lag, we call that a divergence, and a bubble in the making. For stocks, this means that earnings need to keep pace with price.

Back in 2000, the P/E passed 44 based upon inflation adjusted 10 year average earnings, or what’s known as the Shiller P/E; now the Shiller P/E stands at 16. However, for some sectors, we are seeing a divergence; the P/E for internet stocks is up around 47. The P/E for utility stocks is 19, but that is significantly above the historical median of 16. One reason for that divergence might be the recent spike in natural gas prices combined with investors chasing dividend yield. A parabolic spike is relative to the underlying asset, which makes it a bit more difficult to identify, but some examples are not tough to spot.

Look at the spike in Bitcoin about 6 months ago; it went from around $150 to almost $1200 in about one month, and its underlying value was impossible to quantify; that was a bubble. It popped. Remember when gold prices jumped up in spring of 2011? Pop. How about bond prices right now in Spain and Italy? Up 1.1 percentage points in 12 months and just slightly above comparable US Treasuries. It might be a parabolic price increase in combination with a divergence from the underlying asset; or maybe it says something about US Treasuries. You decide.

Of course, the valuation of the underlying asset can change very quickly due to an exogenous event. For example, if Russia shuts off nat gas supplies to Europe, it would quickly change the underlying value of Italian or Polish bonds. When the tsunami hit Fukushima, it changed the value of nuclear sector stocks. When the Hindenburg exploded, it was a black swan event for manufacturers of dirigibles.

And then the other indicator to consider is the madness of the masses. As investors identify a price move, they jump in; when everybody has jumped in, there is no one left. Or as Joe Kennedy said in the winter of 1928: “You know it's time to sell when shoeshine boys give you stock tips. This bull market is over.” By the way, the shoeshine boy reportedly told Kennedy to buy stock in the Hindenburg.

So, markets can get frothy and remain frothy, prices fluctuate, and the market can remain irrational longer than you can remain solvent. Spotting bubbles is possible, but tricky; so it’s important to remember you won’t go broke taking a profit.

Some things seem pretty straightforward. You accept that some things will work in very specific ways. You drive over a bridge and you expect that bridge to not fall into the river below. Yea, good luck with that. A report, released today by the American Road and Transportation Builders Association, warned that there are more than 63,000 bridges in this country in need of urgent repair; the dangerous bridges are used some 250 million times a day by trucks, school buses, passenger cars and other vehicles.

 Pennsylvania led the list of structurally deficient bridges, with 5,218, followed by Iowa, Oklahoma, Missouri and California. Nevada, Delaware, Utah, Alaska and Hawaii had the least. Overall, there are more than 607,000 bridges in the United States, according to the DOT's Federal Highway Administration, and most are more than 40 years old, and more than 10% are considered structurally deficient.

States rely heavily on federal funds to pay for road and bridge projects. The Fed collects 18.4 cents-a-gallon tax on gasoline and 24.4 cents-a-gallon tax on diesel to fund the Highway Trust Fund, which then pays out to the states. The Highway Trust Fund may be insolvent by this time next year unless Congress extends a temporary funding measure which is scheduled to expire in September.

The American Society of Civil Engineers estimates it will take $20.5 billion annually to clear the bridge repair backlog, up from the current $12.8 billion spent annually. That’s just the backlog; to really make a difference, it will take an investment of $3.6 trillion by 2020 to keep the transportation infrastructure in a good state of repair.

Meanwhile, we’ve been watching the Fed’s quantitative easing plan for some time and wondering why it hasn’t really helped the broader economy; it has helped banks, but not much beyond Wall Street. This is not to say the large scale asset purchase program hasn’t had an impact; it has. There is fairly concrete evidence that it has led to lower long-term interest rates; which in turn helped lift some real estate markets that were battered after the housing bubble burst. Some real estate markets are downright hot. Home values in San Francisco and Honolulu are at least 20 times as high as estimated rents. In other words, prices have jumped up and there is a divergence with the underlying asset, which has the makings for a bubble, but that just a couple of markets.

The broader real estate market has experienced a slowdown in the recovery and one cannot help but wonder about the extent to which Fed actions to pull back on their large scale asset purchases is implicated in the said slowdown. When former Fed chair Bernanke set off the "taper tantrum" in a press conference in June of last year by pointing out that at some point, the Fed would start scaling back the LSAP, bond and mortgage rates spiked. The 30-year fixed-rate mortgage went up about a point around then from the mid-threes to the mid-fours and has stayed there.

