"Let them eat cake, anyone?"
Saturday, August 7, 2010
Zero Hedge Digs Deeper Into Jobs; Real Rate At 14.7%
When it comes to pointless (and bullish) reversion to the mean exercises,it seems nobody has a problem with saying stocks have to go back to 1,500 just because that's where they were, and the unemployment rate has to go back to 5% cause that's how we know the Fed is the immaculate and flawless piece of art it is, and always gets things under control to near-peak efficiency. Well, here at Zero Hedge we (again) decided to take the reversion to the mean approach and flip it, instead applying it to a deteriorating indicator, the labor force participation rate. The first chart below demonstrates the LFP rate, which a derivative of the chart we presented earlier, has now plunged to the lowest level in over 25 years, or 64.6% (gotta go back to December 1984 for the first time this was passed). So we decided to "normalize" the LFP by keeping it at the peak achieved at the turn of millennium, or December 1999, when it hit a peak of 67.1%. Now as everyone knows the US population has been soaring since then, and with the cost of living increasing ever more with each day, and as more and more family members are forced to join the work pool, it makes sense that in a normal economy, the LFP should continue rising instead of declining. We thus kept it constant at the 67.1% level (instead of doing the conservative thing and pushing it higher along the trendline), and ran the unemployment numbers through, assuming this part of the jobless equation was constant. To our surprise, we found that the U-3 rate (not the U-6), which today was supposed to be 9.5%, in fact turns out to be 13.0% as of July: an all time record save for the 13.6% recorded in December 2009. And if instead we use the trendline number of a 68.5% LFP rate, the unemployment rate today would be 14.7%. In retrospect we sympathize with Christina Romer's decision to get the hell out of Dodge.
Reported and adjusted labor force participation rate:
Running these numbers through the actual unemplyment calculation, reveals the following: while assuming a declining LFP rate we obviously get the 9.5% unemployment rate, assuming a peak 67.1% LFP results in a 13.0% unemployment rate. And if the labor force participation rate were to grow according to trendline, the jobless rate in the US today would have been reported at 14.7%, just about where the U-6 was reported, but based on an entirely different methodology.
Further Analysis of Jobs Shows Deeper Bad News
from Reuters:
(Reuters) - Friday's employment report provided an odd mix of unpleasant surprises that add another question mark to the pace of economic recovery.
Companies cut back on temporary hires, a segment normally considered a harbinger of future hiring. Government jobs dried up much faster than anticipated and not just because it saw the end of short-term census jobs.
The jobless rate held steady at 9.5 percent, defying expectations for a slight increase, but that was only because thousands more people dropped out of the labor force.
* Temporary jobs dropped by 5,600, reversing a streak of strong gains that economists had viewed as a hopeful sign that hiring would pick up.
* Normally, companies load up on temps at the beginning of a recovery when they are waiting for confirmation that growth is gaining momentum. This recovery has been unusual in that temporary hiring did not herald a jump in private hiring.
* Private hiring totaled a lackluster 71,000 in July, below expectations for 90,000 in a Reuters poll. June's tally was revised down to just 31,000 from an initially reported 83,000.
* Government hiring was another worrisome sign. The loss of 202,000 positions reflected the loss of 143,000 temporary Census jobs.
* The total also included 38,000 jobs lost in local government. For most municipalities, the fiscal year began on July 1, and government associations have been warning that huge budget gaps would force aggressive job and spending cuts. July's report suggests local governments got a quick start.
Note that temp jobs, which are a leading indicator, are also slowing appreciably!
and WSJ:
One worrisome sign from Friday's report: Temporary-help jobs, typically a leading indicator for the rest of the labor market, fell in July. Temporary employment declined 5,600 after nine straight months of growth.
Public reports from the largest staffing firms still show growth in the temporary sector.
The government's figures would suggest "momentum has slowed dramatically," says Adecco's Mr. Gilliam. "If that's the case and that's where we're going for the next couple of months, it suggests a step back in the job-market recovery."
A weak labor market will keep incomes—and consumer spending, which accounts for 70% of U.S. economic output—under pressure. The Fed said Friday that consumer credit declined at a 0.7% annual rate in June as consumers continued to pay down debt. Revolving credit, which is mostly credit-card borrowing, fell at a 6.5% rate, the Fed said.
About 6.6 million people were jobless for more than 27 weeks in July, accounting for 44.9% of all unemployed. Workers who are finding positions after long searches are taking pay cuts to make ends meet.
Friday, August 6, 2010
Goldman Cuts GDP Forecast to Only 1.5% In 2010 2nd Half
SAN FRANCISCO (MarketWatch) -- Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 155.20, +0.02, +0.01%) economists on Friday cut their forecasts for U.S. economic growth in 2011 and said they expect the Fed to respond to high unemployment with "another round of unconventional monetary easing," including more asset purchases. Economists led by Jan Hatzius and Ed McKelvey said they still expect growth in real gross domestic product to average 1.5% at an annual rate in the second half of this year. But they now see a more gradual pick-up by the end of next year. GDP is likely to average 1.9% in 2011 vs. a previous forecast of 2.5%, largely due to Congressional resistance to extending fiscal stimulus. The economists expect the Fed next week to announce a "baby step" to renewed unconventional easing next week.
Wheat Limit Down
Beans are still up for the day! (beans went negative after I posted this)
I remember one other occasion when soybean prices hit limit up, then limit down, the limit up a second time the same day!
Zero Hedge on the NFP Debacle
Zero Hedge is my favorite finance blog. It's is the BEST!
July Non Farm Payrolls miss expectations, coming in at -131,000, way below the consensus of -65,000, yet the unemployment rate drops once again to 9.5% as even more people drop out of the labor force. Total Private Payrolls rise only 71k, on consensus estimates of +90k. The June Jobs report is revised majorly downward to -221K, from -125K, as the double dip gets yet another validation. The 2 Year Treasury just hit another fresh all time low of 0.5136%. And the stunner: those working actually declined by 159,000 to 138.960 million, even as another 381 thousand left the labor force between June and July, resulting in an actual drop in the unemployment rate from 9.6% to 9.5%. Another NFP debacle which will certainly cause stocks to sure by at least 5% as QE 2 is now absolutely inevitable.
- U-6, or real unemployment, is flat at 16.5%
- The average duration of unemployment is now 34.2 weeks, Median 22.2
- 44.9% have been out of a job for longer than 27 weeks.
- Birth/death adjustment just 7k, compared to 147k in June
- The only silver lining: average hourly earnings up 0.2% to $22.59, even as total private hours increased from 34.1 to 34.2, as those employed have to do triple-duty
David Rosenberg's Take on Jobs Report
Again, U.S. nonfarm payrolls came in weaker than expected, and while some of the components offered up some good news, like a 36,000 rise in manufacturing employment and an uptick in the workweek, the report overall was quite soft. If this were summer school, I’d be tempted to give it a C-minus, and only because after a terrific week vacationing in Chicago, I’m in a generous mood.
The headline came in at -131,000 versus the consensus estimate of -65,000 (private payrolls did rise 71,000 but this was below the 90,000 increase that was widely expected). And, the net revisions to the prior two months was -97,000, so in effect the “level” of employment was 153,000 lower than what the economics community was penning in the for the month. So, the shortfall was even greater than the headline “miss” would suggest, counting in the revisions.
