Friday, January 31, 2014
Capital Markets
By Louis S. Barnes Friday, January 31st, 2014
Three weeks ago, surprise market movements embarrassed New Year’s prognosticators. By last week the moves were big enough to attract a few bottom-fishers, others too queasy. At the end of this week, the defensive huffing, “Just a correction” sounds like Monty Python’s amputated knight, “Just a flesh wound!”
First some hard data, then the mechanics and risks of a currency crisis, then the Fed and US response.
Fourth quarter GDP did fine, up 3.2%, which beats hell out of 2% but was a percentage-point lower than the boomer forecasts last month. Best part: consumers led, accounting for the whole gain. But housing is thin at best, pending sales in a bad tank in December. And orders for durable goods sank 4.3% in that month. The questions remain: have we entered true acceleration, and if so enough to raise wages?
We can argue about those questions, but there is nothing in the data to cause the stock-market selloff and bond rally. Those have external foundations.
International currency crises always begin as this one has. Inherently weak but rapidly growing nations are overextended. They look the same in any decade or century: excessive imports over exports, exports concentrated to overextended buyers, domestic inflation, ineffective or destructive governments, and external debt. This time the victim-perps are less in debt, but all else is in play.
These crises begin by global investors selling weak-nation assets (stocks, bonds), which pushes down their currency values, attracts sales of the currencies themselves, and goes viral, infecting even the not-so-weak. The only means of defense: raise interest rates to provide incentive for outsiders to hold your currency, to dampen inflation, and to correct your balance of trade by chopping imports.
If you succeed in putting out the currency fire, you get a bad recession. On Tuesday Turkey’s central bank raised its overnight rate from 4.5% to 12%. Ow. The disease has spread from Argentina to Brazil to India to Russia. Most often these things fizzle out after a fever and some commode-hugging. But a bad one, as Asia in 1998 can topple governments and take 20 years to recover, and ripple outward to the healthy.
The 1998 “Asian Contagion” was a boon to the US. Cash rushed here, dropped our interest rates and goosed our economy. But we had a good economy, then. The risk to us this time: emergings collectively in recession will have lower wages and lower currencies, which can add to global downward pressure on wages and incipient deflation. We have not been here before, and this show is hard to handicap.
Two footnotes. Nassim Taleb has written “The Black Swan” and “Antifragile” on the importance of unforeseen events. To this reader, silly books. It is not useful to spend time looking for things that no one can foresee, like this currency affair. Instead, assume that periodically surprising stuff happens. Second: we have spent the last five years trying to fireproof the banking system, the source of all evil, and in the process stunted it. A poorly framed financial system can transmit crisis, like coughing on an airplane, but the real vulnerability always lies in bad political/economic management.
The Fed insists that QE tapering is not tightening, which few outside believe. The QE venture was inherently circular: those who thought the cash would run to stocks and commodities bought to join the ride, and now sell. China’s restructuring, timid as it is, is a tightening, and this week’s market dive was magnified by worry of tightening by two of the four largest economies, Europe too tight to begin with, and Japan’s easing now canceled by emerging-currency collapse and flight to the yen.
The State of the Union speech was pure limping waterfowl, all the more so because the speaker doesn’t know. Harry Reid the next day canned plans for fast-track trade deals, and the minimum wage hike is in trouble even in the Senate.
It’s okay! There are times to just sit there, don’t do something. This is one. An overbought stock market was overdue, and the currency crisis is knocking rates down, a huge help in a time of too-tight credit. Enjoy and watch. Omaha! Omaha!!
Three weeks ago, surprise market movements embarrassed New Year’s prognosticators. By last week the moves were big enough to attract a few bottom-fishers, others too queasy. At the end of this week, the defensive huffing, “Just a correction” sounds like Monty Python’s amputated knight, “Just a flesh wound!”
First some hard data, then the mechanics and risks of a currency crisis, then the Fed and US response.
Fourth quarter GDP did fine, up 3.2%, which beats hell out of 2% but was a percentage-point lower than the boomer forecasts last month. Best part: consumers led, accounting for the whole gain. But housing is thin at best, pending sales in a bad tank in December. And orders for durable goods sank 4.3% in that month. The questions remain: have we entered true acceleration, and if so enough to raise wages?
We can argue about those questions, but there is nothing in the data to cause the stock-market selloff and bond rally. Those have external foundations.