The Fed has tried to explain away the housing slowdown on the bad winter weather, but that’s just part of the problem. The other part of the problem is that the housing recovery only helped recover lost equity, it didn’t help create equity. In other words, it was a recovery effort not a wealth creation effort.

Kind of like the situation right now with bridges. From the day President Eisenhower signed the Federal-Aid Highway Act of 1956, the Interstate System has been a part of our culture; as construction projects, as transportation in our daily lives, and as an integral part of the American way of life.  Every citizen has been touched by it, if not directly as motorists, then indirectly because every item we buy has been on the Interstate System at some point.  President Eisenhower considered it one of the most important achievements of his two terms in office, and historians agree.  Economists recognize that this enormous public works project helped propel the economy, and still does.

Right now, interest rates are low; they won’t stay low forever. Right now, people need jobs; a massive infrastructure project would provide jobs, especially for long-term unemployed workers. Putting more people to work would mean more money moving through the economy, increasing demand, improving productivity. It seems like a no-brainer, until you remember that the problem rests squarely with our elected officials. Maybe the Federal Reserve could stop its insane and ineffective large scale asset purchases; stop the helicopter drops over Wall Street and instead make helicopter drops of cash strategically, directly over about 63,000 bridges. 

Wednesday, February 12, 2014 - Which Way the Wind Blows

Which Way the Wind Blows

by Sinclair Noe

DOW – 30 = 15,963
SPX – 0.49 = 1819
NAS + 10 = 4201
10 YR YLD + .04 = 2.76%
OIL + .33 = 100.27
GOLD + .90 = 1292.80
SILV unch = 20.34

After a four day rally, the stock market came back to a dose of reality.

Just a reminder that the Fed has started gradually reducing the amount of money it pumps into the economy. The move could hardly have been a surprise, because the Fed announced as early as last spring that it would begin doing so by the end of 2013. Now, it’s happening, and likely won’t change, and Janet Yellen said the rest of the world needs to adjust because the Fed has set its course. That has made for shaky markets around the world.

Remember that about a month ago, we started worrying about emerging markets. China said their economy was slowing down; that in turn will hurt the exports of commodity producers, weakening their trade balances. The big question now is how much further growth in China will slow. A serious cutback in China’s demand would not just harm emerging markets’ shipments directly to China, it would also cause further erosion in the already falling world prices for emerging markets’ coal, copper, palm oil and other commodities. China is also dealing with a shadow banking system ripe with potential defaults. But that isn’t the only problem in the world.

Many of those emerging markets also have unique economic and political problems that seemed to boil over at about the same time.  So, the hot money has been exiting emerging markets. This is the same hot money that flooded into emerging markets when the Fed had the printing press cranked up to QE3. This has happened before. It happens all the time. Back in the late 90’s the Asian economies vowed to avoid a repeat by building up trade surpluses and saving with a vengeance. They held back on investment and consumption; they hoarded foreign reserves, such as US Treasury bonds, which in turn lead to a speculative bubble in American subprime mortgages. Just to remind us all that we are not alone in this global economy.

The Federal Reserve says recent efforts by emerging markets such as Brazil, India and Turkey to stem investor flight from their economies are just “stopgap measures” that need to be followed by heftier policy actions. The Fed issued a report saying continued progress implementing monetary, fiscal and structural reforms will be needed in some emerging market economies to help remedy fundamental vulnerabilities, put them on a firmer footing, and make them more resilient to a range of economic shocks.

The Fed said in its report that many emerging markets learned from the financial crises in Asia and Latin America in the late 1990s and early 2000s and moved to flexible currencies, building cash reserves and cutting their dependence on foreign lending. Now, the response in the emerging markets seems to be slamming on the brakes by raising interest rates as they emerge, potentially sacrificing investment and jobs along the way. This is probably an imperfect reaction. I don’t know what was learned from the crises of the past, but those problems haven’t disappeared with a four day rally on Wall Street.

The Fed’s comments are likely to fuel debate at the upcoming meeting of finance officials and central bankers from the world’s 20 largest economies late next week in Sydney, Australia. The whole mess might even result in strategic shift from China to other developing Asian countries as the preferred locale for making export goods. And if the developing countries don’t step up, it raises the question of whether the EU or the US could fill the void.

I ran across an interesting article from Vanguard. It says financial data is notoriously easy to manipulate. You probably knew that, but the article says a difference of only one year can have a major effect on the five-year annual performance returns of U.S. stocks. If your starting point is 2013, this number is an impressive 18.7%, because it omits the big drop in 2008. But if you ran the numbers just one year earlier, from December 31, 2012, the five-year average return number dropped to 2.04%. Vanguard correctly concluded that basing investment decisions on "data-dependent snapshots" could be a big mistake.