The Establishment survey tends to understate what is happening at the small business level, which is why it is imperative to keep a close eye on the household survey — and employment here contracted 159,000 in July after sliding 301,000 in June and 35,000 in May. Historically, the odds of seeing three whiffs in a row in this survey without the economy either being in a recession or quickly heading into one is 50 to one.
There was palpable relief in some circles that the unemployment rate managed to stabilize at 9.5% in July. The problem here is that the labour force continues to shrink as discouraged workers drop out an alarming rate for an alleged economic recovery — down 181,000 in July and down 1.2 million in the past three months. If the labour force merely stayed the same in the past three months — keeping in mind that in “normal” recoveries the labour force swells as job opportunities expand — the unemployment rate would be sitting at 10½% today. What investors should really be keying on — no doubt the Fed is — is the “employment rate” or the employment-to-population ratio, which fell to 58.4% from 58.5% and is back to where it was at the turn of the year.
While it was encouraging to see the work week rebound, two other leading indicators of job trends — the direction of revisions and temp agency hiring — point to lingering malaise. In fact, the 5,600 drop in temps was the first decline since last August. And, we already know that 479,000 on jobless claims (a three-month high) is the starting point; therefore, we are likely on our way for another poor August reading on the employment backdrop.
To put it all in context, by this stage of the cycle, fully 31 months after the onset of recession, the U.S. economy has not only recouped all of the losses induced by the prior downturns but employment is already at a new high by now (having smashed the previous pre-recession peak by 1.1 million jobs or 2.3%). And, here we are today, sadly, still 7.7mln (or 5.6%) below the December 2007 peak. It will probably take at least five years to climb out of this hole.
As I said, there were some bright spots in the report. Incomes edged up. The workweek did likewise, though is still at depressed levels. The manufacturing sector is in revival mode, though part of this has reflected the powerful inventory cycle that seems to have run its course. The overspending culprits in the prior bubble phase, notably construction, financials and state/local government continue to shed jobs and these sectors comprise 25% of the overall employment pie. To put the math into perspective, for every 1% decline in jobs in these three shrinking areas of the economy, the manufacturing sector has to post a 3% increase. Daunting to say the least.
PERSPECTIVE NEEDED
We need a little perspective on the economic backdrop because I am becoming increasingly concerned. The fact that some at the Fed are beginning to warm towards the idea of more quantitative easing, vocal support from a growing number of Democrats to extend the once-reviled Bush tax cuts, and now chatter of another government-led bailout of “upside-down” homeowners, suggests that I am not alone in this concern.
Even before the release of the nonfarm payroll data, we received the ADP number for July, and while fractionally surpassing market expectations, the results were simply awful. To put it into some perspective, when the economy was coming out of its lull in 2003 and 2004 we were already north of 100k on ADP, on a monthly basis, and by 2005-06 we were printing 200k-250k numbers consistently. A 42k print is actually horrible and is telling you that the economy is either fundamentally weak or that companies are still rationalizing on labour.
Again, to put a 42k print into context, it printed 78k in December 2007 when everyone thought a recession was being averted (it started that month). That same month, the ISM non-manufacturing index came in at 52.3 and if I recall, the widespread sentiment at that time was that we were seeing a pause that refreshes. To sum it all up, the data points don’t tell you a whole lot right now that is very good. They certainly don’t give anyone a green light for cyclical exposure any more than the December 2007 data-flow managed to do. And, as for the non-manufacturing ISM, like its manufacturing counterpart, showed that the number of industries reporting “growth” is on the decline — down to 13 in July from 15 in June and 16 in May, and at a five-month low.
What we know is that we are heading into the third quarter knowing that there was minimal growth coming from that key 70% of the economy otherwise known as the U.S. consumer. July’s data on chain store and auto sales were both below expectations. Personal bankruptcies jumped 9% in June (138,000 personal filings during the month) and 2010 is now on track to be the highest in five years, with respect to consumer insolvencies (908,000 thus far or just under 1% of the total number of households). If capital spending is going to do the heavy lifting, keep in mind that just to keep the economy steady, it has to accelerate by nearly 10 percentage points for every percentage point slowing in household spending. Now that is a daunting task.
Bond Traders to Mr. Market: Something Wicked This Way Comes!
Treasury yields continue to reach new all-time record lows literally every day. This is a sign of very deep concerns that something very ominously dark is coming. Since the treasury and currency markets are the most liquid in the world, I tend to give them more credence than the stock market.
Wheat Sells Off 90 Cents
- It could be a top and exhaustion.
- It might me liquidation of trades before the weekend. There is often a liquidation before a weekend, since many traders don't want to hold positions over a two-day period when the weather may change dramatically.
- It could be longs taking profits.
- It might be just sell stops being hit.
Double Dip: Is This Chart Prescient?
White House Head of Economic Advisers, Christina Romer Quits!
Bad for Obama because it suggests the rats are jumping the sinking economic ship. Whisper rumors are that Obama refuses to listen to her worries about deficits. Same with Orszag! Trouble afoot!
Thursday, August 5, 2010
The Endgame Will Be Disaster
Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if I had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.
—Robert Frost, Fire and Ice, 1920.
Current global macro-economic policy is veering between two strategies: Fiscal austerity, or fiscal spending.
The first camp—fiscal austerity—argues that governments should cut spending, and perhaps even raise certain taxes, so long as those taxes do not harm general economic productivity. The rationale is, the sovereign debt has to be reduced now, as one day, there will be no more buyers for all the debt that’s being floated by countries. When that day comes, the countries will be broke—and broke countries often go up in revolutionary flames.
The second camp—fiscal spending—argues that cutting back and/or raising taxes in the middle of a slowdown is the sure path to macroeconomic suicide. To their way of thinking, the economic slowdown means lower aggregate demand. So the advocates of fiscal spending argue that to cut spending now would further depress aggregate demand—which would further slow down the economy, turning the situation into a vicious cycle: The dreaded Deflationary Death Spiral Freeze-Out. Therefore, to quote Cheney: Fuck the deficit. Rather than tighten its belt, the government should step in and spend more, so as to maintain the level of aggregate demand in the economy, until such time as it is once again back on its feet and able to expand without fiscal stimulus.
The fiscal austerity crowd counter that adding more spending to an already over-spent state will just exacerbate the problem of fiscal over-indebtedness. Indeed, to their way of thinking, adding more debt to the problem will only hasten and make inevitable a final day of reckoning.
The fiscal spenders don’t really have a counter-argument to this. Indeed, some of the more foolish members of the fiscal spenders’ camp argue that, with more spending, the economy will rev up to such a point that it will magically grow its way out of debt—but that’s just stupid; a mirror image of the Laffer Curve nonsense.
It’s not all that surprising, once you realize it: Certain hard-core neo-Keynesians (who argue for even more fiscal spending), and the Reaganaut Supply Siders of the Big Eighties (who argued for even more tax cuts for the rich), really are just twins separated at birth—really stupid twins, who probably should have been smothered in the crib. Both hard-core Neo-Keynesians and Reaganaut Supply Siders basically argue that the greater the fiscal shortfall, the greater the private sector stimulus which will result, said private sector stimulus being the engine which will in time rev up the economy and make up for the fiscal shortfall—an obvious fallacy for anyone who knows basic math.
