Tuesday, September 25, 2012

The Economy shows some life

Yes, we know. We have seen this before. But the Conference Board confidence reading for the consumer has jumped higher, an act we already have seen from the U of M Index. The weekly consumer comfort index is in upward gear too.

All this despite continuing lethargy in the manufacturing measures and still range bound jobless claims.

The economy continues to fool us...optimist and pessimist alike.

Now the Fed could only sort itself out...

Saturday, September 22, 2012

Jimmy Carter- really

I just flew out to Seattle. In flight I watched the movie 'Miracle' that I have safely stored on my I-pad.

If you have not seen it I highly recommend it. If you have seen it I'd recommend seeing it again.

It is beyond nostalgia.

The movie begins with actual news clips of the time. The nation is challenged. It features a speech by Carter that sets the stage telling us that people expect the next five years to be worse than the previous five.

I was never a Carter fan. But Jimmy was a good man if not a good president. And, he was a better president than he will be credited for as he appointed Paul Volcker when inflation began to climb.

Jimmy did not scape-goat the Fed. He appointed a guy he knew would conduct monetary policy so that jimmy would not get re-elected. But the country needed a Paul Volcker and Jimmy gave it Paul at his own personal cost.

The movie is not about this. But I am reminded of all this when I see it. And it is a great film about hope and surmounting insurmountable odds. Truly a film for our times. And it is real!

Tuesday, July 17, 2012

Bernarke testimony July 17 2012


Re:What??? First question is on LIBOR???

 The economy is doing badly and yet the FIRST question these guys ask
Bernanke is about the Libor scandal?

Are we more interested is lampooning banks or understanding what the
economy needs? What 'we' can do?

Oh I See my mistake....

 since the Chairman said  what's needed is to eliminate the fiscal cliff
Congress does not want to go there.

It wants to make hay over banks and bad bankers. Is that going to help us???

This is as bad as Obama... when first elected going after healthcare reform
instead of growth and job creation.

This is misguided

This is a terrible grandstanding show by our 'leaders'. No wonder the Fed
is seen as the last game in town even when it is not its job.

Disgusting isn't it?


Bernanke as expected..NO MAS-Promised

Bernanke remarks....

This what the Fed has said again and again.

it stands ready to do more.

Despite a cut in the GDP outlook the Fed Chairman points to things beyond the reach of monetary policy as risks he cites the risk  of Europe and the fiscal cliff. Does more QE fix either of these???

Today the NAHB index jumped SIX HUGE Points ahead of the Bernanke testimony.Also MFG IP rose sharply in a report issued today. the economy is not ONLY weak it is MIXED. The outlook is CONFUSED and he says uncertain.

Uncertainty CUTS BOTH WAYS!!!

The economic data are mixed and what is wrong QE won't fix. WON'T FIX. WON'T FIX write that 100 times!!! 

Why is the Street so fixated on the Fed? Why are investors globally fixated on central banks doing more when they have already done too much?

We have fiscal problems and policy confidence problems. Central banks overdoing it will only worsen confidence and worsen results in the end.  


Bernanke has laid the groundwork for continuing to be wishy-washy

 I see the same old same old in this report.

The market which wanted the promise of more did not get its fix.

Bernanke is not sticking his neck out. he is not promising any more than he did in his last public meeting

I see little new here.

The just got done extending Op Twist.

It is STILL  watching and waiting.



Wednesday, May 2, 2012

The biggest thing no one is talking about…

The biggest thing no one is talking about…
Or why is the US services sector so darn weak?

Job growth is about having demand and fulfilling it by having someone work in the US to fulfill that demand. Spurring demand alone does not do it. You need demand coupled with sector level economic efficiency. Right now we have two trends that working against job growth in the US. One is well-known in the goods sector and the other is never talked about; it is the service sector and it is the bigger problem for job growth right now.