International currency crises always begin as this one has. Inherently weak but rapidly growing nations are overextended. They look the same in any decade or century: excessive imports over exports, exports concentrated to overextended buyers, domestic inflation, ineffective or destructive governments, and external debt. This time the victim-perps are less in debt, but all else is in play.
These crises begin by global investors selling weak-nation assets (stocks, bonds), which pushes down their currency values, attracts sales of the currencies themselves, and goes viral, infecting even the not-so-weak. The only means of defense: raise interest rates to provide incentive for outsiders to hold your currency, to dampen inflation, and to correct your balance of trade by chopping imports.
If you succeed in putting out the currency fire, you get a bad recession. On Tuesday Turkey’s central bank raised its overnight rate from 4.5% to 12%. Ow. The disease has spread from Argentina to Brazil to India to Russia. Most often these things fizzle out after a fever and some commode-hugging. But a bad one, as Asia in 1998 can topple governments and take 20 years to recover, and ripple outward to the healthy.
The 1998 “Asian Contagion” was a boon to the US. Cash rushed here, dropped our interest rates and goosed our economy. But we had a good economy, then. The risk to us this time: emergings collectively in recession will have lower wages and lower currencies, which can add to global downward pressure on wages and incipient deflation. We have not been here before, and this show is hard to handicap.
Two footnotes. Nassim Taleb has written “The Black Swan” and “Antifragile” on the importance of unforeseen events. To this reader, silly books. It is not useful to spend time looking for things that no one can foresee, like this currency affair. Instead, assume that periodically surprising stuff happens. Second: we have spent the last five years trying to fireproof the banking system, the source of all evil, and in the process stunted it. A poorly framed financial system can transmit crisis, like coughing on an airplane, but the real vulnerability always lies in bad political/economic management.
The Fed insists that QE tapering is not tightening, which few outside believe. The QE venture was inherently circular: those who thought the cash would run to stocks and commodities bought to join the ride, and now sell. China’s restructuring, timid as it is, is a tightening, and this week’s market dive was magnified by worry of tightening by two of the four largest economies, Europe too tight to begin with, and Japan’s easing now canceled by emerging-currency collapse and flight to the yen.
The State of the Union speech was pure limping waterfowl, all the more so because the speaker doesn’t know. Harry Reid the next day canned plans for fast-track trade deals, and the minimum wage hike is in trouble even in the Senate.
It’s okay! There are times to just sit there, don’t do something. This is one. An overbought stock market was overdue, and the currency crisis is knocking rates down, a huge help in a time of too-tight credit. Enjoy and watch. Omaha! Omaha!!
Friday, January 24, 2014
Capital Markets
By Louis S. Barnes Friday, January 24th, 2014
Most year-end forecasts are now on hold, or ought to be. Expectations for a faster economy and higher rates?Later, dear.
Some days the financial markets are beautiful things. Not just because you’re winning a bet, but by clarifying who has done what to whom. Not mere correlation as cause, offered by shills every day, but unmistakable event and effect.
Before New York markets opened on Thursday, news flashed: Markit’s measure of January manufacturing in Europe rose from 52.7 to 53.9, but in China fell from 50.5 to shrinkage at 49.6 and almost a percentage point below forecast. In New York the Dow opened 150 points below Wednesday’s close, and emerging-nation currencies tanked, Argentina almost 20%.
Lessons. Nobody believes in European recovery. China matters. In the old days, “When the US sneezes, the world catches cold.” Today, duck when China reaches for a hanky. World trade is a continuous conveyor connecting everyone, low-end goods exported from low-productivity economies to join high-end from high-end often in China to be re-exported all over hell and gone. When the conveyor jumps a drive tooth at the China station, then so does demand for emerging-nation and commodity exports. Not good for stocks anywhere, and emergings suddenly struggle to pay foreign debts.
The 10-year T-note, under pressure from a QE-tapering Fed and accelerating economy was by now supposed to have broken through 3.00%, up into a range not seen since 2011. Instead it has fallen in each week of the New Year, on the China news now to 2.73%, crashing through technical “resistance.” But there is a lot more to this move than China. Certainly a weakening world would push money to the dollar and US bonds, but the 10-year has been doing better for weeks.
Sometimes a missing puzzle-piece is most illustrative. Scotland Yard: “Anything else of note?” Holmes: The curious incident of the dog in the night. Scotland Yard: “The dog did nothing in the night.” Holmes: That was the curious incident.
Why has the dog not barked? You’d never know from the media happy-talkers, certain that QE was an excessive stimulant, but the 10-year move says that quieter, wiser heads are worried about our economy with the Fed pulling back. If QE was good for the economy, its absence is not.