The more honest members of the fiscal spending camp know this—they know that deficit stimulus will not result in such growth that it will wipe away the deficit through increased tax receipts. But they are also convinced that only government spending will keep the economy from that dreaded deflationary stall. So they hem and haw and equivocate, while all the while seeming to imply—with a weird little twitch—that over time, so as to service that monster debt, the state will simply have to devalue the currency, and thereby give U.S. Treasury bondholders a de facto haircut.
Currency devaluation—or specifically, dollar devaluation—has a lot of obvious benefits in a potentially deflationary crisis. The problem, however, is that it can’t be done by diktat. Roosevelt did it in March of ’33 when he confiscated gold and then repegged the dollar—but that was then, when the dollar was in fact pegged to gold. Since Nixon and the end of Bretton Woods, modern currencies float on nothing but air. So if currency devaluation is to happen, then it can only be done through “controlled” inflation (as if such a thing were possible).
In the fiscal spenders’ playbook—though it is never spelled out—this is the way by which the debt will magically disappear: “Controlled inflation” or “de fact devaluation” or whatever other term is invented for it, will force debt-holders to take the brunt of the shaft, while avoiding the deflationary death spiral. Or so the fiscal spending camp would seem to be implying, but carefully never stating: Krugman et al. are constantly arguing in favor of massive fiscal spending—fueled obviously by massive fiscal debt—but they never bother to give any reasonable alternative explanation as to how the monster fiscal debt will be serviced, aside from leaving the door discretely open for this posited stealth currency devaluation-slash-“controlled” inflation.
Some might argue that devaluation or “controlled inflation” or whatever it’s called is not at all the exit strategy of the fiscal spenders’ camp—after all, they haven’t said that it is. But I would argue that, if the total nominal fiscal debt crosses some as-yet indeterminate ratio of debt-to-GDP—say for the sake of argument two times the GDP—then would there possibly be any other way to service the debt, save by inflation or currency devaluation?
The fiscal austerity camp sees this too—and they give the big middle-finger to a de facto currency devaluation. Because just as the Neo-Keynesians are terrified of a deflationary stall, the fiscal austerity crowd are terrified of asset value destruction.
The fiscal austerity camp freely admits that austerity measures will cut government spending and indeed lead to a slowdown—but they claim it’s necessary to “clean out the dead wood”, or arguments to that effect. They insist that any enforced or triggered slowdown won’t be a self-perpetuating deflationary black hole. The reason, they argue, is because eventually, once overhanging inventory is wiped out either through write-offs or price cuts or just regular old consumption, the economy will reach an inflection point: There will be no overhang left to consume—the economy will have to start producing again, which will naturally lead to the end of any deflationary downward spiral, and an upturn in the economic fortunes of America.
To this scenario, however, the fiscal spenders camp asks the obvious question: How long will this process take? A year? Or a decade? Or maybe two? But we’ve got people hurtin’ now. So once again—fuck the deficit . . .
. . . and so off they go again, both camps arguing endlessly as they spin off into space like a top built out of PowerPoint presentations, PDF papers with more footnotes than arguments, and mathematical equations from all those cool and useless models that sure as hell did not see this mess coming.
These aren’t academic questions here: Both policy approaches are being tried out—fiscal spending on a world-historic scale in the United States, fiscal austerity for-real in the UK, and in-name-only in the Eurozone.
My sense is, both policy approaches will fail, because both are ignoring the elephant in the room—the real culprit responsible for the hole we’re in.
To understand the real culprit, let’s look first at the priorities of both policy camps:
The fiscal spending camp are basically Neo-Keynesian, “saltwater” economists; ‘cause they’re on the coasts. They consider the maintenance of aggregate demand as the primary goal of macroeconomic policy. More demand means more production, which means more jobs, which means more demand—voilà : A virtuous Neo-Keynesian cycle. (They are so into their vicious and virtuous cycles that they remind me of Tasmanian Devils.)
The fiscal austerity camp, on the other hand, are basically Monetarists, with a few Austrians thrown in for flavoring—so-called “sweetwater” economists; ‘cause they’re in Chicago and Middle America. This camp considers the stability of asset prices in real terms to be necessary for the sound running of the economy: Asset price stability means more investment, means more jobs, means more savings, means more assets, means more investment—and so on.
The two camps view it as “normal” for both aggregate demand and asset levels to continuously and predictably (on a macroeconomic level) accrete. When demand and/or assets plateau (or let alone fall), one or the other camp gets into a tizzy—which makes perfect sense: Each camp views either aggregate demand (for the Neo-Keynesian “saltwater” economists) or asset levels (for the “freshwater” austerity camp) as the cornerstone of economic activity, and therefore of economic prosperity. Whatever damages that economic cornerstone is exactly what ought to be avoided—just as whatever benefits that cornerstone is precisely the thing which ought to be implemented or encouraged.
They might as well just print up placards, and go march on either end of Wall Street: “What’s Good For Aggregate Demand is Good For America!!!” on one side, “What’s Good for Asset Levels is Good For America!!!” on the other.
Neither policy prescription is inherently evil—or even inherently wrong. Both policy prescriptions are simply trying to bring back the good ol’ days—when everyone had a multi-million dollar McMansion-slash-ATM, and everyone drove the latest 3-ton urban assault vehicles to go pick up little Junior and little Missy at the private daycare center and soccer practice. In essence, both approaches are seeking a status quo ante.
Neither camp, however, realizes that what they both want is impossible—not because they are contradictory or mutually exclusive: But because the aggregate demand increases and the asset level increases we have experienced over the past 30 years or so were artificial and illusory. Both the massive aggregate demand increases over the last 27 years, and the massive asset level increases over the last 27 years, were both caused by the same culprit: Subsidized money.
Not cheap money—subsidized money.
The prosperity in the U.S. over the last 27 years has not been earned. Those asset levels and aggregate demand levels that formed the basis of the prosperity of the last quarter century were both founded upon now-unpayable debt. That massive debt happened because debt was cheap—because the Federal Reserve, that bastion of free-enterprise, effectively subsidized the cost of money and made the debt cheap.
Rather than let the market determine the cost of money—just as with any other commodity—the Fed basically carried out a Marxist-Leninist top-down policy towards money (How ironic, considering Greenspan’s love of Ayn Rand). This money subsidy kept both economic camps happy—because subsidized money goosed both aggregate demand and asset levels. But subsidized money led to the massive distortions which, over time, crested and broke, causing the near-existential crisis of capitalism we are living through today.
The current crisis was caused by subsidized money. Period.
This shouldn’t be controversial—this is Eccy 101: The price of something is the intersection of supply and demand. If a price is subsidized, then demand will ramp up, often to an unsustainable level if it is an essential good. In every single economy where the price of something essential has been subsidized—be it food, fuel, housing—the result has been messy to the point of disastruous. Why should it be any different when you subsidize money?
The Fed artificially fixed the price of money—indeed, this policy was called The Great Moderation. The rationale for this money subsidy was an intellectually bankrupt hodge-podge ideology of Keynesian “pump-priming”, coupled with Monetarist “inflation fighting” bullshit. But then Greenspan, Bernanke, and all the rest of those self-important yahoos were never nearly as clever as they thought they were: That’s why they were all so surprised at the distortional effects of this subsidy, when the chickens came home to roost in September of ’08. That surprise was genuine—they didn’t have a fucking clue what they did wrong: And they still don’t.