There are two telling charts about why US jobs growth is struggling. The first one is below and is the most familiar. It shows that since the mid- 1980s the US purchases of goods for the economy as whole (not just consumer sector) have been volatile, but steady. The growth rate of real spending on goods is just under 4% per year even in this weak climate after a severe economic contraction and its weak recovery.  And with that stability we have had a tendency for job growth to decline year in and year out. The chart itself shows very few episodes of Yr/Yr job growth. We have one now mostly because we are recovering from the severe loss of jobs in the recession. Goods sector jobs are still some 12% lower than they were just before the recession began…. so much for thinking that the recent MFG job growth is really good news.

The reason for this steady jobs erosion is several-fold: It is because of productivity. We can make a given amount output with fewer workers. It is because of imports. When we demand or buy goods, we can purchase those goods from overseas. So we do not need as many US-based workers to buy the same quantity of goods.

The second ‘telling chart’ about jobs and the economy may be unexpected to you. It is the services sector. Services jobs and spending have both been transitioning to lower rates of growth. The chart is actually a bit stunning. For this chart I have used the comprehensive data on services, goods and structures in the economy. I have manipulated the growth rates to construct long term indices of real sector activity for goods and for services. From 1990 through 2007 it was rare indeed that service sector goods purchases did not grow at 2% per year or more. There are only a few isolated examples of spending that was so weak. Spending was usually so much stronger.

Since the recession the best growth we have gotten from services in this cycle is 1.4% Yr/Yr. And this is from the jobs-producing sector of the economy. As the chart below shows job growth does tend to follow services purchases. And services jobs have been getting even more volatile than output in recent cycles. Job growth is not just about demand weakness in the US, it is about the composition of demand itself. Based on the relationship between spending and jobs a growth shift in demand of one percentage point from Goods to Services would create an additional 112,000 jobs. Yet spending on goods is being maintained at a historically normal pace and spending on services is wallowing at never-before-seen lows. Why?   

The goods sector is small as a jobs source. Goods jobs are only 11% of the total of services jobs. The GDP shares of output are skewed to services too at around 61% of GDP. 

The weakness in the services sector is harder to chronicle. Some of it is because of productivity but while that can explain job weakness it does not explain demand weakness as easily. Service sector demand weakness has been in train for a long time as the chart below demonstrates.  In past recoveries the pickup in demand and in jobs occurred usually right at the recession end, in the last two cycles demand picked up but was delayed as the pickup in jobs actually preceded the pickup in demand and exceeded it. In this cycle demand is still quite weak and in the not averaged data in the chart above we see that job growth in services is exceeding the growth in the demand for services. This has happened before, but it is rare (1987, 1993).

We do not have any clear link as to why services spending has gotten so much weaker. It is curious that it has happened with goods spending continuing on its historic firm path. What has changed that has hit services demand harder than goods demand?    

One thing is relative prices. Since 1990 the ratio of core goods to core services prices (taking energy out of the picture, entirely) has fallen by nearly 25%. Thus goods have become are much less expensive relative to services. Since the recession there has been a slow and partial reversal of this process. (see the chart that is below)

What we do know is that some of the components in services have among the fastest rising prices in our various price measures, like the cost of health care and the cost of education. Health care is, of course, in the news and the problems with having employer-paid healthcare insurance and overconsumption as well known; other issues are well known if not easily able to be solved.  Education costs keep rising and yet we complain that Americans’ quantitative skills are on the decline. Are we overpaying for what we are consuming in education or will these expenditures pay off for students?

In this recession the steady rise of the ratio of core services prices to core goods prices (negative values on a year-over-year basis in the chart above) has been stopped. We can see that goods prices are now starting to rise relative to services prices persistently since late 2009 (see chart above). And with this there is some growth in services spending and jobs once again –although it is still very limited. . 

