Economic Outlook

Peddling Fiction, Ignoring Fact

 
In his seventh, and final, State of the Union address this January, President Obama, clearly looking to bolster his legacy as the president who vanquished the Great Recession, boldly asserted that “Anyone claiming that America’s economy is in decline is peddling fiction.”  Unfortunately for the President, more and more Americans seem to believe (with an adequate basis in proof) that the fiction is emanating from the White House.
 

It’s hard to imagine how anyone can really assert with a straight face that the economy is currently “strong.” The most recent Gross Domestic Product (GDP), from 4th Quarter 2015, shows us barely inching along at a 1% annualized growth rate (Bureau of Economic Analysis, 2/26/16). Given that moderate growth used to be measured in the 3%-4% range, and that recent declines in the trade balance could further subtract from both 4th (2015) and 1st quarter GDP, we could be forgiven for raising an eyebrow or two in reaction to Obama’s boast. 
 For the President and his boosters, last week’s February non-farm payroll report, which showed 242,000 new jobs created and an unemployment rate below the crucial 5% level (Bureau of Labor Statistics, 3/4/16), provided proof that the Administration’s  economic policies, whatever they may actually be, are working. By beating the 190,000 consensus forecast for February of economists surveyed by Reuters, and revising upward the low 151,000 jobs previously reported in January to 172,000 (BLS, 3/4/16), the government was able to point to two months that averaged north of 200,000 new jobs.
 
The good news prompted Obama to invite reporters into a Cabinet meeting to crow about the results and to shame those who somehow remain skeptical, saying (to paraphrase) “America’s businesses are creating jobs at the fastest pace since the 1990s…and I don’t expect…this evidence to convince some…to change their doomsday rhetoric.”(The White House, Office of the Press Secretary, 3/4/16) He’s right on that point, the gloom should remain. Yes, the economy is creating jobs, but they are not the kind that can bring us back to the days of solid growth. The more important fact, which Obama did not mention, was that the report showed one of the largest drops in weekly earnings ever reported. It’s too bad that our media seems to be incapable of noticing such a tremendous problem right below the surface. 
 
One month ago, the January jobs report was enlivened by a healthy .5% jump in average hourly earnings. At the time, I argued that such good news would be a one-time event as it resulted from the increases in minimum wages that kicked in at the start of the year in many states across the country. As predicted, the momentum was fleeting. In February, average hourly earnings did not increase the .2% that was expected, but fell .1%. The drop may not seem like much, but it is the first decline since December 2014, and one of only six declines in the past ten years, according to BLS data. Making matters worse, average hours worked declined from 34.6 hours to 34.4. Combining falling wages and falling hours translated into a .7% decline in weekly earnings, the biggest drop ever measured in that statistic. (BLS, 3/4/16) For some reason Obama let that one slide.
 

The truth is that the big numbers in job creation do not reflect healthy economic growth but a fundamental shift in the labor force away from high-paying, full-time jobs to low-paying, part-time jobs. The February “household” survey of job creation shows that 78% of the jobs created were part-time, and 82% of those were in the low-paying service industries such as food service and retail. This partially explains February’s data that shows exports at the lowest level in almost five years. It’s hard to export the things created by bartenders and waiters. Meanwhile, we lost much higher-paying full time jobs in manufacturing, mining, and logging that would have produced things capable of being exported. Yes jobs are being created, but only at the expense of higher-paying jobs that are being destroyed. (BLS, 3/4/16)
 

Most observers assumed that the February Challenger Job Cut Report (released the day before non-farm payrolls) would be a big improvement over the very large 75,000 layoff figure posted in January. And while the 61,000 layoffs announced in February was an improvement, it was not nearly as much as observers had hoped. Averaging the two months puts the current pace for announced layoffs at 32% higher than the same period last year. Also, last week, the PMI Service Index, which came in at 53.2 in January, came in at 49.7 in February, showing actual contraction (below 50), (joining the smaller manufacturing sector, which has been contracting for months). 
 
Companies have been incentivized to cut their full-time work force by a variety of costly and burdensome regulations that are largely the result of the Obama Administration. If a company replaces a full-time worker with two part-time workers, the statistics count that as a job gain. But this only holds up if you count quantity while ignoring quality. The view from the street looks quite different, as workers prefer one good job to several bad ones. This is why rallies for Donald Trump and Bernie Sanders are so well-attended. The underemployed are fed up with platitudes from the elites and they flock to these outsider candidates, who seem to understand their pain. 
 