Then, the overall economy aside, too hard to predict in an unprecedented cycle becoming an era, the big deal for long term rates always is inflation. And it’s still trending down, core measures in the 1.0%-1.5% range. In the modern era the yield on a 10-year T-note tends to be a little less than 1.5% over inflation. Voila: the 10-year under 3.00% is not crazy — not unless you think either the Fed will be raising its overnight rate soon, or you believe that inflation is soon to rise.
Two groups think inflation will rise soon. One is the crowd eager to re-fight granddaddy’s war. The 1970s will be back any day! Put the gold bugs, the currency debasers, and money printers in this bunch. We have nothing to fear from them; they get a lot of ink but don’t move markets. The second group is worth study: the Fed. The Fed has insisted for a year that inflation will rise back to its 2% target. Delayed, perhaps, and contained, but will rise.
The downward pressure on inflation is real, but true deflation is not likely, and required to spook the Fed to new easing. The fracking boom is big, especially in oil, but natural gas really can’t fall below three bucks, too low for drilling. At that level a huge benefit to American commerce, but not a global-price under-cutter. Oil could drop, but a fall in its price is more stimulative than deflationary, low gasoline prices a booster.
Wages feel deflationary pressure, especially in the West and the emerging world. But they are not likely to go negative, just not rise much. One odd upward push on inflation: rents — depending on the measure, as much as 30% of inflation indices.
So, enjoy low inflation and this low-rate patch while they last, which may be quite a while. Not too hot, not too cold. One eye on China.
Most year-end forecasts are now on hold, or ought to be. Expectations for a faster economy and higher rates?Later, dear.
Some days the financial markets are beautiful things. Not just because you’re winning a bet, but by clarifying who has done what to whom. Not mere correlation as cause, offered by shills every day, but unmistakable event and effect.
Before New York markets opened on Thursday, news flashed: Markit’s measure of January manufacturing in Europe rose from 52.7 to 53.9, but in China fell from 50.5 to shrinkage at 49.6 and almost a percentage point below forecast. In New York the Dow opened 150 points below Wednesday’s close, and emerging-nation currencies tanked, Argentina almost 20%.
Lessons. Nobody believes in European recovery. China matters. In the old days, “When the US sneezes, the world catches cold.” Today, duck when China reaches for a hanky. World trade is a continuous conveyor connecting everyone, low-end goods exported from low-productivity economies to join high-end from high-end often in China to be re-exported all over hell and gone. When the conveyor jumps a drive tooth at the China station, then so does demand for emerging-nation and commodity exports. Not good for stocks anywhere, and emergings suddenly struggle to pay foreign debts.
The 10-year T-note, under pressure from a QE-tapering Fed and accelerating economy was by now supposed to have broken through 3.00%, up into a range not seen since 2011. Instead it has fallen in each week of the New Year, on the China news now to 2.73%, crashing through technical “resistance.” But there is a lot more to this move than China. Certainly a weakening world would push money to the dollar and US bonds, but the 10-year has been doing better for weeks.
Sometimes a missing puzzle-piece is most illustrative. Scotland Yard: “Anything else of note?” Holmes: The curious incident of the dog in the night. Scotland Yard: “The dog did nothing in the night.” Holmes: That was the curious incident.
Why has the dog not barked? You’d never know from the media happy-talkers, certain that QE was an excessive stimulant, but the 10-year move says that quieter, wiser heads are worried about our economy with the Fed pulling back. If QE was good for the economy, its absence is not.
Then, the overall economy aside, too hard to predict in an unprecedented cycle becoming an era, the big deal for long term rates always is inflation. And it’s still trending down, core measures in the 1.0%-1.5% range. In the modern era the yield on a 10-year T-note tends to be a little less than 1.5% over inflation. Voila: the 10-year under 3.00% is not crazy — not unless you think either the Fed will be raising its overnight rate soon, or you believe that inflation is soon to rise.
Two groups think inflation will rise soon. One is the crowd eager to re-fight granddaddy’s war. The 1970s will be back any day! Put the gold bugs, the currency debasers, and money printers in this bunch. We have nothing to fear from them; they get a lot of ink but don’t move markets. The second group is worth study: the Fed. The Fed has insisted for a year that inflation will rise back to its 2% target. Delayed, perhaps, and contained, but will rise.