There are some very specific things in the economy’s troubles that are contributing to this as well. Banking is a service and that sector –once a high flyer- has been hit hard and is now in low gear. Housing weakness for example has probably cut the demand for services. A lot of services expenditures surround the purchase and maintenance of a house: lawn and garden services, pool maintenance, painting and upkeep. When someone is unemployed or under employed these are jobs that can be done by the homeowner. Other services like eating out or vacationing can be set aside if money is tight. Certainly goods purchases can be and are put off as well, at least for durable goods.  But for services the list of postponable items is longer. In many cases buying services is a leisure-work trade off or a lifestyle choice. When you have lots of time on your hands your leisure is not worth as much to you especially if your income is lower.  

On balance we should be aware that the dynamic between labor force participation rates and services consumption are probably related. If the choice is between having some of the services you like to buy or foregoing them and foregoing a lesser job some may choose to remain idle and to wait for the good job to reappear. It may never re-appear.

I think there is a lot to consider when it comes to the evaporation of services spending. We have never seen it as weak as it is. The goods side of the economy is all but back to normal. Of course, I speak of the consumption side: the output side isn’t back either. But competitiveness is something we are still working on. And that involves the much bigger question of the global economy and the allocation of investment between foreign and domestic sources by US firm..

As a policy matter The US is caught with the issue of cheaper foreign labor and putting more demands on firms that located in the US like providing healthcare.

To me the lesson of the housing crisis was that Barney Frank failed in trying to get everyone involved in the housing boom that was in train. But he didn’t just fail. He ruined it for everyone. This is the real lesson. By setting up 120% mortgages and urging (mandating) Fannie and Freddie to underwrite more and more subprime loans, by setting the desired down payment in some cases to zero, by taking away the income test from home buyers, we did let ‘anybody’ into the exclusive homeownership club. And then it became that old Groucho Marx Joke- ‘Don’t want to belong to a club that would have you as a member?’

Housings hurdles were not discriminatory by ‘mistake.’ Discrimination is not a bad word. It is just used with the modifier ‘race’ too often. Firms need to and do discriminate, by income, by credit quality, and when you take that away you ruin economics. And that is what the housing bubble did. Let’s not apply that same stupid idea to our businesses when we set policy. If we force them to take on more and more responsibilities that are really social welfare responsibilities, we will kill even more job growth.

 We need to encouraging hiring real long terms hiring. We do not need gimmick hiring. Hiring comes from spending. It emanates from spending coupled with the provision that the desired goods or services can be effectively produced and delivered in the US. The slide in the US competitiveness position is clear. What is going on in services is less clear. Let’s not make it worse because we want to adhere to some social agenda.

Computers have facilitated call centers and few other remote job sucking possibilities. But so many services are simply needed to be provided on the spot. We need to consider what is happening to reduce our demand for these things as well as what we can do to bring the spending on services back to life and jobs along with it.

The table below should help in this assessment…

This table looks at the rise in spending from the end of the recession in the recovery period for key consumer goods and services categories. It compares the rise this cycle with average of the past seven cycles back to 1960 ( the 1980 recovery did not last this long, so it is not part of these comparisons) and places this cycle in the percentile range between the best and worst among these.

We see immediately see that service sector is worse off than the goods sector. The service sector averages a rank of 6.6 out of a possible seven ranked cycles. Durable goods sectors average 5.3 out of seven, and non-durables sectors average a near normal 4.3 out of seven. The average recovery would post a 3.5 average rank.

Of the seven sectors in services this cycle is the worst recovery in five on them. While the non durables rebound is 80% to 90% of normal the durables rebound is 90% of normal for vehicles and closer to 50% for other categories, the service sector averages a rebound that has been 43.6% of average. It is nearly 60% below normal on average.

Clearly the sector we understand the least is services and for all the coverage about manufacturing and our large trade deficit and US competiveness our worst problems are right here at home in a sector where there is virtually no international competition.

It’s the biggest tissue in the economy right now and NO ONE is talking about it.       