Let’s take the distortional effects on asset levels first.
People today moan the fact that investors are constantly chasing returns, leading to serial asset bubbles. But let’s look at the obvious: If the Fed had not subsidized money, then plain vanilla FDIC-insured savings would have been getting decent returns (≥5%). Ten-year Treasuries would have been at average yields of 6% to 8%. We would not have had the asset inflation we’ve experienced since ’83. We would likely not had the fiscal deficits we’ve experienced, either—it would have been much too expensive for the U.S. Federal Government to service those deficits.
Asset inflation really started in ’73, with the first oil shock—but it was part of an across-the-board inflation spike, which was finally brought to heel by Volcker in ’82–’83. Asset inflation as an exclusive phenomenon took off in ’83, then really picked up speed after the ’86 “tax reform”, until the 2007/2008 top.
Subsidized money courtesy of the Fed—coupled with the perverse capital gains tax cut of ’86, which effectively abetted speculators—led to asset inflation on a scale not seen since the Tulipmania. I don’t think this needs much defense—the evidence is all around.
The principal effect of this subsidized-money-and-low-capital-gains-tax-leading-to-asset-inflation phenomenon was that it became more worthwhile to trade than to produce. Since all asset prices were rising, and on top of that the tax code was benefitting asset traders over income producers, it created the perverse financial incentive to outsource American industries.
This is what wreaked the American middle classes. Massive outsourcing, and the loss of manufacturing jobs it produced, wasn’t a case of “economic efficiencies” at work. Nor was it “globalization” at work either. Rather, this was the case of subsidized money wreaking American industries by making it more lucrative to trade away a company than to improve it. With the whole economy chasing returns, it was cheaper to “outsource” manufacturing to “cheaper” countries, since the Fed’s subsidized money, coupled with the lowered capital gains tax, made it more worthwhile to play roulette than to build a doo-dad.
This was on the asset side of the equation. But the Fed’s subsidized money policy (if anyone ever again calls it “cheap money” I swear to God I’m gonna get one of my gold bricks and bash someone’s head in, I swear to God!), also had tremendously distortional effects on aggregate demand.
Again, the obvious: Every consumer got cheap credit. So everyone went out and bought stuff with that cheap credit. Hence aggregate demand continued to rise inexorably—hence the Neo-Keynesians felt satisfaction that there was more demand (the engine of their economic ideology, don’t forget), even as they tut-tutted middle-class stagnation and “jobless recoveries”, and other weird distortions in the economy. Some people tried explaining this middle-class stagnation—of course they failed. They produced papers vaguely talking about globalization and improved efficiencies, but the explanations sounded as bogus as XVI century doctors blaming “the vapors” for a lethal case of pneumonia.
The reason for middle-class stagnation, of course, as well as the stratification of American society, is that the wealthy became traders, and traded away the middle-class jobs so as to benefit from the capital gains tax breaks. The middle-classes didn’t complain much—they were getting offers for new credit cards every week in the mailbox, with which they went out and shopped, shopped, shopped ’til they dropped.
Which they did: The middle-classes are in much worse shape than the macroeconomic numbers show. (This piece is a depressing case in point.)
The subsidized money which the Fed provided made both economic camps happy: It was the financial steroid that provided rapid asset level increases, while bulking up aggregate demand.
The only cost, of course, was that the subsidized money provided by the Fed hollowed out the American economy.
Now, as both policy camps try coming up with a solution to return to the good ol’ days of the status quo ante, it is increasingly and depressingly clear that the status quo ante won’t be coming back any time soon—because the days of status quo ante were all a lie.
So what to do?
If I were absolute dictator of the United States, I would ignore both of these policy “choices”. Instead, for the sake of the long term health of the American economy, and the other world economies intimately connected to it, this is what I would do:
•Allow interest rates to float at the whim of supply and demand. The Fed would provide liquidity, but only at market rates, never subsidized.
•Impose a flat tax across the board of 15% for individuals earning any income over the minimum wage, 25% for corporations, a 20% national VAT, and impose a capital gains tax of 40%, with no loopholes, subsidies, tax breaks or tax write-offs—not even amortization or depreciation.
•Cut government spending to the bare bones, until the budget is balanced. Cut military spending to 10% of what it is today.
•Eliminate Social Security and Medicare/Medicaid, and impose a private but highly regulated pension and health care system, like the ones here in Chile (which are damned good, BTW, and which were also, unsurprisingly, imposed by a dictator—but are still going strong 20 years after he left).
•Cut the Fed’s life-support of the Too Big To Fail banking system, and let those zombies die already. Whie we’re at it, prosecute the banksters.
•Finally—and this is the tough part—let the economy crash: Let the asset prices collapse to sustainable levels, and let aggregate demand collapse to sustainable levels.
If the above measures were imposed, and the U.S. economy were allowed to crash quickly, harshly, unemployment as measured by U-6 would spike to 50% or 60%, and hang around 35% for a good six months before slowly settling to 20% in a year or so—which is where we are now. Half the S&P and all the Too Big To Fail banks would go broke. Imports would evaporate. The idea of America as a consumer society would be gone almost overnight. There’d also be riots and general civil unrest for a year or two, but nothing that terrible—Americans are a remarkably docile people.
What would happen after that? What would the U.S. get for this short-term pain and suffering?
The two thing needed for true long-term prosperity, from where the U.S. economy is today: Asset price levels would collapse. And aggregate demand levels would also collapse.
It would mean that trading—in whatever assets—would cease to be financially beneficial, and instead production would reassert itself as the form of social wealth creation.
It would also mean that mindlessly consuming would also cease to be a macroeconomically beneficial policy priority, much less a personal goal. It might even lead to a truly Green economic mentality—true conservation, as opposed to the pseudo-brand, where buying more and more “green” stuff is supposed to be “helping the environment”, when of course it isn’t.
These measures would all be very painful—adaptation always is. But this approach—what I would call Free Market Redux—would be the healthiest way to rebuild the U.S. economy, and frankly American society.
Of course, no one’s ever going to let me be dictator of the United States. And no one is going to so much as contemplate the need to take the hits that I propose. I’m sure many clever readers are smirking at my “foolish measures”, dismissing them, while they take seriously the two policy prescriptions—fiscal spending versus fiscal austerity—which I outlined above. Both will continue slugging it out, while they both ignore the causes—or rather, the cause—of what brought us here.
Right now, in the U.S., there really is no debate: Fiscal spending on a world-historic scale is taking place. Fuck the deficit indeed.
But don’t be fooled—the deficit is being handled.
While world-historic fiscal spending is going on, a scam which I’d call Surreptitious Monetization is also taking place.
Like all good scams, Surreptitious Monetization is basically simple: The U.S. Treasury is issuing debt, in order to raise the cash to finance this world-historic fiscal spending. The Big Six banks, the Too Big To Fail banks, are dutifully buying up every scrap of Treasury paper . . . while through the backdoor, the Federal Reserve Board is providing liquidity to the banks, precisely so as to buy up this Treasury paper. In the details, it’s insanely complicated, of course—deceptions live or die on how opaque the details of the scam. But in its basic shape, that’s what’s going on: Surreptitious Monetization.