It appears that investors are no longer signing up for the optimism either. Normally, a much stronger than expected non-farm payroll report would have ignited a market rally, but this one ignited a rally in gold, which at one point neared a high of $1,280 per ounce (gold was up 3% for the week). The strong jobs report should have convinced investors that the Fed would raise rates, which would hurt gold. But that didn’t happen. The markets have started to figure out that the jobs numbers are meaningless and that soon they will roll over to mirror all the bad data emanating from other sources.
 
I don’t expect that the President will ever officially acknowledge that the economy has weakened, let alone relapsed into recession. He has walked out too far on his rhetorical branch to walk it back. As a lame duck, he really has no incentive to do so. Such admissions would also undercut the campaign of Hillary Clinton,who is running as the logical successor to carry his torch.
 
But Janet Yellen is in a very difficult spot. If she continues to ignore the growing signs of recession, she runs the risk of letting one develop prior to the election. This would favor the Republican challenger, whether that is Donald Trump or Ted Cruz, neither of whom would be inclined to reappoint her as Fed Chairwoman, if elected. Allowing the Greenspan bubble to bust on Bush’s watch sealed John McCain’s fate, allowing Obama to ride a wave of voter outrage into the White House in 2008. Yellen does not want Trump to catch a similar wave in 2016.
 
As a result, I expect the Fed to soften its rhetoric in the very near future. They will promise that the punch bowl is going to remain on the table for the foreseeable future. This means that market movements that have defined 2016 thus far may accelerate in the months ahead, and may provide relief for investors in commodities and foreign currencies who have had the patience to wait out the nonsense.
 
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Helicopter Money Comes To Canada: Ontario Pledges “Basic Income Experiment”

imagesEarlier today, we explained why so-called “helicopter money” can’t save the world when ZIRP, NIRP, and QE have all failed to revive global demand and boost inflation.

The reason: QE is helicopter money. That is, we’ve been doing this for 8 years and it hasn’t worked yet. 

Some readers were reluctant to buy this rationale, but the fact is, just because the bank intermediary failed to do its part for Main Street doesn’t thereby mean this entire experiment isn’t still a farce. Think about the mechanics of it: 1) the government prints a liability (a bond), 2) that liability is sold to a primary dealer, 3) the central bank buys that government liability with yet another liability (dollars) that the government also prints.

That’s a scam. It’s deficit financing with one (very tenuous) degree of separation. The fact that the middlemen (the banks) didn’t pass along the benefits to you doesn’t make the mechanics of it any less ridiculous.

But if that’s helicopter money “v.1,” Main Street thinks it didn’t work out so well. Banks recovered, Jamie Dimon and Lloyd Blankfein became billionaires, financial assets soared, and everyday people got....continue reading HERE

Saudi Arabia—a Failing Kingdom

Screen Shot 2016-02-29 at 3.31.58 PMTo say that Saudi Arabia is on the verge of its most significant change in decades is not an exaggeration.

Inside Saudi Arabia—a Failing Kingdom you will learn:

  • How the House of Saud could collapse in four years… and what it means to the region and the globe.
  • Why the Saudi government is considering an IPO of its crown jewel—after it helped drive oil prices down.
  • Why OPEC is defunct and may never return to its glory days.
  • How the Saudis’ policies are empowering ISIS.
  • What Middle Eastern oil policies mean for the future of the US shale industry… and why it matters to you.

 

…continue reading HERE 

Refugee Crisis Escalates: Greece Pulls Ambassador to Austria; Macedonia Announces Border Controls; 15,000 Trapped in Greece

100,000 refugees have entered Greece since the beginning of the year compared to 5,000 a year ago.

Where can they go? On February 16, Austria announced it will take at most 80 a day. Just this week Macedonia reduced the number of refugees allowed to transit through its territory to about 1,000 a day.

At least 15,000 are trapped in Greece, a country without resources to deal with them. In response to the growing crisis, Greece Withdraws Ambassador to Austria.

Athens withdrew its ambassador to Austria on Thursday in a sign of the mounting acrimony between EU countries over the bloc’s failed refugee policies, a fight that increasingly risks destroying the continent’s passport-free travel zone.

In a statement announcing the decision, Greece’s foreign ministry accused the Austrian government of taking unilateral action outside of EU rules and recent agreements by capping the number of asylum seekers that it would accept across its southern border.