Let’s talk about the weather. Not the Ice storm in the Southeast; you know about that; hundreds of thousands of people without electricity because the ice on the lines or on trees that fall into the lines; more than 3,000 canceled flights. Atlanta looks like some frozen wasteland in an apocalyptic science fiction movie. Soon, the storm will pass and meander up the seaboard and dump a foot or so of snow on New York City. Yesterday, Fed Chair Janet Yellen said the wild winter storms probably had an impact on the December and January jobs reports; probably knocked a smidge off the GDP as well. It’s important, but that’s not the weather I want to talk about today.

Today, I’d like to talk about the drought in California. Of course, last week a weather pattern known as the pineapple express dropped some rain on the state, and all it seems to take is one decent rainstorm to wash away all awareness of a drought. But it would take three months of nearly solid rain to get out of the current drought and that isn’t going to happen. Here’s what will happen.

Food and electricity and water will all cost more. And then there will be additional costs to build up water systems because if we don’t then things will get really dicey. The scientists have been warning us for decades that droughts will become more common. Predicting any single season’s rainfall is tough but forecasters think this year may be the driest year in the last 500 years. Most of the state is experiencing “extreme drought”. About 10 percent of the state is experiencing "exceptional drought," the highest possible level. Several smaller communities are in danger of running out of water, soon and despite the rain last week.

Most of the computer modeling seems to predict that over the next 3 to 5 decades, the changing current patterns caused by melting sea ice will increase average annual precipitation in the Northwest by about 40%, and average precipitation in the Southwest will decrease by 30%, maybe faster. Those are big changes, but before we get there, we’ll get smaller previews of the future.

Let’s start with agriculture. California produces a good chunk of the nation's food: half of all our fruits and vegetables, along with a significant amount of dairy and wine. Many farmers who plant annual crops have already made plans to cut back on planting to conserve water.

Farmers who tend crops that grow on trees and vines are in a tougher position, because their plants have to be maintained year-round. The good news is that it usually takes more than one year of drought to kill a tree, the bad news is that one year of drought can wreak havoc with production, and the worse news is that we’re in the third year of drought.  An almond tree after one year of drought will lose 50% of production, and even if we get normal water levels next year, the production will continue to drop by 90% before returning to normal. So, this year will be bad and next year will be worse. The most vulnerable crops are probably stone fruits like plums, cherries, peaches, and apricots, which are adapted to wetter climates.

For California rancher’s the drought means less grass for beef and dairy cows to graze, and that means many ranchers are selling now. If you enjoy a barbecue, enjoy it now before you have to take out a loan for a steak.

Expect shortages and possible price increases for lettuce, broccoli, melons, citrus, and rice. Yes California is a major rice producer. Of course, rice is an international food stuff, but in China there has been a major drought as well. Citrus also comes from different parts of the world, but remember the southeast has had a crazy cold winter that has already caused damage to citrus crops.

Expect to spend more on electricity. Hydroelectric energy makes up about 14 percent of the state's power supply. With less water running through turbines, the grid may need to use more natural gas, which is more expensive. And the state is also running low on natural gas, in part because of the extra demand generated by Eastern states. Southern California has become increasingly dependent on natural gas-fired plants since the decision last year to shutter the troubled San Onofre nuclear power plant. When it was operating, the twin-reactor San Onofre plant produced enough power for 1.4 million homes. And there will be extra costs to clean up the San Onofre site, which will be passed on to you. And just last week there was a “flex-alert”, where state officials called for people to turn off the lights and anything else that was sucking power. A flex alert in the winter is strange indeed.

And don’t forget the fires. In Southern California, fire season really never ended. Seasonal firefighters in Southern California, usually employed only during summer and fall months, have stayed on staff all year long. And already this year, this winter, wildfires have been igniting all up and down the state. Cal Fire is considering expanding inspections to check compliance with "defensible space" rules, which require that residents have 100 feet of space free of flammable materials, like brush or other vegetation, around their houses.

And finally, water will cost more. Conservation will be increasingly important but it can be costly. One solution is desalination plants, but those use lots of energy and are very expensive. Transporting water is a possible option, again very expensive.  Major water projects can’t be constructed in 2 or 3 months. Planning and infrastructure involve a lot of lead time. There really isn’t much choice. It has to be done.