The Big Six banks are dutifully carrying out the game plan, while making themselves rich in the bargain, by way of massive bonuses. A lot of commentators have wondered why the U.S. authorities aren’t cracking down on the banksters bonuses—these commentators don’t seem to realize that the “bonuses” are in essence pay-offs from the Fed and the Treasury to the banksters, to keep them doing what they’re doing: They are effectively colluding with the authorities in their efforts to monetize the national debt.
It’s why there hasn’t been deflation—the Federal Reserve has been pumping cash out into the economy, halting price deflation in its tracks. (BTW, it’s also why the Fed is terrified to open its books to outside scrutiny.) Though there ought to be deflation, there won’t be deflation. Helicopter Ben will be true to his moniker.
Through Surreptitious Monetization, the U.S. economy is being kept afloat—but how will it end? Will the Fed close its windows, bringing about the much-feared Deflationary Ice Age? Or will the Fed continue printing money, until a hyperinflationary firestorm burns us all to a crisp?
At the start of this piece, I quoted Frost’s Fire and Ice in its entirety, drawing the analogy between these two policy camps and the lines of verse. I actually never cared for the poem. It’s always sounded to me like an over-serious limerick—I keep half-expecting to hear the word “Nantucket” crop up in the middle of it. But be that as it may, most readers basically take Frost to mean that he does not know how things will end—it might end in fire, or it might end in ice. But regardless of how it will happen, Frost suggests that it will indeed end—because everything ends, regardless of the manner.
Similarly, I have no idea if we will end in the revolutionary-hyperinflationary fire so feared by the austerity camp, or in the icy freeze-out of a deflationary death spiral as per the fiscal spenders camp.
All I know is how we got here—subsidized money. And all that I am certain of is that our current system will indeed end—one way or the other.
Deflation Can Become Hyperinlation Overnight!
by Gonzalo Lira:
Currently, the United States is conducting one of the most remarkable experiments in fiscal finances in world history.
The American economy is in a severe recession. Coupled with that—as both partial cause and partial effect of the recession—the United States' banking system crashed in the Fall of '08, a crash which in many ways is still ongoing as I write this, nearly two years later.
What the recession and the concomitant banking crisis have caused are, essentially, a fall in aggregate demand levels, as well as a fall in aggregate asset value. In other words, the population is spending less, and asset values have deteriorated, both nominally and as compared to any basket of hard commodities.
These are the two metrics which the two principal camps of current American macroeconomic thought consider vital. “Saltwater” economists look to aggregate demand levels, while “freshwater” economists look to aggregate asset value—each of these camps view their fetish-object as the cornerstone for economic growth, development and prosperity. Naturally, when either of these camps see their juju slide, they freak out. They declare the economy to be “in crisis”—and further declare that “something must be done”.
Something has been done: It's called The Deficit.
To combat the fall in aggregate demand levels, the Federal Government has embarked on a massive spending program. This spending program has been financed by debt issued by the Treasury. The way things are looking, another big spending package is in the offing some time soon—that should keep the “saltwaters” happy.
On the other hand, to combat the fall in aggregate asset value—and keep the “freshwaters” happy—the Federal Reserve Board has embarked on an asset purchase program that is also massive and unprecedented. Through a fairly complex scheme that seems to be deliberately opaque, the Fed has relieved the Too Big To Fail banks of their deteriorated assets, and given them cash, in an ongoing process. The Too Big To Fail banks have turned around and used that cash to purchase Treasury bonds—which are being used to finance this massive Federal Government spending. Whether there has been collusion between the Treasury, the Fed and the TBTF banks is for the courts and the historians to decide—but prima facie, it would certainly look so.
This two-sided scheme—more Federal Government spending on the one hand, and more propping up of asset values on the other—adds up to The Deficit.
When I refer to it as The Deficit (it is too majestic for the lowercase), I am not referring to a mere fiscal shortfall—I am referring to a policy mentality. This policy mentality—shared by both “saltwater” and “freshwater” economists—effectively amounts to a suspension of the notion of opportunity cost. In the realm of The Deficit, the macroeconomic policy questions cease to be “either/or”—they become “both/and”. All policy options can be achieved because—according to the macroeconomic policy known as The Deficit—the American fiscal shortfall can never bring the United States to bankruptcy. As Dick Cheney so memorably phrased it, deficits don’t matter—so The Deficit as a macroeconomic policy can continue indefinitely.
In a historical sense, The Deficit is unprecedented: Never before in world history has a reserve currency provider gone into this much debt, with a currency that floats on nothing but air. This is the key issue: The dollar is a fiat currency. The Roman, French, British, Austro-Hungarian empires, all of them world-historical empires in their times, all might have gone way into the red on more than one occasion—but none has ever done it on a purely fiat currency before.
America is the first to do so (“U!! S!! A!! WE’RE!! NUMBER!! ONE!!”). Hooray.
The Deficit is the policy that the United States is implementing, and it has had several effects:
1. The most obvious, it has allowed the Federal Government to finance every last one of its spending programs, in an effort to boost aggregate demand levels. No need for Obama’s vaunted talk of “tough choices”—the Federal Government has officially been renamed the Great American Teet.
2. It has prevented the TBTF banks from acknowledging the plain fact that they are broke. Indeed, the Fed asset buy-back has effectively kept the banks solvent in a practical sense—they have money to pay off any of their liabilities. But more importantly from the Fed's point of view, it has sustained deteriorated aggregate asset values in the overall economy, at least on a nominal basis.
3. It has created a fiscal shortfall of staggering proportions—currently about 100% of GDP, and growing without end.
4. Finally—and most importantly—it has created the generalized impression among policy makers that fiscal shortfalls indeed do not matter, and that liquidity and stimulus simply mustbe provided whenever there is a crisis, the rationale being that the economy is too “fragile” to withstand the “shock”.
This is a key effect of this policy, I would argue the most important of all of the effects: The fact that the fiscal shortfall has crossed the 100% of GDP mark, and nothing bad has happened has given everyone a false sense of security—the sky has not fallen, the world has not ended.
Therefore, as a practical political matter, the people with decision-making authority in American public policy have effectively said, “Fuck The Deficit, let’s keep on truckin’.”
But what if the sky does fall? What if we are simply living in the lull before the fall? I mean, it can't be that this enormous fiscal shortfall can continue growing indefinitely, can it? It has to lead to some kind of ruinous effect, right? Like drinking a bottle of scotch in a single sitting—you feel good while you're doing it, sure, but you know you’ll feel like death warmed over soon enough, right?
I mean, The Deficit will eventually come back and bite us on the ass—right?
Lately, there have been an awful lot of clever people explaining how, in fact, The Deficit will not harm us in the long term.
Very sensible-sounding words, and seemingly-sophisticated arguments, are deployed to make precisely this point. Others further argue that The Deficit, because of its sheer size, will become its own growth engine, and hence will grow the economy to such a point that The Deficit will essentially pay for itself—a bit of financial magic that almost seems believable.
And to any talk that The Deficit and the stealth-monetization going on might lead to hyperinflation, these clever people are scoffing and saying, in effect, “Haven’t you heard the news? We got deflation, pal—forget about inflation, let alone hyperinflation: We gotta spend-spend-spend, in order to whip that deflationary monkey. After that’s taken care of, and the economy’s growing again, that’s when we’ll be able to bring down The Deficit.”
