Thursday, February 13, 2014 - The Popsicle Economy

The Popsicle Economy

by Sinclair Noe

DOW + 63 = 16,027
SPX + 10 = 1829
NAS + 39 = 4240
10 YR YLD - .02 = 2.73%
OIL - .02 = 100.35
GOLD + 11.00 = 1303.80
SILV + .25 = 20.59

According to the latest AAII Investor Sentiment Survey, over the last week the number of self-described bulls jumped to over 40% while bears plunged from over 36% to 27%. Did all those people suddenly become timing experts or is this an indication that it’s time to take profits?

The number of Americans who applied to receive unemployment benefits rose last week and the gradual decline in claims since last year appears to have halted. Initial jobless claims climbed by 8,000 to a seasonally adjusted 339,000 in the seven days ended Feb. 8.

RealtyTrac reports monthly foreclosure filings — including default notices, scheduled auctions and bank repossessions — reversed course and increased 8% to 124,419 in January from December. One month does not make a trend, but the foreclosure rebound pattern is not only showing up in judicial states like New Jersey, where foreclosure activity reached a 40-month high in January, but also some non-judicial states like California, where foreclosure starts jumped 57% from a year ago, following 17 consecutive months of annual decreases. As a whole, 57,259 US properties started the foreclosure process for the first time in January, rising 10% from December but still down 12% from last year.

On a monthly basis, retail sales decreased 0.4% from December to January (seasonally adjusted), and sales were up 2.6% from January 2013. Sales in November were revised down from a 0.2% increase to a 0.1% decrease.

In its monthly budget report, the Treasury Department said that the deficit for January was $10.4 billion. For the period from October through January (the first four months of this budget year), it totaled $184 billion. That is down $106 billion from the same period a year ago and puts the country on track for a further improvement in the budget deficit.

The Congressional Budget Office is projecting that the deficit for the current budget year will decline to $514 billion. That would be the smallest imbalance in six years. The deficit last year was $680 billion. The CBO's deficit projection for this year would represent a drop of 24% over the 2013 deficit. The CBO's latest forecast issued earlier this month projected that the deficit will decline to $478 billion in 2015 before starting to rise again in 2016 and keep heading higher for the rest of the decade.

As we know, Congress agreed to approve a suspension of the federal debt limit through March 2015. If it sounds like a bipartisan agreement, that doesn’t really describe what happened; more like a game of chicken taken to extremes, and hope for avoiding another head on collision. Ted Cruz’s best efforts notwithstanding, the United States will not dabble in first-time debt defaulting until next year, at the earliest.

Dallas Federal Reserve Bank President Richard Fisher made a speech the other night and blamed Congress for the sluggish economy. Fisher said: “For far too long, the greatest obstacle to our nation’s prosperity, has resided in this building right here: the Congress of the United States.”

Fisher said Congress has repeatedly failed to develop a tax or fiscal policy that would boost the economy. He pointed out an editorial in the Financial Times this week that concluded – ”Fiscal policy is still not an ally of U.S. growth,” and then added, “Fiscal policy is not only not an ally of U.S. growth, it is its enemy.”

This week when Janet Yellen testified before House lawmakers we learned more about how she's thinking about the labor market. In her prepared remarks she pointed to concerns including the long-term jobless as well as part-time workers who would like more work. And during her testimony, she indicated she believes the increase in unemployment since the financial crisis is cyclical, related to the business cycle and related to demand.

The reason that's important is if you think it's cyclical, then you think monetary policy can help. That's opposed to structural unemployment which is longer-term and due to fundamental shifts in an economy, which would require fiscal and regulatory policy response.

Another key aspect of the labor market story is the decline in the labor force participation to a 35-year low. Yellen told lawmakers while a significant part of this decline is structural due to demographics, she said some of it may be cyclical. The difference between unemployment and being out of the labor force is not just statistical: if you are unemployed you are job ready, if you're out of the labor force it takes a big effort to get back in the labor force.