Friday, January 10, 2014 - Jobs Report Friday

Jobs Report Friday

by Sinclair Noe

DOW – 7 = 16,437
SPX + 4 = 1842
NAS + 18 = 4174
10 YR YLD - .10 = 2.86%
OIL + 1.23 = 92.89
GOLD + 20.90 = 1248.60
SILV + .63 = 20.27

Jobs report Friday. The US economy created only 74,000 net new jobs in December. The number of jobs created was the lowest in 3 years and was well short of expectations for about 195,000 jobs. In the four months before December, the average number of jobs created in the US was 214,000 a month. The Labor Department said 38,000 more jobs in November were created than the 203,000 previously reported.

And the unemployment rate dropped from 7% to 6.7%.

If that doesn't seem to add up, you are correct. The headline news that the unemployment rate dropped to 6.7% is not good. The problem is that a bunch of people fell out of the labor force, 347,000, to be exact. They stopped looking for work, which made them no longer "unemployed" in the eyes of the Bureau of Labor Statistics; they just become invisible.

The Labor Force Participation Rate dropped from 63% in November to 62.8% in December. This is a measure of the working age population in the labor force. The participation rate is well below the 66% to 67% range that had been considered typical over the past 20 to 30 years. The participation rate has been dropping for the past 12 years.

Part of the reason for the drop in the participation rate is due to the Baby Boomers retiring, but that's just part of it; and actually many boomers are staying in the work force, unable to retire after the financial crisis of 2008. The bigger problem is that the economy is not strong enough to create enough jobs to keep or bring people into the labor force. Not just boomers, but also younger people are leaving the labor force, or never getting in. Many younger people are in school and not counted as part of the labor force, while others are probably just hanging out, plotting how to overtake this flawed economic system that has failed them.

So, when we look past the young people who can't get a job and the older people who are retiring whether they can afford to or not, we turn to the 25 to 54 year olds, the meat and potatoes of the labor force; The 25 to 54 participation rate declined in December to 80.7% from 80.9%, and the 25 to 54 employment population ratio increased to 76.1% from 76.0%. So, for many people in their prime earning years, there just isn't work to be found. And if they find work, it takes a while to get up to speed on wages. It now takes the average worker until age 30 to earn the national median salary; young workers in 1980 reached that point in their careers at age 26. This has significant implications for financial prosperity later in life.

So, we had very weak growth in new jobs, just 74,000 and the unemployment rate dropped significantly from 7% to 6.7%.

Women gained, on net, 75,000 jobs in December; men lost, on net, 1,000 jobs. This was the first time since December 2007 that a month’s job gains were captured entirely by women. Women represented 56% of the net gain in the 12 months. Women also suffered far fewer job losses during the downturn, partly because men are more likely to work in industries very sensitive to the business cycle. Also, because women are generally paid less than men to begin with. Women’s recent job gains have been concentrated in low-wage sectors, though not exclusively.

As a side note, we learn today that American workers tend to stick to the same job longer today than they did 10, or 20, or 30 years ago. Workers had an average job tenure of 4.6 years in 2012, the last year for which figures are available, that’s up from 3.7 years in 2002 and 3.5 in 1983. And that holds for all age and gender categories.

American workers are stuck in a rut, and they’re staying in their jobs longer rather than seeking new opportunities. A high “churn” rate is typically seen as a reflection of a healthy economy. People are holding on to their jobs not because they want to, but because they don’t have as much opportunity as they once did. There were about 4.2 million so-called separations in October 2013, the latest month for which data are available; this is still down from 5.1 million in 2006, but a significant improvement on 3.9 million separations in 2011.

The leisure, manufacturing and services sectors added jobs in December, but construction cut 16,000 jobs, the biggest drop in the industry in 20 months. Some of the cuts in construction might be weather related. Retailers hired 176,000 workers in December; much of that is seasonal hiring but it was the highest level of seasonal hiring since 1999. The net gain for retailers was 55,000 jobs.

Health care cut 6,000 jobs, for the first cut in 10 years; I'm not sure what that says about the implementation of Obamacare. Transportation and warehousing lost a small number of jobs; this might suggest that shippers hired fewer workers for the holidays; UPS should have hired more. Factories added 9,000 jobs for a fifth straight monthly gain, however that was down from 31,000 in November.

Involuntary part-time workers, or people working part time because they can't find full time work, held steady at 7.8 million. These workers are counted in an alternate measure known as U-6, which measures unemployed as well as under-utilized workers. The U-6 was unchanged at 13.1% for December.