Recently, I had a private exchange with a financial blogger, about precisely this point. This blogger—who should have known better—argued that since we were in a deflationary environment, there were currently no inflationary pressures, and none in the forseeable future. Therefore, she argued, since the economy was experiencing a deflationary trough and inflation highly unlikely, then hyperinflation was an impossibility. Nay, an absurdity, or so she claimed.
She's clever, but she made a common mistake—she confused inflation with hyperinflation.
Granted, they do seem to look alike—both of them are essentially money losing value against wages, commodities and goods-and-services over time. Commonly—and mistakenly—hyperinflation is viewed as simply inflation-plus, inflation-XL. After all, the name seems to imply it: Hyper-inflation. Inflation’s big brother. Inflation with an extra bit of kick.
This is a dangerous fallacy.
Inflation is indeed the economy “over-heating”, in Neo-Keynesian parlance—wage pressures, say, dragging prices up across the economy, or perhaps raw commodity prices doing the same. Inflation can gallop up to 25% a year, but still remain a distinct animal from hyperinflation. Ordinarily, inflation is simply the economy eating up commodities—be it raw materials or labor—so as to meet demand.
Hyperinflation, however, is the loss of faith in money. It is not that prices are rising because the economy is moving forward—it’s that prices are rising because nobody believes that money is worth a damn anymore.
Hyperinflation is not simply money-printing: Rather, it is when no amount of money will get you what you want. Zimbabwe-style hyperinflation is an example of government money-printing run amok. The Zimbabwe example gives us the mistaken sense that hyperinflation only happens in “disorderly printing” regimes. But that’s not the case.
Chilean hyperinflation in 1973 (which led to the September 11 coup), or Weimar style hyperinflation (which led to you-know-who), are more indicative of what I’d call “scarcity” hyperinflation: Both are examples of when the scarcity of basic commodities suddenly and abruptly leads to a complete loss of faith in money—the belief that no amount of money will get you what you want or need.
That’s hyperinflation.
2008 Deflationists (of which I am a member) argued that after the credit crisis, there would be a deflationary trough. The reasoning of the 2008 Deflationists was, credit should be considered as part of the money supply—so when credit contracts sharply, as happened following the banking crisis in ’08, then that’s the same as if total money supply had contracted. A constriction in the money supply obviously leads to deflationary pressures: Less money is available for the same or more goods. Hence prices fall to meet lowered demand. Hence wages fall as business incomes fall. Hence less money. Hence downward spiral.
As the 2008 Deflationists predicted, today the U.S. economy is in a deflationary trough—I am certainly not arguing otherwise: The evidence is all around, and too obvious.
But what I am saying is, our current deflation can trip over into hyperinflation at a moment’s notice. The stumbling block—the thing that could trip us over from deflation to hyperinflation literally overnight—is The Deficit.
Not just the Federal shortfall itself, but the policy implicitly embodied by The Deficit: The belief that all you need to do is throw money at the problem—open up as many liquidity windows as needed, or expand Federal spending as much as necessary, to prop up those twin aggregates I mentioned before, aggregate demand and aggregate asset value.
The pernicious sense among American macroeconomic policy makers that fiscal shortfalls don’t matter—and don’t matter especially in a financial or economic crisis—is what I believe will lead to hyperinflation. Policy makers—who have lost any fear of providing as much liquidity and stimulus as necessary to steamroller any problem—will have no compunction about adding to The Deficit at the next crisis.
That’s when hyperinflation will kick us in the teeth.
If I had to make a prediction, I’d say that the immediate trigger for a hyperinflationary catastrophe will be a sudden and unexpected commodity spike. It won’t necessarily be big, but it’ll be flashy—enough to cause a panic.
This will be the opening stages of hyperinflation: It will be a market panic, and it’ll be fast.
At the next panic-inducing crisis, American public-policy makers will once again turn to The Deficit, providing more liquidity and more stimulus—and this will make the financial markets realize that the fiscal shortfall is unsustainable: It will be obvious that all those Treasuries cannot be repaid—or if they are ever to be repaid, it will be done by the Fed via surreptitious monetization. In other words, a dollar with lesser value.
Thus, everyone will want to be the first to get out of the dollar—and everyone will want to be the first out the door all at once.
Markets turn on a dime, and they are not rational in the short term—they’re rational like a herd of thundering buffaloes hopped up on crystal meth.
As everyone gets out of the dollar in the financial markets, there’ll be a cascading effect, as everyone—both Wall Street sophisticates and Main Street naifs—try getting out of their dollars, and into hard assets: Gold, land, food, whatever.
In other words, hyperinflation as I have described it above: A loss of faith in money. The belief that no amount of money will buy you what you want.
The Deficit—that’s the demon’s name. The Deficit. Not, as I have argued, the fiscal shortfall, but the macroeconomic mentality that fiscal shortfalls in a reserve fiat currency do not matter. The sense that as much liquidity and stimulas must be and can be provided to maintain aggregate demand levels and aggregate asset value.
Policy makers are not exactly known for being prescient timers of the markets—at the next market crisis/panic, they will without hesitation provide stimulus and liquidity, adding even more to the fiscal shortfall. But it will be the market’s and the public’s loss of faith that that fiscal shortfall will ever be repaid that will lead them to abandon the dollar.
Once they lose faith in the dollar, hyperinflation will ensue, as public policy officials continue providing “stimulus” and “liquidity” which the market will interpret as nothing but worthless paper.
Actions have effects—it is stupid to think that massive deficit spending of a fiat currency won’t have consequences. The policy embodied by The Deficit has brought the U.S. economy to the brink of oblivion—with no way to pull back from that brink. So at this point, the only question is, what will finally tip it over, and what will give us that final push.
Taking Money Off the Table In Face of Dour Economic Data
I couldn't help noticing his mention of the bad economics results this week.
This blog post originally appeared on RealMoney Silver on Aug. 5 at 7:36 a.m. EDT.
Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits -- a spontaneous urge to action rather than inaction -- and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. -- John Maynard KeynesA critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. And the move from about 1,020 to 1,130 in the S&P 500 over the past five weeks has reignited investors' animal spirits. Indeed, many of the skeptics of early July have been transformed into raging bulls, as it usually is among those who worship at the altar of price momentum.
"When the facts change, I change my mind. What do you do, sir?" -- John Maynard KeynesBut, have the facts really changed? While I continue to believe that the July 1 lows will not be revisited in the months ahead, as the hyperbole surrounding a double-dip in the domestic economy has abated, along with steady improvement in certain risk markets (e.g., junk bond yields down, euro up, industrial commodities higher, two-year swaps down), the facts (i.e., the fundamentals) have not changed much.
The sharp ramp up in the indices has been surrounded by the continued ambiguity of the economic soft patch, which grows daily and was reinforced with this week's sluggish data -- factory orders, pending home sales, personal income and spending were all weak. Moreover, recent economic releases now point to a revision of second-quarter GDP to under 2% later this month.
And with the structural increase in unemployment, the economic outlook for the second half of 2010 still looks less than certain, especially relative to the magnitude of the market's rise and to the rise in animal spirits that has accompanied it.