America’s real job creators are consumers, whose rising wages generate jobs and growth. If average people don’t have decent wages there can be no real recovery and no sustained growth. If the Fed and/or Congress wants to see economic growth, it starts with jobs.

Comcast is acquiring Time Warner Cable. It's a $45 billion deal that would combine America's top two cable TV companies for a total of about 30 million subscribers, who are already among the least-happy customers in all of Corporate America. When it comes to customer satisfaction cable companies rank very low, and Comcast and Time Warner rank among the worst. The history of mergers suggests customer service might only get worse for these two companies. Coupling companies typically struggle to knit together their massive systems, and customers get lost in the process. When Comcast bought AT&T Broadband for $50 billion in 2002, customer billing problems led to such a backlash that the company ultimately launched a "Think Customer First" training program.

A BusinessWeek study of 28 mergers between 1997 and 2002 found that customer-satisfaction ratings dropped significantly after the unions, with the effect lasting for years. Cable companies suffered some of the biggest drops in that study. If there's any reason to hope, it's that both companies are suffering from the broader long-term trend of customers dropping cable subscriptions in favor of other alternatives. One of those alternatives is broadband Internet, which both companies also offer. Maybe they can learn from their mistakes. Yeah, that’s not going to happen.

After years of lamenting the factory sector’s diminishing role in the American economy, many American firms are counting on the domestic energy boom, rising overseas labor costs and stronger domestic demand to revive the long-stagnating manufacturing sector. The International Monetary Fund, the iMF, has just published a paper that says a US manufacturing renaissance is probably not gonna happen.

Manufacturing has become an increasingly smaller share of U.S. economy for the better part of a century. At the end of World War II, more than a third of all U.S. workers held manufacturing jobs. That figure fell below 10% in 2008 and manufacturing employment has failed to rebound to prerecession levels, according to Labor Department data.

After the Great Recession, a depreciating dollar, falling natural gas prices and declining unit labor costs boosted U.S. manufacturing production, the IMF economists write. Recent data shows that several durable goods sectors have rebounded strongly after the recession, potentially foreshadowing a strong manufacturing presence in the global marketplace, they said.

In 2010, the manufacturing sector grew by 6.8%, outpacing the nation’s growth in gross domestic product of 2.5% that year. Increasing consumer demand in the U.S. and abroad propelled factory output. Exports grew 11.5% in 2010.

Manufacturing exports could provide “non-negligible growth opportunities” for the American economy, especially as new technology allows energy companies to tap massive domestic deposits of natural gas and oil reserves, IMF economists added. The shale energy boom could add up to 0.3 percentage point a year to growth by 2020.

But a surge in manufacturing — as a share of the U.S. economy — has failed to materialize. Growth in the manufacturing sector trailed the overall economy in 2011 and 2012, according to Commerce Department data released last month. The pace of export growth has tapered off since 2010 and  manufacturing employment increased more slowly than total U.S. payrolls the past two years.

Still, the IMF economists said that the U.S. energy jolt, combined with further dollar depreciation and swelling consumer demand from China, India and other emerging markets could gradually increase U.S. manufacturing output over the longer term.

Despite the boost from energy, the researchers found the U.S. is unlikely to be able to significantly offset the gains made in many emerging markets as companies move their operations where manufacturing is less expensive.

Paul Krugman writes: Bloomberg reports on the soaring prices of trophy apartments in Manhattan. The biggest sale so far was former Citigroup head Sandy Weill’s apartment, which he sold for $88 million to the daughter of a Russian oligarch. But $100 million listings are out there.

For a bit of perspective: the median full-time worker in the United States makes about $40,000 a year. So it would take the typical worker 2,000 years to earn enough to buy the Weill apartment.

Still, people like Weill are exemplars of the free market at work. They work in an industry that delivers clear value to the economy, and has never relied on government bailouts. Oh, wait.