Wednesday, April 4, 2012

ADP shows increasing progress

The ADP rose by 209K while last months gain was revised up to 230K

Last month's revised ADP nearly his the private non-farm gain of 233 on the head.

over the last 51months the ADP and the private nonfarm jobs gains post the same average gain
over the last 34months the ADP averages a gain of 12K compared to the nonfarm private gain of 35K
over the last 24months the ADP averages a gain of 126K compared a PNF gain of 156K
over the last 12 months the ADP rose by 32K less than did the PNF survey

So over the last 24 months as well as over the last 12months the NFP gain has averaged 31K more than the ADP.

Moreover the ADP by size data show that employment levels for small services are now ABOVE their levels as the recession STARTED- its a 'complete recovery' for job losers in services but, of course, it means we have not put new job seekers to work there and have not kept up with the needs of population growth ( for 32-months running -a long time and bit omission). Still given the weakness of this recovery to date this is impressive.  Service sector (private) employment in total only lags its prerecession level by 1.2%. 

The goods sector despite its 'progress' and despite the first gain in MFG jobs in a year in the past decade still shows employment levels in the GOODS SECTOR are 16% BELOW their recession threshold level.

On balance it looks like the ADP points to a private jobs gain of about 230K to 240K

There is progress and good progress in some sectors but others are still lagging very far behind. 

Friday, March 30, 2012

Germany the Vampire Squid of Europe

The real story of Germany, to be blunt, is that it is a parasite economy. Its domestic demand lags. It has a labor force with different values than most. It will live with low wage increases and low inflation. It has lured other EMU members into a currency bloc and let them run such persistently higher rates of inflation (with no criticism of it!) that Germany now OWNS any domestic demand that other EMU countries can generate. Germany is like the vampire squid economy of Europe. Now it’s kind of caught in its own huge blinding squirt of ink, since its banks have to lent to these other EMU countries to finance their excessive consumption entangling Germany in their financial problems. But on the real-economy side of things, the German economy is eating their lunch, however, meager.

Some think that the solution is to knock the euro down on FX markets; that is something that might help Spain and Portugal and Italy and others… and it will absolutely enrich Germany with its hugely advantageous competitiveness position in the EMU region.

On one hand it is easy to extol the virtues of Germany for its relative prudence. But its banks helped to recycle funds Germans would not borrow to fuel excess consumption in the other places in the Zone. When there is a crisis, the lesson is that bankers get coddled and the borrower-homeowner gets put on the short leash and gets the lecture and the penalties. That’s exactly how Europe is playing out.

I think that EMU has let inflation differences- parities- get so far from their starting point so that there is no going back. It needs a whole re-benchmarking or split up. Maybe the very strongest (lowest inflation nations) need to leave the Zone. But the Zone seems to have outlived its workability. It is in real need of change and not tinkering. I don’t see how or why financing it to let these disequilibria conditions persist makes any sense. And I don’t see actions being taken to make the less competitive more competitive. I just see austerity piled on top of high indebtedness and that will only lead to ruin.

The fact that Germany is not the engine of growth and will not bear the financial burden of rebuilding Europe as its financial pillar is the real truth of the role of the German economy. It is in EMU to take not to give. EMU is fine as long and it becomes more and more Germanic. And that is the final lesson. It might end when the zone is renamed GMU.

Monday, March 26, 2012

Bernanke rolls the dice on what seems to be a bad bet

Bernanke’s argument that he can push demand harder to reduce unemployment is based on the notion that unemployment is more cyclical than structural. Unfortunately that seems like a bad bet given the evidence. The greatest bulge in unemployment in this cycle is from not-temporary unemployment instead of from temporary unemployment. And that category’s contribution to the unemployment rate is larger than in this expansion at this point than in any previous expansion at the 32-month mark since at least the 1970s.  Ben seems to be rolling the dice on a bad bet. But it’s a bet that gives him a rationale for postponing tightening which is what his Great Depression lesson tells him to do. Right now all we really know is the ‘what’ of his policy ‘not the ‘why.’  

this is the teaser text for My Zero Hedge article and below it, the table that explains the data discussed in the body of that article. 