"The man who is a pessimist before 48 knows too much; if he is an optimist after it, he knows too little." -- Mark TwainI am 61 years old! My baseline expectations for a subpar economic expansion and a range-bound market remain unchanged. I continue to look for a relatively narrow range in the S&P 500 of between 1,025 and 1,150 over the balance of the year. As we are now moving toward the higher end of the projected range, I plan to de-risk, and, should the domestic economy deteriorate further, I can see moving back into a net short position.
Intermediate term, I continue to expect a period of inconsistent and uneven economic growth that will be difficult for corporate managers (who do not have pricing power and face tepid top-line growth) and investment managers to navigate. With an elevated unemployment rate, the economy will feel worse than it is. In the quarters ahead, there will be times when it will appear as though we are reentering a recession; at other times, it will appear that we are reentering an expansionary phase.
From my perch, lumpy growth and the emergence of nontraditional headwinds (fiscal imbalances at the federal, state and local levels, higher marginal tax rates, a costly and burdensome regulatory backdrop, etc.) will serve to cap the market's upside valuations and target level within a few percentage points from the current level.
To conclude, on stocks and bonds, consider me at the polar opposite of Mae West, who once exclaimed, "I only like two types of men, domestic and imported."
Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.
Washington Policies Don't Help Create Jobs
from Peter Morici at the Street.com:
Forecasters expect the Labor Department Friday to report the economy shed 70,000 jobs in July and unemployment rose to 9.6%.
Economists expect the private sector created about 100,000 jobs but government employment fell 170,000 as more temporary census jobs disappeared.
Thirteen months into recovery from a deep recession, this is disappointing. The economy must add 13 million private sector jobs by the end of 2013 to bring unemployment down to 6%. President Obama's policies are not creating conditions for businesses to hire those 320,000 workers each month, net of layoffs.
Net of inventory adjustments, the economy demand for goods and services is growing at only 1.3% a year.
In the second quarter, consumer spending, investment in new structures, equipment and software, and government purchases added 4.1% to demand. But as imports grew much more rapidly than exports, the trade deficit tapped off 2.8%. The difference -- 1.3 % -- is annual growth in demand for U.S.-made goods and services. That has been the pace since recovery began in July 2009.
Businesses can accommodate up to 2% growth in demand by improving productivity and not adding workers. Unless the rapid growth in imports can be curbed, the U.S. economy is headed for very slow growth and rising unemployment.
Washington isn't helping.
The massive permanent expansion in federal spending and regulatory oversight built into the president's budget is discouraging private hiring by raising fears of higher taxes and regulation. Simply, higher taxes discourage purchases of non-essentials and high-line durable goods, like better appliances, more appointed automobiles and higher-quality homes, while higher taxes and tougher regulation increase incentives to offshore production to locations where those burdens are less.
Prior to the crisis in 2007, President Bush spent 19.6% of gross domestic product and the deficit was $161 billion in 2007; two years into the economic recovery in 2011, Obama's budget projects outlays at 25.1% of GDP and a $1.3 trillion deficit in 2011.
All that spending will require higher taxes, and raising taxes on families earning $250,000 simply won't be enough finance it. Higher rates for those families will raise taxes on half the income earned by proprietorships -- those small- and medium-sized businesses will invest less to create jobs.
Much of the $787 billion stimulus money was squandered on pet projects that created few jobs. For example, grants to build green buildings displace other planned construction and didn't increase the amount of commercial space rented or built over the next several years.
The biggest banks received more than $2 trillion in assistance from the Troubled Assets Relief Program and the Federal Reserve to clean up their balance sheets and recapitalize securities trading, while the 8,000 regional banks got little assistance and remain burdened by toxic real estate loans. Consequently, more than 230 regional banks have failed, and small- and medium-sized businesses cannot get credit to expand.
In addition to credit, businesses need more customers to create jobs, and the trade deficit -- in particular, imports of oil and the imbalance with China -- cut a huge hole in demand for U.S. goods and services. Without addressing oil and China, other efforts to create jobs are futile.
The president's moratorium on deepwater drilling, though popular with environmental fundamentalists, kills jobs two ways: directly, by laying off workers in the oil and gas industry; and indirectly, by sending too many consumer dollars abroad that could be spent here.
Detroit has the technology to build much more efficient gasoline-powered vehicles now, and a shift in national policy to rapidly build these would reduce oil imports and create many jobs.
China's undervalued currency makes its products artificially cheap and deceivingly competitive on U.S. store shelves, but its promise of new flexibility on the yuan hasn't translated into meaningful revaluation.
If President Obama wants to fix the federal deficit and create jobs, perhaps he should dust off George Bush's 2007 budget and spend a lot less, get serious about better using and developing more conventional fossil fuels, and finally fixing trade with China.
Jobless Claims Send Stocks Into Freefall
AP excerpt:
In a reminder of how weak the job market is, the government said Thursday that first-time claims for unemployment benefits rose last week to their highest level in four months.
Claims rose by 19,000 to a seasonally adjusted 479,000. Analysts had expected a small drop. Claims have now risen twice in the past three weeks.
Economists closely watch initial jobless claims because they are considered a gauge of the pace of layoffs and an indication of employers' willingness to hire. And even at a time when profits are coming back, businesses aren't very willing.
Pierre Ellis, an economist at Decision Economics, wrote in a note to clients that an "unyielding flow of layoffs" suggests employers are still not comfortable with the size of their staffs.
And with the job market still looking shaky, Americans are in no mood to spend freely.
Wednesday, August 4, 2010
Wheat: More "Turmoil" or "Unwarranted"?
from Agrimoney.com:
The United Nations warned over the world's dependence on "erratic" Black Sea wheat as it cut its forecast for the world crop by 15m tonnes, injecting extra zest into the grain's renewed rally.
Wheat for November delivery closed at two-year highs in both Paris, where it finished up 2.3% at E209.00 a tonne, and London, where it ended 2.3% higher at £151.50 a tonne.
Chicago wheat for September hit $7.30 a bushel, a fresh 22-month high for a spot contract.
The rises reflected continuing concerns about Russian wheat exports, and followed a cut to 651m tonnes in the UN Food and Agriculture Organisation's forecast for the global crop.
The FAO attributed the revision to the "devastating drought" in Russia, and lower harvest forecasts expected for its Black Sea neighbours Kazakhstan and Ukraine, adding that the shortfalls "raise the likelihood of higher wheat prices compared to the previous season".
Furthermore, the drought threatened problems for winter grain plantings, "with potentially serious implications for world wheat supplies in 2011-12". Russian farmers usually begin sowings for next year's harvest in the last half of August.Indeed, the "turmoil" in wheat markets caused by the woes of the former Soviet Union trio illustrated the perils to importers of depending so heavily on the region.
"The turmoil… is evidence of the growing dependence on the Black Sea region, an area renowned for erratic yields, as a major supplier of wheat to world markets," the FAO said.
The US Department of Agriculture describes Kazakhstan and Russia's Volga Valley, which has been particularly badly hit by drought, as zones of "risky agriculture". Kazakhstan is prone to droughts two out of every five years.
Tender results
The UN's warning came as Russia won its second tender in a week to supply wheat to Egypt, the world's biggest importer of the grain, and is set to supply 180,000 tonnes at prices of $252-270 a tonne, excluding freight.
Jordan also bought 50,000 tonnes of Black Sea wheat, at $297.92 a tonne, including freight.