Long term unemployment remains a problem, with more than 3.8 million workers unemployed for 26 weeks or more and still wanting a job; that number was down from just over 4 million in November. Last month, 37.7% of the unemployed had been so for at least six months (2.5 percent of the labor force), an average that fell only slightly over the year, down about one percentage point. These long-term unemployment measures remain highly elevated, both in historical terms and most importantly relative to times in the past when Congress allowed extended benefits to expire.

State and local governments lost jobs for 4 straight years, but actually added about 54,000 jobs for 2013; however for the month of December, local government jobs dropped by 11,000. Federal government jobs continued to drop, of course.

The private sector has added jobs for 46 consecutive months, increasing by 8.2 million over that period. For 2013 the economy added 2,186,000 jobs; down slightly from 2012; up slightly from 2011; much better than 2008 and 2009, when we lost a combined 8.6 million jobs. The unemployment rate has dropped from 7.9% in December 2012 to 6.7% in December 2013, but again, much of that was due to people leaving the work force. The share of Americans with jobs did not increase in 2013. The economy added about 182,000 jobs a month, just enough to keep pace with population growth.

At the end of 2006, 63.4% of American adults had jobs; for 2013 the employment rate had dropped to 58.6%. The unemployment rate doesn't measure the share of American adults who don't have jobs, it only counts people who are seeking work, and the unemployment rate has been dropping because fewer people are seeking jobs.

This weak report is just one month, and that is not enough to form a trend. There will be revisions in coming months. The BLS director said that cold weather may have distorted the figures a little, maybe not.

Today's jobs report may have some important policy implications. The decline in unemployment may limit the Federal Reserve’s ability, or at least its willingness, to stimulate the economy. St. Louis Fed Bank President James Bullard said today the central bank is likely to continue to reduce its bond purchases and not be swayed by the weak December job report. "I would be disinclined to react to one month's numbers," Bullard told reporters after a speech in Indianapolis. "For now we are on a program where we are likely to continue to taper at subsequent meetings," he said. Starting this month, the Fed reduced its monthly bond purchases to $75 billion from $85 billion. The Fed rate-policy committee meets again on Jan. 28-29.

This morning's report suggests the economy is recovering in starts and fits; what it should tell the Fed is that their QE never really trickled down to the average American family. The Fed may claim that the wealth effect from artificially stimulated housing markets and QE juiced stock markets has been a rising tide that lifts all boats, but the reality is that it only lifted yachts. And the problem, or one of the problems, is that the rich spend a far smaller proportion of their earnings than the middle class and poor; who tend to live paycheck to paycheck or even hand to mouth. This is why the Fed's reliance on the wealth effect has resulted in a demand deficit, and ever-slowing velocity of money. The rich save, the poor spend, and when money is spent, it circulates through the economy, creating demand, and to meet demand businesses hire people, or people take entrepreneurial incentive; and this is how jobs are created – by demand.

It’s the job market, not the stock market, that most people depend on for their economic well-being, and as long as the former remains below full employment and with a declining share of participants, the benefits of growth will not reach far beyond the top echelons and the economy will not get out of second gear. 

Thursday, September 19, 2013 - Shine On You Crazy Dimons

Shine On You Crazy Dimons

by Sinclair Noe

DOW – 40 = 15,636
SPX – 3 = 1722
NAS + 5 = 3789
10 YR YLD +.06 = 2.75%
OIL + .04 = 106.43
GOLD - .20 = 1366.10
SILV + .13 = 23.19

No taper, despite hints and great expectations. Having announced the intention to taper, ultimately, a few weeks later, the proposal was shelved. The reasons given were concerns about the strength of the economic recovery and the impact of high rates on the ability of an over-indebted world to continue to meet its obligations. All these factors were largely unchanged between the time of the original announcement and the repudiation.

What did change was the taper tantrum, the unpleasant market reaction to the hint of taper. Bond yields rose sharply; the Fed's tough talk has already led to a 140 basis point rise in 10-year Treasury yields, which would be roughly equivalent to six rate increases; that in turn resulted in pushing mortgage rates higher, putting a crimp in the housing recovery. Today we learned home sales were up. Sales of previously owned homes unexpectedly rose in August to the highest level in more than six years as buyers rushed to lock in interest rates before they jumped even higher.

The labor "participation rate" dropped to 63.2% in July, the lowest level since the late 1970s. The rate for men is at an all-time low. The unemployment rate has been falling, but chiefly because so many people are giving up hope and dropping off the rolls.