Go here ( LINK BELOW) to see the article that explains why these data undermine Bernanke's case for saying unemployment is mostly cyclical.

Sunday, March 25, 2012

Europe at odds with the financial gods

Europe at odds with the financial gods
…and out of Greek goats to sacrifice?
Last week we highlighted the apparent snit between Bernanke, as he  called on Europe to ‘get its house in order’ and Draghi who did his best imitation of Alfred E.Neuman’s, “What me worry?” slogan. Draghi, as far as my spies can tell, actually uttered with a straight face the following line… ‘The worst for Europe is behind it.” Or some other such tomfoolery.

Anyone that allegedly ‘thinks’ Europe’s worst is behind it is just letting wishing and hoping and perhaps even praying get the better of thinking.

In the clip below after a short commercial interlude and a first interview with Jay Pelosky I join Pimm Fox on Bloomberg TV (at the 11 ½ minute mark.) to talk about the new revelations on John Corzine. After that we talk about Europe and some of its issues… I will also expand on that in the text below.

Fooling ourselves
The troubles at MF Global in the US, which stem from a separate issue developing after the financial crisis, underline that the financial safety net is not fixed. The fact that Greece got money to plug a financing hole but has did not improve its dire economic circumstance nor has it mended its huge competitiveness disadvantage begs the question of what purpose that bail out served…at least for Greece. Greece is in need for much more help. All this suggests that we are still not above fooling ourselves again and again.

ECB’s ‘capital’ to become lower-case? (The ‘A’ to ‘a’ function?)
Meanwhile, back in the ‘Oh what tangled webs we weave when we practice to deceive’ Department, the ECB while claiming to be making progress is getting deeper and deeper into its own personal interbank quagmire. The ECB, looking for a solution to the unraveling sovereign debt problem found a way to stopper the contagion by herding banks to the slaughter, although that is not exactly how the ECB describes it. What it has done is to sacrifice its own balance sheet and potentially is own reputation. It extended to banks credit throwing the already troubled banks into sovereign auctions with borrowed money so they could get even more exposure to their local Tier-one capital provider. This has enabled them to ‘bulk-up’ on tier-one exposure before it spawns tears two and three through one thousand. As surely as we watch these developments today much of that Tier-one credit will prove to be another case of fancifully overrated debt, and the true  debt rating will represent a cut and the next round of the Euro-debt crisis will wash over the banks taking the ECB’s reputation with it. Bon Voyage.  Tsunami or Sue-not-me?

LTRO (Losers Taking Risk Onboard)
It’s all been enabled by something called LTRO. What it represents is the most stop-gap of stop-gap plans. If Larry Moe and Curley were bankers they might have tried this. Don’t YOU try this at home; it is for seasoned professionals only… The ECB has played out capital to banks because the ECB cannot buy sovereign debt directly and because some are worried about the ECB amassing debt of sovereigns with questionable credit standing. The Greek experience has had some impact on behavior. Yes some but…not much, and …not enough. So the ECB is seeking shelter (just a shot away, in some sense) by lending the money to banks (i.e. typical ECB ‘customers) who then participate in their local government’s debt auctions and buy the bonds thereby stoppering the auction deterioration that was in train and cutting the threat of contagion.

It worked! Sort of…

Well, this is good!? Hmmm. Well, this has been effective, anyway!? Hmmm. Well, it has been so far…and yes so far… and so far only. But there is NO WAY –NO WAY- that this can end well.