However, analysts have warned against interpreting tender victories early in 2010-11 as a sign that Russia's wheat supplies are deeper than had been feared, saying they may just reflect long held stockpiles, and the relatively strong, and early, harvest in southern areas nearer to ports.
Latest data from Russia's farm ministry showed the grain harvest falling behind last year's at this time, even thought an extra 2.4m hectares has been harvested.
The average yield was 2.22 tonnes per hectare, lower than the 2.32 tonnes per hectare reported as of July 29, as combines swept into areas worse affected by drought. The year-ago figure was 2.78 tonnes per hectare.
'Fears unwarranted'
The FAO added that, despite the production problems in the Black Sea and Canada, where farms received too much rain, the wheat market was "far more balanced" than in the run up to the last price spike, in 2007-08.
Furthermore, the booming global economic conditions, and bottlenecks in supplies of other crops, such as rice, which fostered price rises then were "not posing a threat so far".
"Fears of a global food crisis are unwarranted at this stage," the organisation said.
Wheat Up Nearly 50 Cents Today
Doug Kass: Short Bonds
Indeed, in yesterday's opening missive, I argued to further reduce long exposure as we traveled toward the higher end of my expected second-half trading range in the S&P.
I continue to believe that the July 1 lows will not be revisited in the months ahead as the hyperbole surrounding a double-dip in the domestic economy has abated, along with steady improvement in certain risk metrics and risk markets (e.g., junk bond yields down, euro up, industrial commodities higher, two-year swaps down).
Nevertheless, the ambiguity of the economic soft patch grows daily and was reinforced by Tuesday's sluggish data (factory orders, pending home sales, personal income and spending were all weak). Moreover, a reduction in inventories and some other influences now point to a revision of second-quarter GDP to under 2% later this month.
Since the generational low, I have argued that we are in a period of inconsistent and uneven economic growth that will be difficult for corporate managers (who do not have pricing power and face tepid top-line growth) and investment managers to navigate. In this anticipated sloppy setting, it will sometimes appear, in the quarters ahead, that we are reentering a recession. At other times, it will appear that we are reentering an expansionary phase.
Lumpy growth and the emergence of nontraditional headwinds (fiscal imbalances at the federal, state and local levels, higher marginal tax rates, a costly and burdensome regulatory backdrop, etc.) will serve to cap the market's upside.
Supporting the market (among other factors) will be low interest rates and reasonable P/E multiples (especially when viewed vs. generational low interest rates and quiescent inflation).
As well, the risk premium (S&P earnings yield less the risk-free rate of return in fixed-income) is at the highest level since 1980, when the bull market started. This means that stocks are cheap relative to bonds and/or bonds are way overpriced and possibly in bubble territory.
As I wrote yesterday, I tip in favor of shorting bonds over being long stocks. I believe that my downside in a bond short is limited and, if stocks rally, the reasons behind that rally (economic clarity) could produce a larger drop in fixed-income than a gain in equities.
How expensive are bonds? Consider, that at a 2.89% yield on the U.S. 10-year note fixed-income is priced at a P/E multiple of 34.5x (the inverse of 2.89%) against the S&P's P/E multiple of only 12.0x.
Regardless of one's views, erring on the side of conservatism seems to be the preferable course of action, especially after the sharp rise in the U.S. stock market.
Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.
ADP Up a Paltry Amount
WASHINGTON(MarketWatch) -- U.S. private-sector firm employment rose 42,000 in July, according to the ADP employment report released Wednesday. "July's rise in private employment was the sixth consecutive monthly gain," said Joel Prakken, chairman of Macroeconomic Advisers, which produces the report from anonymous payroll data supplied by ADP. "However, over those six months increases have averaged a modest 37,000, with no evidence of acceleration." On Friday, the government is scheduled to report nonfarm payrolls for July, and economists polled by MarketWatch are looking for a decline of 60,000. That payrolls estimate includes an expected increase of 96,000 jobs in the private sector, and layoffs of about 145,000 temporary Census workers.
CNBC's Take On Pending Home Sales' Record Decline
Contracts for pending sales of previously owned U.S. homes fell to a record low in June as buyers sat on the sidelines, a survey from the National Association of Realtors showed on Tuesday.
The Realtors said its Pending Home Sales Index, based on contracts signed in June, fell to a record low 75.7 from a revised 77.7 in May. Economists polled by Reuters had expected a rise of 0.6 percent.
"We really need to see stronger job creation to have a meaningful recovery in the housing markets," said NAR chief economist Lawrence Yun, adding "there could be a couple of additional months of slow home-sales activity before picking up later in the year" if the job market improves.
The June decline followed a 30 percent drop in May after a popular tax credit expired at the end of April.
The index was 18.6 percent lower than in June 2009 and fell in three of four regions compared to the prior month.
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Contracts rose 3.7 percent in the South, the country's largest region, but dropped by 0.2 percent in the West, by 12.2 percent in the Northeast and by 9.5 percent in the Midwest.
Tuesday, August 3, 2010
It's a Crock: Businesses Aren't Hoarding Cash Because They're Deep in Debt
BOSTON -- You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.
You could hear this great news pretty much anywhere -- maybe from Bloomberg, which this spring hailed the "surprising strength" of corporate balance sheets. Or perhaps in the Washington Post, where Fareed Zakaria reported that top companies "have accumulated an astonishing $1.8 trillion of cash," leaving them in the best shape, by some measures, "in almost half a century." Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?
It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock.
Investors hear July echoes
This July resembled the previous July in several key respects. What does this suggest for the markets for the rest of 2010?You'd think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can.
Does that sound a little odd to you?
A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?
According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.
The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009.
Remember that these are the debts for the nonfinancials -- the part of the economy that's supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.
The Fed data "underline the poor state of the U.S. private sector's balance sheets," reports financial analyst Andrew Smithers, who's also the author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers," and chairman of Smithers & Co. in London.
"While this is generally recognized for households," he said, "it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials' corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels."
By Smithers' analysis, net leverage is nearly 50% of corporate net worth, a modern record.
There is one caveat to this, he noted: It focuses on assets and liabilities of companies within the United States. Some U.S. companies are holding net cash overseas. That may brighten the picture a little, but the overall effect is not enormous, and mostly just affects the biggest companies.
That U.S. companies are in worse financial shape than we're being told is clearly bad news for those thinking of investing in U.S. stocks or bonds, as leverage makes investments riskier. Clearly it's bad news for jobs and the economy.
But why is this line being spun about healthy balance sheets? For the same reason we're told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.
Journalists, for example, seek safety in numbers; there's a herd mentality. Once a line starts to get repeated, others just assume it's correct and join in.
Wall Street? It's a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?
You can also blame our partisan age too. Right now, people on the right have a vested interest in claiming businesses are in healthy shape. That makes the saintly private sector look good, and demonizes President Barack Obama and Big Government for scaring away investment. Vote Republican! Meanwhile, people on the left have an interest in making businesses sound really healthy too: If greedy companies are hoarding cash instead of hiring people, they can cry "Shame on them! Vote Democratic!"
As ever, the truth is someone else's problem and no one's responsibility.
When it comes to the economy, let's just hope the public is too hopped up on painkillers and antidepressants to notice. If they knew what was really going on, there'd be trouble.
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