The downward pressure on inflation is real, but true deflation is not likely, and required to spook the Fed to new easing. The fracking boom is big, especially in oil, but natural gas really can’t fall below three bucks, too low for drilling. At that level a huge benefit to American commerce, but not a global-price under-cutter. Oil could drop, but a fall in its price is more stimulative than deflationary, low gasoline prices a booster.
Wages feel deflationary pressure, especially in the West and the emerging world. But they are not likely to go negative, just not rise much. One odd upward push on inflation: rents — depending on the measure, as much as 30% of inflation indices.
So, enjoy low inflation and this low-rate patch while they last, which may be quite a while. Not too hot, not too cold. One eye on China.
Friday, January 17, 2014
Capital Markets
By Louis S. Barnes Friday, January 10th, 2014
Two things this week: the aftershocks of last week’s jobs surprise, and astounding word that delinquencies on new mortgages are too low.
The weak jobs report knocked down long-term rates, and although everyone is suspicious of the report, the improvement has held. The all-defining 10-year T-note is trading near 2.85%, 30-year mortgages sliding down close to 4.50%.
After any wildcard report, everyone scours new data looking for confirmation or contradiction. The poor “non-farm payrolls” data last Friday came from the BLS “establishment survey” of big business, in the last few years the healthiest segment of the economy. This week we got the NFIB survey of small business: no change in overall conditions, just pacing back and forth in the same trench since late 2009. However, the NFIB employment component did improve ever-so-slightly at mid-year last year and held in December. No acceleration, but no deterioration.
Industrial production has no particular correlation with jobs, but has risen in five straight months. This run may be another temporary inventory-overbuild, but GDP running over 3% may leak into hiring. We need rising wages even more than jobs.
Retail sales were okay in December, up from November, but year-over-year 2013 finished with a gain of 4.2% before subtraction for inflation, well off the 5.4% gain in 2012. The CPI core rate of inflation at 0.1% is stuck at less than half the Fed’s target.
Then, mortgages performing too well. For the last dozen years we have quarreled about how to calibrate underwriting of mortgages. An hysterical mob still imagines bubbles around every corner, and a nasty bunch of thugs wants to shut down anything involving government, well-calibrated or not.
How to know, too tight, or too loose? Abraham Lincoln was asked, how long should a man’s legs be? Abe replied, “Long enough to reach the ground.” Proper measurement of underwriting begins at the end, with the default rate. Too many defaults means that underwriting was too easy (although a flow of really bad credit will defer the reckoning by pushing up prices — not today). Too few defaults is the signature of too tough.
From the back of the room, a hard-head: “We don’t want any defaults at all.” As you tighten toward no defaults, you reach a diminishing return, turning down acceptable credits in mania for perfection. Doing so will intercept recovery from recession, as it has, will impair any normal market, and make loans available only to the rich.
Specifics. In normal times 1945-2000, Fannie-style underwriting produced delinquency rates just above 4% and foreclosure rates near 0.7%. Today the overall US delinquency rate is still 6.25%, some 4.5 million loans. However, new loans made since 2010 have had the lowest rates of delinquency ever measured. One of the best metrics is early default: performance in the first six months of a new loan reveals underwriting “misses” — those who had dreamed of owning a home but were not ready and quickly were late on a payment. From a 2007 peak at 0.60% of Fannie loans late-paying at six months, now 0.05%. Even FHAs, from over 1.00% are down to 0.09%.
That squeeze was not easy to accomplish. Weak markets create high rates of DQ, and housing is still in trouble in a lot of places. The newest poster-children are NY and NJ with DQ rates 12.4% and 14.6%, joining Florida still at 14.6%, all three boosted by self-inflicted local legal mire and flinching from foreclosure. CA and AZ at 5.6% and 5.5% are strong evidence that foreclosure medicine is worth the pain. Rustbelt IL-IN-OH-PA is still 10%-plus, as is the old Confederacy and abandoned Nevada.
The conservator of Fannie and Freddie, Edward DeMarco, booby-trapped their operations. Ending Bubble foolishness was easy; zealous trip-wiring has hurt all of us. His replacement, Mel Watt, knows defusing is necessary but needs political support.
Economic recovery aside, over-tight credit punishes all young and recovering households. Meet enough borrowers, review enough files, it’s not hard to tell who can be trusted with a small down payment, and which condo project is safe to lend in. It’s not rocket science: we had it right for 55 years.
Two things this week: the aftershocks of last week’s jobs surprise, and astounding word that delinquencies on new mortgages are too low.
The weak jobs report knocked down long-term rates, and although everyone is suspicious of the report, the improvement has held. The all-defining 10-year T-note is trading near 2.85%, 30-year mortgages sliding down close to 4.50%.