The deli-debt sandwich - no pickle needed!
What we have are sovereign debt problems now weighing even more heavily on the balance sheet so banks and banks owing money to the ECB that is in some sense collateralized by sovereign debt. So it is as though the ECB participated in these auctions and bought this debt it self except banks can use the funds they got for the ECB for other transactions too and except that the banks are now another layer in the sovereign debt stacked too high to fit in your mouth deli-debt sandwich. Could I have a pickle with the debt sandwich please, sir? What’s that? I don’t need a pickle? I’m already in one? Never mind.

From too-big-to-fail to too mammoth to use anything but a Cray
When the Fed got involved in its program of assisting banks in the US crisis it was financing troubled institutions through a period in which assets were trading at temporarily depressed values. The Fed judged the market valuations to be ‘wrong’ at distressed levels. So it took some of these assets as collateral for loans (after imposing haircuts). The Fed just booked $25billion in profit on one of its portfolios. Of course the Fed made its own detour to safety through hostile territory when it ‘saved’ weak banks by letting them merge with strong ones. Now we have some too-big-to-fail banks that are too big to do their accounting with anything but except with a Cray computer.

Welter of problems serving wrong master
The problem I Europe is that its sovereign debt crisis is not going to just go away. It is not a case of a market run that has oversold valuable sovereign assets. The problems of sovereigns in Europe are linked (yes) to excessively large fiscal deficits/debt, governments that are ‘too big,’ pension schemes that are unaffordable, tax revenues that collapsed and will be hard-pressed to grow back, and competitiveness losses that are ingrained and enshrined by the existence of EMU and the single currency.

Not dealing with the consequences (NDWTC) and the consequences of NDWTC
The real problem with EMU is that it is a system set up to glorify the currency. In Europe everything has been done to support the currency. In real economics the currency is there to serve the needs of the economy. In Europe they have turned it upside down. And because they did not have good fiscal backstops (Mass-Trick was a joke, but had they spelled it as I do maybe people would have seen though it sooner). Now, Europe is dealing with the consequences of not having dealt with the consequences. And what it the tact by the ECB? To not deal with the consequences but to push them off onto banks to whom its gives extended loans so that they can continue to avoid the consequences. Pushing consequences into the future usually is not a good idea. The present value of consequence not dealt with today is something that can grow exponentially when marked to 'market' tomorrow.

The causes of the consequences
In the US we may be seeing first big fish of the banking sector caught in a net. John Corzine may yet wriggle out, but for the moment he is flopping around out of water and looking vulnerable. Stanford was caught and Madoff was caught. But no prosecutor has been eager to go after real bankers, let alone banks. This reticence could leave the stink of moral hazard in the air and bring back these bad practices or others like them. It is important to deal with the causes of the consequences as well as the CAUSERS of the consequences.The need to prove 'intent' is a beard best shorn...

ECB goes to Euro Disneyland?
Europe is still in denial about the extent of its problems and the entanglement of its central bank. Maybe Draghi should have the ECB relocated to Euro Disneyland and do its mark-to-market in fantasy land? All this makes ME THINK that what is becoming more likely is that the strong countries like Germany might leave the e-Zone eventually. Some are arguing that Europe will inflate its way out of its mess. But the Germans would never acquiesce to that. This is the whole problem in speculating about the Euro’s value: no one knows if the Zone will stay together and if it does not, who will leave. The Zone and its central bank, once built to emulate the Bundesbank, is looking less and less like something the Germans could be comfortable with.

As a result there New Zone member theme song: Should I stay or should I go? A real clash, pardon the pun…      Click link below


Thursday, March 15, 2012

Key stories from overnight: March 15

Spanish home sales still unwinding

UK rating at risk
Chinese biggie bites the political dust
Got yer’ back buddy: Cameron to Obama…

Here we go again fighting a flow imbalance of unknown duration with a stock; The SPR
Is this the new college major? Whistle-blowing
Markets are discriminating as Spanish stocks lags
More help needed for Portugal and Ireland says Bini Smaghi
US Korea Free Trade starts up today!
Rates in India unchanged