The move by Vienna has angered several member states, particularly Germany, which believe it was a direct violation of principles agreed by Werner Faymann, Austria’s chancellor, at recent EU summits.

While Vienna is capping the number of daily asylum applications it accepts at 80, it is freely allowing as many as 3,200 refugees a day to pass through Austria en route to Germany — even after agreeing not to do so at the most recent EU summit.

Despite anger in Athens and Berlin, Vienna has hastily put together a group of EU and non-EU allies along the so-called “Western Balkans route”, most of whom met in Vienna on Wednesday to agree policies that could constrict tens of thousands of refugees in Greece indefinitely. Neither Germany nor Greece was invited to the Vienna meeting.

The EU’s migration chief, Dimitris Avramopoulos, warned on Thursday that the bloc had 10 days to improve the situation “or else there is risk the whole system will completely break down“.

Even the French and the Belgians have engaged in verbal sparring after Belgium’s decision to impose border controls on its frontier with France. Belgium is concerned it could face an influx of refugees due to an imminent move by the French authorities to clear part of Calais’ so-called “jungle” migrant camp.

Mr Tsipras said Greece would block an agreement at a refugee summit on March 7 that “does not ringfence an obligatory sharing of the responsibility and burden [of the refugee issue] among the member states in a proportional way”.

Whole System Broken Down

I don’t need 10 days to report the obvious: The whole system has already broken down.

The biggest problem at the moment is actually Greece. By letting all refugees in, even though passages to the North are severed, Greece is the problem child, not Austria, nor Hungary, nor Macedonia.

At the expense of its own citizens, with money it dos not have, Greece bears the brunt of the refugee crisis. The smart thing for Greece to do would be to close its own border just as Hungary did.

Border Control Map

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Larger Image

The above map is from the BBC on January 25. I added the blue anecdotes that show additional blockages since then.

Blockage Math

 

  • In 56 days, starting January first, 100,000 have entered Greece primarily from Turkey. That’s 1,786 a day.
  • As the temperatures climb, the count will rise if Greece does nothing to stop the flow.
  • Macedonia reduced the number of refugees allowed to transit through its territory to about 1,000 a day.
  • 15,000 are already trapped in Greece and that number will rise by at least 786 a day. In one month, that’s another 23,580.
  • If Germany refuses the pass through from Austria, the maximum flow would decline to 80 per day, and the trapped rate would rise from 786 a day to 1,706 per day (51,180 a month).

Not Broken Yet Thesis Recap

Don’t worry. We are told the system is not broken yet. Greece says there’s still 10 days to fix the problem.

Meanwhile, Greece has vowed to veto any solution that does not spread the refugees around, while Austria has called a summit of countries sympathetic to more blockages.

Related Articles

February 16, 2016: “Just Say No”: Austria Announces Daily Quotas on Refugees: Yearly Flow Reduced to 37,500 from 1,000,000.

February 18, 2016: Pass Thru Politics: EU Says Austria’s Refugee Quotas Violate Geneva Convention; In Praise of Austria.

U.S. Inflation: Prepare for 4% (or more!)

Last we visited on the subject of U.S. inflation (November, 2015) we wrote,

“Using those simplistic numbers suggests that U.S. inflation as measured by the [headline] CPI could rise to an annual rate of about 4% …”

That possibility is now increasingly likely given recent rise in U.S. inflation. This view is reaffirmed by recent data. If an error exists in this projection, it is to underestimate potential for inflation in U.S. to rise.

40537 a

Analyzing the state of U.S. inflation begins with the median CPI produced monthly by Federal Reserve Bank of Cleveland. What is the median CPI? To calculate the headline CPI for any particular month the rate of change is calculated for each of the components of the CPI such as energy, food, and housing. Headline CPI is then calculated by weighting each of those components to produce a weighted average. Median CPI is that rate of change for which half of the components had a higher rate of change and half had a lower rate of change. It divides a ranking of the component rates of inflaton in half. The median is less impacted by extreme changes in the prices for anycomponent which can in someways distort the weighted average CPI.

In top chart is plotted the year-to-year percentage change for the median CPI. Two observations are worthy of mention. These observations suggest that expectations of higher U.S. inflation are reasonable and likely to be correct. First, the latest observation exceeds the previous high. Second,in January the year-to-year percentage change rose to the highest level since 2009.