After any wildcard report, everyone scours new data looking for confirmation or contradiction. The poor “non-farm payrolls” data last Friday came from the BLS “establishment survey” of big business, in the last few years the healthiest segment of the economy. This week we got the NFIB survey of small business: no change in overall conditions, just pacing back and forth in the same trench since late 2009. However, the NFIB employment component did improve ever-so-slightly at mid-year last year and held in December. No acceleration, but no deterioration.
Industrial production has no particular correlation with jobs, but has risen in five straight months. This run may be another temporary inventory-overbuild, but GDP running over 3% may leak into hiring. We need rising wages even more than jobs.
Retail sales were okay in December, up from November, but year-over-year 2013 finished with a gain of 4.2% before subtraction for inflation, well off the 5.4% gain in 2012. The CPI core rate of inflation at 0.1% is stuck at less than half the Fed’s target.
Then, mortgages performing too well. For the last dozen years we have quarreled about how to calibrate underwriting of mortgages. An hysterical mob still imagines bubbles around every corner, and a nasty bunch of thugs wants to shut down anything involving government, well-calibrated or not.
How to know, too tight, or too loose? Abraham Lincoln was asked, how long should a man’s legs be? Abe replied, “Long enough to reach the ground.” Proper measurement of underwriting begins at the end, with the default rate. Too many defaults means that underwriting was too easy (although a flow of really bad credit will defer the reckoning by pushing up prices — not today). Too few defaults is the signature of too tough.
From the back of the room, a hard-head: “We don’t want any defaults at all.” As you tighten toward no defaults, you reach a diminishing return, turning down acceptable credits in mania for perfection. Doing so will intercept recovery from recession, as it has, will impair any normal market, and make loans available only to the rich.
Specifics. In normal times 1945-2000, Fannie-style underwriting produced delinquency rates just above 4% and foreclosure rates near 0.7%. Today the overall US delinquency rate is still 6.25%, some 4.5 million loans. However, new loans made since 2010 have had the lowest rates of delinquency ever measured. One of the best metrics is early default: performance in the first six months of a new loan reveals underwriting “misses” — those who had dreamed of owning a home but were not ready and quickly were late on a payment. From a 2007 peak at 0.60% of Fannie loans late-paying at six months, now 0.05%. Even FHAs, from over 1.00% are down to 0.09%.
That squeeze was not easy to accomplish. Weak markets create high rates of DQ, and housing is still in trouble in a lot of places. The newest poster-children are NY and NJ with DQ rates 12.4% and 14.6%, joining Florida still at 14.6%, all three boosted by self-inflicted local legal mire and flinching from foreclosure. CA and AZ at 5.6% and 5.5% are strong evidence that foreclosure medicine is worth the pain. Rustbelt IL-IN-OH-PA is still 10%-plus, as is the old Confederacy and abandoned Nevada.
The conservator of Fannie and Freddie, Edward DeMarco, booby-trapped their operations. Ending Bubble foolishness was easy; zealous trip-wiring has hurt all of us. His replacement, Mel Watt, knows defusing is necessary but needs political support.
Economic recovery aside, over-tight credit punishes all young and recovering households. Meet enough borrowers, review enough files, it’s not hard to tell who can be trusted with a small down payment, and which condo project is safe to lend in. It’s not rocket science: we had it right for 55 years.
Friday, January 10, 2014
Capital Markets
By Louis S. Barnes Friday, January 10th, 2014
Gotta love it. The 2014 consensus forecast for accelerating growth lasted nine whole days. Crashing with it: any immediate rise in mortgage rates. Oh, hopes for faster GDP will be back, maybe quickly, but given a black sense of humor nothing beats the post-surprise scurrying for cover by experts and televised “Er… um… ahem….”
Wizards of market economics had talked themselves into a December employment report due today jumping to 250,000 new jobs. Ah… no. 74,000, and 55,000 of those were shaky retail. Wages grew by $0.02 in the month, less than 1% annualized and half the 2013 average.
Eggy faces include Perfesser Bernanke’s, whose farewell speech included belief that the declining unemployment rate really does reflect job growth, and not just a contraction in the workforce. In this December report the basic unemployment rate stone-dropped from 7.0% to 6.7% only because another 347,000 people left the workforce, participation at a 35-year low. The 347,000 one-month shrinkage is overstated, but the BLS’ U-6 gauge including “involuntary part time” is still over 13%.