Fed governors tried to pass this off as a structural problem; due to evolving technology, or a "skills mismatch", or that catch-all concept "demographics". No doubt this is half true. But half truths also go by another name. Chronic lack of demand is the real villain is this jobs slump. The problem is not that the labor market is under performing; it is that the recovery has been very slow.

The economy has weathered the most draconian fiscal tightening (2.5% of GDP this year) since the end of the Korean War remarkably well, helped by shale gas, but it is not yet at "escape velocity". The fiscal squeeze goes on. The International Monetary Fund has advised Washington to go easy, citing an "output gap" of 4.6% of GDP. The Dallas Fed's measure of core inflation was 1.2% in July. Growth of the M1 money supply is the slowest in two years, while growth of broad M3 has slowed to the point where it could turn negative without QE. The inflation threat is a fiction; it could be a problem at some point, but not today.

The US dollar rose sharply and stocks sold off, and emerging markets sold off even harder. The BRICS have been hit hard already and given the dangers of another euro-zone debt hemorrhage, which happened after the end of QE1 and QE2, it would be a globally rude gesture to taper.

Ultimately, most market prices, except interest rates, headed back to where they roughly started before the taper talk. Billions of dollars were gained and lost in the zero sum marketplace casinos that constitute the modern economy. And really that seems to be the determinant factor for the Fed. The Bernanke Fed has twice misjudged the global effects of premature tightening already, each time precipitating a credit and stock market crash within weeks, and each time forcing the Fed to capitulate. The exit from QE3 will be ugly, when it eventually arrives.

A paper by former Fed governor Frederic Mishkin, "Crunch Time", warns that the Fed will struggle to extract itself from QE if it delays until 2014. It may drown from losses on its $3.6 trillion of bond holdings as yields rise. The Fed's own balance sheet is at risk, and the risks may indeed outweigh the rewards. Certainly some Fed policymakers would like to head for the exits, but they would like to exit without imploding the Wall Street debt machine; and that may not be realistic.

If QE as conducted is causing asset bubbles, then we should deploy central bank stimulus more creatively, should it prove necessary. We know how to do it. The methods were pioneered by Takahashi Korekiyo, who pulled Japan out of the Great Depression early in the 1930s. His feat is now the model for what Japan is doing again under Abenomics.

Takahashi turned the Bank of Japan into an arm of the treasury - "fiscal dominance" - and ordered it to finance the budget deficit. You can deploy QE in any way you want. It could be used to build houses, or to build infrastructure, or other ways of injecting the money directly into the veins of the economy, instead of the veins of hedge funds. There is no reason why it cannot be administered by an independent Fed, choosing the calibration level as they see fit.

Don't hold your breath. At this point, Bernanke seems content to leave the fuse burning on the financial weapons of mass destruction, as he rides off into the sunset.

Of course, the whole mess could implode, if the US decides it doesn't want to pay its bills. And that is looking more and more possible. The White House promised a veto of a Republican effort to gut President Barack Obama's health care law as part of a temporary funding bill in the House to prevent a partial government shutdown on Oct. 1.

The official policy statement said the GOP attempt to block Obamacare “advances a narrow ideological agenda that threatens our economy and the interests of the middle class" and would deny "millions of hard-working, middle-class families the security of affordable health coverage."

The veto threat was expected and wasn't going to stop House Republicans from pressing their effort to defund the health care law. Republicans in the House spent Wednesday talking about how hard they would fight to derail the health care law on the eve of its implementation and weren't conceding that their Senate rivals would undo their handiwork. A key force in the tea party drive against the law conceded the point even before the fight officially began, but urged the House to force a government shutdown rather than retreat.

The rhetoric will likely fade in the harsh light of an actual shutdown, but then again Congress is a hot mess. The Obama administration's budget director, Sylvia Burwell, issued a memo to department heads that said, "Prudent management requires that agencies be prepared for the possibility of a lapse" in funding.

In the years since the financial crisis, we may not have solved too big to fail, sent any bankers to jail, or done much to prevent another financial crisis, and we certainly haven't changed Wall Street's devotion to money-making at all costs.

But we at least have finally gotten a bank to admit it broke the law.

In what amounts to a relatively stirring triumph of justice on Wall Street, the SEC has convinced JPMorgan Chase to admit that it broke federal securities laws in its handling of the $6.2 billion "London Whale" trading debacle.

The SEC press release says: "JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses..., While grappling with how to fix its internal control breakdowns, JPMorgan's senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company's problems and determine whether accurate and reliable information was being disclosed to investors and regulators."