40537 b

Before we move to what the median CPI might be saying about U.S. inflation, let us take a brief look at recent developments in U.S. inflation. In chart to right is plotted the year-to-year percentage change for the headline CPI. Notice that it has risen fairly dramatically in recent months. See arrow.

Era of no inflation is over. U.S. inflation has moved back into a “trading range” of 1-2% in which it had moved for several years. That may suggest the low inflation experienced was an aberration, not an equilibrium state.

Chart below compares the year-to-year percentage change for the headline CPI, black line, with that for the median CPI, red line. Twice early in the chart the headline CPI moved below the median CPI. In both of those cases the headline CPI rate of change turned up and moved above the median CPI. In the first of those cases the rise in the headline CPI rate of change was roughly 4 percentage points from low to high, as highlighted by blue arrow.

40537 c

In the second case the rise from low to first high was about 4.5 percentage points and 6 percentage points to the ultimate high in the rate of headline inflation.

Median CPI is one of several measures of central tendency, as is the weighted average used for the headline CPI. However, the median is not distorted by high and low values as is the case with averages. Note how far less volatile the median is compared to the weighted average. It may be in the above instance the better measure of central tendency. It seems to act as a “magnet” for the headline CPI, returning the calculation to a more “normal” reading.

In the more recent data, right hand side of graph, the headline CPI is below is running below the median and it has turned up sharply. Current situation is developing much like the earlier two cases. Using4 percentage points as suggested by those earlier moves, a common number in the above discussion, suggests that the headline CPI which had a low of roughly 0% is likely beginning a move to 4%, as highlighted by the third blue arrow, or higher. Several factors, which includes time and the mechanics of averaging, may contribute to coming rise in U.S. headline inflation.

First of those is oil prices. Writers seem to often have difficulty with verb tense. Oil prices have fallen, meaning yesterday. Oil prices are not falling, meaning present time. Looking forward from today, oil prices are likely to rise, though perhaps by not much. Commodity price are self correcting, though often the process is lengthy. The “dividend checks” from the oil price slide have largely been cashed and spent. Those declining oil prices did have a tendency to depress other prices. That good news is slowly fading into history. Oil prices should now begin to buoy and then cause other prices to rise.

The speculative advance in the value of the U.S. dollar against other currencies is beginning to fade. Rising value of the dollar depressed dollar denominated prices as foreign purchasers could not and cannot afford those dollar denominated commodities and goods. The value of their currency having fallen means foreign consumers cannot purchase the same amount of U.S. goods and commodities. A simple ending of the speculative advance will begin to support dollar denominated prices. And if it declines as it should, dollar denominated prices will rise.

Third is the long overdue normalization of interest rates in the U.S. While the path is unclear, the need to remove the interest rate distortions in the U.S. economyseems obvious to the Federal Reserve. Abnormally low interest rates of recent years have caused funds to shift to the financial sector. Prices of financial assets rose, but are ignored in the calculation of inflation. Normalization of interest rates will shift funds from speculation in financial markets to the real economy, which is included in the calculation of the CPI. As fund flow from speculation to real activity, prices in latter sector should firm and rise, pushing up the CPI.

With U.S. inflation headed to 4%, and likely higher, is your portfolio positioned to prosper? The “markets” have already begun to discount this development. Fantasy “growth” stocks have fallen, and continue to be the most vulnerable. Gold has moved sharply higher, jumping by more than $200 at one point. Gold stock ETFs have risen from their lows by more than 40%. These market adjustments are a reminder to investors that diversification is still smarter than any and all strategists. If you have missed the first step in a new Gold bull market, today is the time to correct that inefficiency.


Ned W. Schmidt,CFA has had for decades a mission to save investors from the regular financial crises created by economists and politicians. He is +publisher of The Value View Gold Report, monthly, with companion Trading Thoughts. These reports again turned to raging bulls on Gold and Silver in 2015. To receive these reports, go to: www.valueviewgoldreport.com Follow us @vvgoldreport

Don’t Fall for the Government Fake-Out

Washington, DC is pretty proud of the employment numbers it has been pumping out. Most recently, the Labor Department reported that the US unemployment rate dropped to 4.9% in January.

That’s an eight-year low going back to the 2008–2009 Financial Crisis.

The actual number of new jobs was a little on the light side, at 151,000 versus the expected 190,000, but most of the Wall Street crowd was impressed with the +0.4% monthly increase in wages.

Image 1 20160216 CTD

….read more HERE