Even if you have a pricey Manhattan apartment, it’s still snowing in New York. More than 700,000 people, including residents of Georgia and South Carolina hit by a heavy blast of ice a day earlier, were without power as the storm made its way up the coast, closing much of Washington and threatening to drop up to 18 inches of snow in some areas.

Wednesday, December 11, 2013 - Let's Make A Deal

Let's Make A Deal

by Sinclair Noe

DOW – 129 = 15,843
SPX – 20 = 1782
NAS -56 = 4003
10 YR YLD + .05 = 2.84%
OIL -1.09 = 97.42
GOLD – 9.70 = 1253.30
SILV - .13 = 20.40

We have a deal. Bipartisan budget negotiators, led by senator Patty Murray for the Democrats and House Republican Paul Ryan, announced last night that they have reached a deal to settle the federal budget for two years, and avert a possible government shutdown. We have a deal; it's just not a done deal. There is pressure from both the left and right, as Democrats sought to negotiate a further deal on unemployment benefits and Republicans fended off attacks from conservative pressure groups.

House Speaker John Boehner lashed out at right wing groups such as the Heritage Foundation, claiming they were criticizing the compromise deal before they even knew what was in it. Meanwhile, some Democrats lashed out at the $1 trillion deal because it did not include an extension of long term unemployment benefits for some 2.1 million out of work workers.

Republican leaders will likely have to rely on House Minority leader Nancy Pelosi to deliver sufficient Democratic votes to counter any rebellion among their Tea Party wing, which gives the minority leader a rare moment of leverage. So far, Republicans have not ruled out allowing a separate vote to extend long-term unemployment benefits, but signal they too want more concessions from Democrats first. There is also opposition from Republicans in the Senate, who are less able to block the budget's passage, but are under pressure from a renewed wave of primary challenges by Tea Party candidates in the 2014 midterms.

The framework includes $85 billion in spending cuts and non-tax revenue from new fees to replace the mandatory budget cuts and supply a modest amount of deficit reduction. As drafted, the bill would reverse $63 billion in across-the-board spending cuts scheduled to take effect in the current budget year and the next one, easing a crunch on programs as diverse as environmental protection and the Pentagon.

It would offset the higher spending with $85 billion in savings over a decade from higher fees and relatively modest curtailments on government benefit programs.

Nearly a third of the total savings would come nearly a decade from now, in 2022 and 2023, partly from extending a current 2 percent cut in payments to Medicare providers. Also, future federal workers would pay more toward their own retirement, fees would rise on air travelers and corporations would pay more to the government agency that guarantees their pension programs.

With the increased spending to begin immediately and much of the savings delayed, Congressional Budget Office estimates showed the deal would push deficits higher than currently projected in the current year and each of the next two. The CBO said red ink would rise by about $23 billion in this 2014 fiscal year, $18 billion in the next year and about $4 billion in the one after that.

Though congressional negotiators may have reached an agreement over the federal budget, they may not have may not have figured out how they will get it passed. Still, the fallout from the government shutdown in October wasn't difficult to understand. Americans are sick and tired of the dysfunction in Washington, and another shutdown, or even the threat of another shutdown is unacceptable. There could be a vote on the deal as early as tomorrow.

On Wall Street, good news is bad news. The idea that Washington might actually be able to pass a budget raised the expectations that the Federal Reserve might be able to scale back it's quantitative easing stimulus plan. Indeed, the big question is not whether the Fed will taper, but when. The FOMC meets next week, and the Fed policymakers will likely debate how best to communicate their plan. It's still unlikely they will actually start tapering now; that would be a little shocking, but they might indicate they are going to do it in the near future, with the caveat that taper proceeds absent some exogenous catastrophe. So, expect some clarification on the thresholds for taper and interest rates.