Jamie Dimon in a separate statement said: "We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them." Which is true, depending on what Dimon means by "from the start." When the London Whale story first broke in the spring of 2012, Dimon infamously dismissed it as a "tempest in a teapot." He has since repeatedly admitted that the bank erred, although this is the first time it has admitted breaking laws.

JPMorgan also agreed to pay $920 million to the SEC and other agencies to settle various London Whale charges. That is quite a lot of money to you and me, more than twice the size of the current Powerball jackpot. And for JPMorgan it amounts to little more than 13 days' profits, and nothing more than the cost of doing business.

But it does mark a turning point, finally there has been an admission of wrongdoing. Finally.

But wait, there's more. Today, bank regulators also ordered JPMorgan to  correct its debt collection and other credit card procedures and to refund more than $300 million to customers harmed by the bank's practices. In separate orders, regulators faulted the bank for errors in how it pursued credit-card debts in court, and for charging customers for credit-monitoring services they never received.

The Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency ordered the bank to refund $309 million to about 2 million customers charged for the credit-monitoring services. The orders also include $80 million in penalties. The OCC also ordered the bank to review past debt collections and compensate customers affected by errors. It did not provide details of how extensive the debt-collection problems were. That order did not include financial penalties, but left the door open to future fines.

At some point, you have to wonder how long a chronic offender can continue before we say, enough is enough.

Friday, April 12, 2014 - Trade Secrets

Trade Secrets

by Sinclair Noe

DOW – 0.08 = 14,865
SPX – 4 = 1588
NAS – 5 = 3294
10 YR YLD - .07 = 1.72%
OIL – 2.85 = 90.66
GOLD – 84.00 = 1478.00
SILV – 1.81 = 25.95

The S&P 500 is up about 2.4 percent for the week, and the Dow up about 1.8 percent and Nasdaq up about 2.4 percent. The S&P has only had two weeks in 2013 with bigger gains. For the year, the Dow has gained more than 13 percent and the Nasdaq is up 8.7 percent.

Retail sales fell in March for the second time in three months and consumer confidence dropped in April. Sales fell 0.4 percent in March. Consumer spending was considerably weaker in the first quarter than estimated. Core sales, which strip out cars, gasoline and building materials, fell 0.2 percent last month. This measure corresponds closely with the consumer spending component of the government's measure of gross domestic product. It is widely believed that the end of the payroll tax holiday is related to the drop in consumer spending. Going a step further, growth is expected to slow sharply in the second quarter largely because fiscal policy tightened further in March.

A separate report from Thomson Reuters/University of Michigan shows the consumer sentiment index dropping ot 72.3 in April, the lowest level since last summer.

Producer prices, or prices at the wholesale level, fell 0.6 percent in March, their biggest drop in 10 months, as gasoline prices tumbled. In the 12 months through March, wholesale prices were up 1.1 percent, the smallest rise since July. Prices had increased 1.7 percent in February.

It's earnings season, and today a couple of the biggest banks posted results. Wells Fargo reported earnings of $5.2 billion, up from $4.2 billion a year ago. Revenue was slightly lower. The bank’s mortgage banking income slipped 3 percent; mortgage originations dropped by 16%. Corporate lending increased.

The nation's largest bank, JPMorgan Chase, reported a 33% increase in first quarter earnings. Net earnings came in at $6.5 billion, even as revenue dipped by $1 billion. JPMorgan reported strength in mortgage lending and investment banking. Within the investment banking unit, assets grew to $19 trillion for the first quarter. At least that's what it looks like. And it looks like they had about $2.3 trillion in derivatives on the balance sheet, and $1.6 trillion in derivatives “off balance sheet”. The notional amount of assets associated with these derivatives is somewhere around $70 trillion; again just kind of guessing.

What are these derivatives assets being used for? How do they contribute to JPMorgan’s record earnings? What risks are being run by having such large items “off balance sheet”? Is it gambling in derivatives that is enabling JPMorgan to make record profits in a depressed marketplace? The public has no information and no way of finding out.

JPMorgan and various counterparties operate in what is basically a hidden casino, and when one of the players loses, the entire global derivatives casino tends to freeze; that's what happened in 2008 with the collapse of Lehman; everything froze because nobody had enough information to assess the damage to their own balance sheets and “off-balance sheet” holdings, and that means they were totally clueless about the counterparties in the derivatives casino.

Jamie Dimon, the CEO of JPMorgan, talked about the growth in tangible book value, but he did not include the off balance sheet derivatives, which would clearly push book value below one. Which means that all the analysts who cover JPMorgan can't figure out value. And the reason is they don't know how much risk the bank is taking. And an even better question is why are they taking all the risk? How does this benefit the economy? The answer is that it provides no benefit to the economy, beyond enriching a few executives and traders in the firm.