Before expanding the sarcasm, it is fair to say that this is only one month’s report. The November’s result was revised up from a gain of 203,000 to 241,000, and this December report will be revised and may be an anomaly.
Excuses worthy of ridicule: the weather did it. (It’s December, happens every year.) Seasonal adjustments distorted the data. (See “December.” Every year.)
The most sensible response to the report: look to other data for confirmation, and continue to assume that this recovery will look like no other since WW II. Every month the companions to the jobs data are the twin ISM flash reports from the immediately prior month. The manufacturing ISM slid insignificantly from a strong 57.3 to 57.0, and historically would indicate a much better job report than this one. The service sector ISM has been slipping for real, in December to 53.0 from 53.9 contrary to forecasts for higher. Based on the ISMs it’s a fair bet that this payroll report exaggerated weakness.
However. The wages figure in this report is not subject to the possible distortions above. The greatest US economic weakness going back to 1990 has been no growth in real household incomes followed by roughly 8% shrinkage in the Great Recession. December wages grew at half the inflation rate.
Lefties argue that the 1% have run off with all the loot and keep it in Scrooge McDuck vaults, neither spending nor investing. Disney does Karl Marx. Righties offer the usual baseless goop involving too much government. Oh-by-the-way: among the embarrassed this morning, the entire inflation boogeyman crew. Sustained inflation is a mathematic impossibility without rising incomes.
Today’s news, even if payrolls are revised up or revive in coming months, is entirely consistent with the theory that US wages are suppressed by global competition on an unprecedented scale. That competition has been enhanced by the IT revolution facilitating trade of all kinds, including electronic delivery of production. As trade and competition have flourished, those nations running predatory schemes have skinned us.
We got new trade data this week. The US petroleum trade deficit is shrinking very fast, even though domestic producers are not supposed to export. The net cut in imports over exports is entirely due to substituting US supply for imports. The November net petroleum deficit was barely $15 billion; at the worst of 2008, $40 billion in a single month.
Our overall November trade deficit, including petroleum: $34.3 billion. Our deficit with China alone: $26.9 billion. NOT China-bashing, here. China is a trade funnel. Fancy ideas export from the US; sophisticated components export from Japan, Taiwan, S. Korea; and join low-tech components from Vietnam and Malaysia in China for assembly and re-shipment to the US and elsewhere. However, along the way wages and unemployment in those places are exported back here, too.
Answers are not easy, but all begin with helping our people to compete.
Gotta love it. The 2014 consensus forecast for accelerating growth lasted nine whole days. Crashing with it: any immediate rise in mortgage rates. Oh, hopes for faster GDP will be back, maybe quickly, but given a black sense of humor nothing beats the post-surprise scurrying for cover by experts and televised “Er… um… ahem….”
Wizards of market economics had talked themselves into a December employment report due today jumping to 250,000 new jobs. Ah… no. 74,000, and 55,000 of those were shaky retail. Wages grew by $0.02 in the month, less than 1% annualized and half the 2013 average.
Eggy faces include Perfesser Bernanke’s, whose farewell speech included belief that the declining unemployment rate really does reflect job growth, and not just a contraction in the workforce. In this December report the basic unemployment rate stone-dropped from 7.0% to 6.7% only because another 347,000 people left the workforce, participation at a 35-year low. The 347,000 one-month shrinkage is overstated, but the BLS’ U-6 gauge including “involuntary part time” is still over 13%.
Before expanding the sarcasm, it is fair to say that this is only one month’s report. The November’s result was revised up from a gain of 203,000 to 241,000, and this December report will be revised and may be an anomaly.
Excuses worthy of ridicule: the weather did it. (It’s December, happens every year.) Seasonal adjustments distorted the data. (See “December.” Every year.)
The most sensible response to the report: look to other data for confirmation, and continue to assume that this recovery will look like no other since WW II. Every month the companions to the jobs data are the twin ISM flash reports from the immediately prior month. The manufacturing ISM slid insignificantly from a strong 57.3 to 57.0, and historically would indicate a much better job report than this one. The service sector ISM has been slipping for real, in December to 53.0 from 53.9 contrary to forecasts for higher. Based on the ISMs it’s a fair bet that this payroll report exaggerated weakness.
However. The wages figure in this report is not subject to the possible distortions above. The greatest US economic weakness going back to 1990 has been no growth in real household incomes followed by roughly 8% shrinkage in the Great Recession. December wages grew at half the inflation rate.