Across the globe, central banks have resorted to forward guidance on interest rates in the wake of the financial crisis to convince markets they are serious about supporting recovery in the world's top economies for a long time to come. So, even as the Fed is likely to offer a more solid opinion on taper, they will likely offer a more precise outlook for maintaining Zero Interest Rate Policy. In a Reuters poll conducted this week, 32 economists said they expect the central bank to wait until March, while 22 looked for a move in January. Only 12 expected a move next week.

The "better than expected" figures in the latest employment data were far below the level of job creation needed to put unemployed Americans back to work on any kind of reasonable schedule. It was even below the average monthly job creation during most of the 1990s. The jobs picture is still far worse than many people would have you believe. The current unemployment rate doesn't include the workers who have become discouraged and left the workforce, and workforce participation rates remain at historic lows. The jobs numbers don't include the underemployed who are working part-time and prefer to work full-time. The ratio of job seekers to available jobs remains discouragingly high. There are no jobs for nearly two out of every three job seekers, no matter how hard they look.

The employment picture for the long-term jobless remains dismal. And many of those people were left out in the cold under the budget deal announced last night. They will fall off the roles, and basically become invisible for economic data purposes. Of course, they aren't really invisible; they're still there. But maybe there isn't anything the Fed policymakers can do to achieve maximum employment. Maybe a taper is an admission, a clear and honest communication that Fed policy is impotent in its dual mandate, and maybe the time has come to amend the Fed's tools so that all that money they've been dropping out of helicopters falls somewhere else besides Wall Street, maybe they can toss a little bit over Main Street.

Jamie Dimon, the CEO of JPMorgan was speaking at an investor conference in New York today. Dimon said he was thankful congressional leaders had reached a budget deal and was "less worried" about the impact of an eventual scaling back of the Federal Reserve's market-friendly stimulus measures. Dimon said the budget agreement was good for business confidence and that he would send thank you cards to congressional leaders. That makes me a bit more nervous about the deal.

Dimon said business demand for loans should rise to more normal levels as confidence rises, and demand for investment banking services in 2014 would be stronger than many people expect; and higher interest rates that would come with a Fed tapering would be good for the bank. He also said public attention to investigations of the bank by regulators and law enforcers was "really, really painful." Ahhh, maybe he should stop breaking the law, and then he wouldn't have all that painful attention.

Time magazine named Pope Francis its Person of the Year, crediting him with shifting the message of the Catholic Church while capturing the imagination of millions of people who had become disillusioned with the Vatican. This is the third time the magazine has chosen a pope as its Person of the Year. Time gave that honor to Pope John Paul II in 1994 and to Pope John XXIII in 1963.

Pope Francis, who, as archbishop of Buenos Aires was known as the slum cardinal for his visits to the poor and penchant for subway travel - beat former U.S. National Security Agency contractor Edward Snowden and gay rights activist Edith Windsor for the award.

The new pope's style is characterized by frugality. He shunned the spacious papal apartment in the Vatican's Apostolic Palace to live in a small suite in a Vatican guest house, and he prefers a Ford Focus to the traditional pope's Mercedes. In September, Francis gave a groundbreaking and frank interview, in which he said the Vatican must shake off an obsession with teachings on abortion, contraception and homosexuality, and become more merciful. And in July, Francis told reporters he was not in a position to judge homosexuals who are of good will and in search of God, marking a break from his predecessor, Benedict, who said homosexuality was an intrinsic disorder.

And a couple of weeks ago he published his apostolic exhortation, The Joy of the Gospel, which has gained attention for what some are calling an attack on capitalism, but is more precisely an attack on unbridled financial speculation and runaway greed. Which may actually be an attack on capitalism, but he did it without using the actual word “capitalism”.

Rather he made an impassioned plea for society and government to protect the vulnerable from the predations of the greedy, to include everyone in this prosperity, not by taking from the rich to give to the poor but by making sure they have a role to play. His call to reject the “idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose” are lessons we've heard for a couple of thousand years, and that ancient economic wisdom is as valid today as it was 2014 years ago.