While the banks are still reporting big profits, they are also cutting jobs. So, something doesn't add up. Why would a business that grows earnings 33% need to fire tens of thousands of workers? Regulation will force changes in their business model. The big question is what the banks will look like in a year.

Of course, Jamie Dimon couldn't let the earnings report pass without begging for some relief from regulators. Dimon argued  that banks are safer than ever, that JPMorgan’s size and scale and universality provides services that clients want and is good for the world, and that “I hope at one point we declare victory and stop eating our young.”

of course yesterday, JPMorgan research released a 328 page report arguing that global tier 1 investment banks were “un-investable” and the mega banks need to spin-off their businesses to provide capital return to shareholders. So, there's a bit of a disconnect there. Also, there was a Wells Fargo report this week saying the biggest banks trade at 20-30% discounts to their sum-of-the-parts values.

A follow-up to the mortgage abuse settlement. Recall the PR barrage in the wake of the robosigning scandal: its was “sloppiness,” “paperwork errors”. Servicers kept claiming, despite overwhelming evidence of bad faith and the institutionalization of impermissible practices, that there was really nothing wrong with how they were operating. Remember it was important for them to take that position, because if they were to admit that the bank knew it was engaging in widespread abuses with management knowledge and approval, it would be admitting to fraud.

The Fed and the OCC told the big 14 mortgage servicers to conduct reviews of all mortgages; the mortgage servicers hired consultants to scour the mortgage files; the consultants charged $2 billion but couldn't get through many files; the Fed and the OCC threw up their hands and worked out a deal for the servicers to send out checks to abused homeowners, $3.6 billion for 4.4 million homeowners; most check are for $300 or less. Now, you may be wondering how the mortgage servicers and banks and regulators knew how much to send to abused homeowners, and which homeowners should get checks, seeing as how they didn't finish the investigation; well, they let the banks tell them how much they felt was a good amount to pay, and that settled it. Senators are now looking into the mess and demanding information from the regulators, but the Fed is stonewalling the Senate investigation.

At the meeting yesterday, Federal Reserve staff argued that the documents relating to widespread legal violations are the “trade secrets” of mortgage servicing companies. In addition, staff from the Office of the Comptroller of the Currency (OCC) argued that these documents should be withheld from Members of Congress because producing them could be interpreted as a waiver of their authority to prevent disclosure to the public of confidential supervisory bank examination information.

Widespread legal violations are the trade secrets of mortgages servicing companies. I can’t make this stuff up.

Lots of people have been discussing how negative investor sentiment is. Markets are making new all time highs as expectations that markets will be higher six months hence is at a mere 19% 

While the stock market has been climbing to record highs, the rally has highlighted the disconnect from the broader economy; however, the market does not appear disconnected from earnings. Record high stock indices are matching record high levels in corporate earnings. S&P 500 companies are on track to generate north of $25 per share in collective profits this quarter. That's better than it sounds; earnings for S&P 500 companies are expected to grow at a modest 1.2 percent in the first quarter. What's very unusual about this particular new high in earnings is that it doesn't come along with a new high in economic activity around the world. If we have record earnings in a relatively lousy economic environment, what if the economy improves? Or the flip side of that question is whether we can maintain corporate earnings without improvement in the economy?

As the U.S. Commerce Department released a report late last month showing corporate profits at a 60-year high, suddenly the big news was about how cheating surely must be rampant in Social Security disability.

Wait, what?

Also late last month, a Washington Post investigation showed that the 30 companies that make up the Dow Jones industrial average pay a dramatically smaller portion of their profits in taxes than they did a half century ago. Instead of discussing how that impacts government services, all of Washington is talking about slashing Social Security and Medicare.

It’s bait and switch.

The Commerce Department says corporate profits increased to 25.6 percent in 2012, the highest in any year since 1950 and far higher than the 19.9 percent level common in the years just before the economic collapse.  Citizens for Tax Justice and the Institute on Taxation and Economic Policy evaluated 280 of the Fortune 500 companies and found that 30 paid no federal income taxes at all from 2008 through 2010. The following year, 26 paid no income taxes. None. Zip. Zero. Some corporations pay. But not much. A Washington Post analysis found that about 50 years ago, corporations included in the current Dow Jones industrial average routinely listed federal tax expenses as 25 to 50 percent of worldwide profits. Now, the Post found, they report less than half that.