Lefties argue that the 1% have run off with all the loot and keep it in Scrooge McDuck vaults, neither spending nor investing. Disney does Karl Marx. Righties offer the usual baseless goop involving too much government. Oh-by-the-way: among the embarrassed this morning, the entire inflation boogeyman crew. Sustained inflation is a mathematic impossibility without rising incomes.
Today’s news, even if payrolls are revised up or revive in coming months, is entirely consistent with the theory that US wages are suppressed by global competition on an unprecedented scale. That competition has been enhanced by the IT revolution facilitating trade of all kinds, including electronic delivery of production. As trade and competition have flourished, those nations running predatory schemes have skinned us.
We got new trade data this week. The US petroleum trade deficit is shrinking very fast, even though domestic producers are not supposed to export. The net cut in imports over exports is entirely due to substituting US supply for imports. The November net petroleum deficit was barely $15 billion; at the worst of 2008, $40 billion in a single month.
Our overall November trade deficit, including petroleum: $34.3 billion. Our deficit with China alone: $26.9 billion. NOT China-bashing, here. China is a trade funnel. Fancy ideas export from the US; sophisticated components export from Japan, Taiwan, S. Korea; and join low-tech components from Vietnam and Malaysia in China for assembly and re-shipment to the US and elsewhere. However, along the way wages and unemployment in those places are exported back here, too.
Answers are not easy, but all begin with helping our people to compete.
Friday, January 3, 2014
Capital Markets
By Louis S. Barnes Friday, January 3rd, 2014
Last week’s look-ahead column closed with passing mention of surprises. As the world will not truly re-open until next Friday, January 9 with release of December job data, today we’ll explore the potential for one domestic surprise, and three foreign oops-a-daisies. The more the four tilt toward oops, interest rates will fall; the more they improve, rates up.
My domestic opinion has survived the week: headwinds are lighter than any time in a decade. That said, tailwinds are also lighter, especially good, ol’ cyclical recovery. In the aftermath of the Great Recession neither jobs nor housing have behaved as they “should,” and the stock market rally may be more QE artifact than GDP anticipation.
Disparate observers (Tim Duy, U of Oregon; Rick Reider, Blackrock) have noted recent changes in the Fed’s estimation of the job market. A four-year puzzle: a steady decline in unemployment, but a nearly equal decline in participation in the workforce. If unemployment really is falling, competition for workers will cause wages to rise and ultimately turn inflation upward. Bernanke in December: “Inflation can be quite inertial. It can take quite a time to move. I think a lot of the declines in the participation rate are demographic or structural… a lot of the unemployment decline that we’ve seen, contrary to sometimes what you hear, I think a lot of it really does come from jobs.”
Tha-dump. That’s the most optimistic forward by the Chairman since the show stopped. Bilateral surprise potential: 1) cyclical growth pressure has been low, but is now stronger than we’ve thought, or 2) job growth looks like cyclical pressure but isn’t. Down the first road the Fed is eager to end QE for fear it may have to tighten sooner than anyone thinks; down the second, global forces have made obsolete the cycles of the last 65 years, and the Fed may not have done enough. Or be able to.
Japan is everyone’s “bug in search of a windshield.” Its national debt is at least double its GDP, and it has entered last-ditch emergency policy. The Bank of Japan is buying Japanese bonds at about 2.5 times the rate of the Fed’s QE, trying desperately to ignite the economy, and in April Japan will attempt the simultaneous feat of austerity, raising the national sales tax from 5% to 8%. Yesterday the Health Ministry (often less than frank) announced a 244,000-person decline in Japan’s population, an annual affair since the crest before 2010 at about 128 million. Rather worse than a 2% annual shrinkage: most of us get a lot older before we die and become a drain on tax revenue. Good news and bad news: Japan’s life expectancy is the longest anywhere.
All of that notwithstanding, 95% of Japan’s debt is held inside Japan, and so long as Japan’s people will accept the yen printed by the BoJ… no big surprises. Internationally the yen fell 25% last year, undercutting the exports of its competitors (everybody).
Europe’s thin pulse is getting great press. Presumably because treading water is so much better than drowning. Re-elected Angela Merkel’s first demand of the others: surrender control and tighten austerity (Nicht Schwimmen!). The ECB: if anyone bets on drowning by shorting Club Med bonds, we will throw a life-preserver. But not until they are drowning. Nothing has changed: Germany’s surplus, peripheral unemployment and debt growth; economic, fiscal and banking disunion. Europe’s people are second-oldest only to Japan, adding to the impossible fiscal situation (Europe does allow immigration, stabilizing population; Japan is 98.5% Japanese). As big as Europe’s debts are, only about half of Japan’s GDP percentage, and most is owed in-country.
China is attempting to rebalance from fast-expansion over-investment to a normal economy, and nobody there or anywhere knows how it will go. Its politics are so different from any other economy that no one outside even knows how to keep score. The US Army is not in business for itself. Our political parties do not run our judiciary. We do not plan quickly to move 400 million farmers without other skills to new cities. We spy on civilians, but you can write or speak as you wish. Bet on one thing: a China consensus values stability. Xi Jinping will not be China’s Mikhail Gorbachev.
Overseas surprises are not imminent, but if they were, they wouldn’t be surprises.
Last week’s look-ahead column closed with passing mention of surprises. As the world will not truly re-open until next Friday, January 9 with release of December job data, today we’ll explore the potential for one domestic surprise, and three foreign oops-a-daisies. The more the four tilt toward oops, interest rates will fall; the more they improve, rates up.
My domestic opinion has survived the week: headwinds are lighter than any time in a decade. That said, tailwinds are also lighter, especially good, ol’ cyclical recovery. In the aftermath of the Great Recession neither jobs nor housing have behaved as they “should,” and the stock market rally may be more QE artifact than GDP anticipation.
Disparate observers (Tim Duy, U of Oregon; Rick Reider, Blackrock) have noted recent changes in the Fed’s estimation of the job market. A four-year puzzle: a steady decline in unemployment, but a nearly equal decline in participation in the workforce. If unemployment really is falling, competition for workers will cause wages to rise and ultimately turn inflation upward. Bernanke in December: “Inflation can be quite inertial. It can take quite a time to move. I think a lot of the declines in the participation rate are demographic or structural… a lot of the unemployment decline that we’ve seen, contrary to sometimes what you hear, I think a lot of it really does come from jobs.”
Tha-dump. That’s the most optimistic forward by the Chairman since the show stopped. Bilateral surprise potential: 1) cyclical growth pressure has been low, but is now stronger than we’ve thought, or 2) job growth looks like cyclical pressure but isn’t. Down the first road the Fed is eager to end QE for fear it may have to tighten sooner than anyone thinks; down the second, global forces have made obsolete the cycles of the last 65 years, and the Fed may not have done enough. Or be able to.
Japan is everyone’s “bug in search of a windshield.” Its national debt is at least double its GDP, and it has entered last-ditch emergency policy. The Bank of Japan is buying Japanese bonds at about 2.5 times the rate of the Fed’s QE, trying desperately to ignite the economy, and in April Japan will attempt the simultaneous feat of austerity, raising the national sales tax from 5% to 8%. Yesterday the Health Ministry (often less than frank) announced a 244,000-person decline in Japan’s population, an annual affair since the crest before 2010 at about 128 million. Rather worse than a 2% annual shrinkage: most of us get a lot older before we die and become a drain on tax revenue. Good news and bad news: Japan’s life expectancy is the longest anywhere.
All of that notwithstanding, 95% of Japan’s debt is held inside Japan, and so long as Japan’s people will accept the yen printed by the BoJ… no big surprises. Internationally the yen fell 25% last year, undercutting the exports of its competitors (everybody).
Europe’s thin pulse is getting great press. Presumably because treading water is so much better than drowning. Re-elected Angela Merkel’s first demand of the others: surrender control and tighten austerity (Nicht Schwimmen!). The ECB: if anyone bets on drowning by shorting Club Med bonds, we will throw a life-preserver. But not until they are drowning. Nothing has changed: Germany’s surplus, peripheral unemployment and debt growth; economic, fiscal and banking disunion. Europe’s people are second-oldest only to Japan, adding to the impossible fiscal situation (Europe does allow immigration, stabilizing population; Japan is 98.5% Japanese). As big as Europe’s debts are, only about half of Japan’s GDP percentage, and most is owed in-country.
China is attempting to rebalance from fast-expansion over-investment to a normal economy, and nobody there or anywhere knows how it will go. Its politics are so different from any other economy that no one outside even knows how to keep score. The US Army is not in business for itself. Our political parties do not run our judiciary. We do not plan quickly to move 400 million farmers without other skills to new cities. We spy on civilians, but you can write or speak as you wish. Bet on one thing: a China consensus values stability. Xi Jinping will not be China’s Mikhail Gorbachev.
Overseas surprises are not imminent, but if they were, they wouldn’t be surprises.
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