Archive - Sep 7, 2012

Central Banks United have the upper hand these days. So don’t mess with them…

At least not this week…

There is so much stuff floating around America that we end up with stuff we didn't buy or even ask for--old laptops, bicycles (abandoned on our property, left by neighbors moving away, left to us by elderly neighbors who passed on, etc.) and clothing, to mention but a few of of the things that we have "inherited." I make a point to be a "good citizen" by taking outdated printers, modems and other electronics to the recycling yard; others aren't so civic-minded, as proven by the piles of high-tech detritus that litter street corners and dumpsites around the nation. When the university students leave town in May, dumpster after dumpster is filled with broken Ikea furniture and old mattresses, many of recent vintage. It isn't worth hauling any of it home. They will buy more future-landfill at Ikea when they settle down somewhere else. My new mantra is "please don't give us anything we won't consume in a few days."

One look at the short squeeze in the EURUSD, coupled with the endless jawboning out of Europe, and one may be left with the faulty impression that Europe has been magically fixed and that Greece couldn't be more delighted to remain in the Eurozone. One would be wrong. This is what is really going on in Europe: "As a pharmaceutical salesman in Greece for 17 years, Tilemachos Karachalios wore a suit, drove a company car and had an expense account. He now mops schools in Sweden, forced from his home by Greece’s economic crisis.“It was a very good job,” said Karachalios, 40, of his former life. “Now I clean Swedish s---." That more or less explains everything one needs to know about the "fixing" of Europe.

Total meltup panic and confusion in all but the US equity market where the INTC punch has sent stocks reeling, as an epic, Volkswagen-like short covering squeeze has taken the EURUSD up well over 100 pips in the past few hours (with technicals now running rampant as predicted three months ago), and where gold has now soared by nearly $40 on the day, sending it to just shy of $1740 and at the highest level since February. And all of this is happening without the Fed having announced QE, which it very well may not as it would then be seen as a largely political organization, or the ECB having bought a single bond under its restarted conditional monetization program, which paradoxically still needs Spain to crumble and demand a bailout before any of its bonds are eligible for purchases. In short: total centrally planned confusion, whose ultimate achievement will be to scare the last remaining non vacuum-tube based traders out of the market. 

Today's reported unemployment rate: 8.1%. The reason: the labor "participation" dropped to a 31 year low 63.5% as reported earlier. Of course, this number is pure propaganda, and makes no sense for one simple reason: despite the economic collapse started in December 2007, the US civilian non-institutional population since then has grown by 186,000 people every month on average hitting an all time high of 243,566,000 in August. These people need a job, and the traditional shorthand is that at least 100,000 jobs have the be generated every month for the unemployment rate to merely stay flat, let along improve. So what does one get when one uses the long-term average of the past 30 or so years which happens to be 65.8%? One gets an unemployment number that is 45% higher than the reported 8.1%, or 11.7%. That is what the real unemployment rate is assuming the US labor participation rate was realistic and not manipulated by the BLS cronies and the Bank of Spain assisted Arima-X-13 seasonal adjustment models. It also means that, as the chart below shows, the spread between the real and propaganda data hit an all time record, which was to be expected two months ahead of America's banker muppet presidential election.

Since there have been tens of thousands of lawsuits filed internally in Germany with its constitutional court alleging the ESM is illegal, it was only a matter of time before the Germans decided to sue the ECB as well for its "unlimited" bond buying. The time has arrived. From Bloomberg:

• TILLICH SUPPORTS LEGAL STEPS AGAINST ECB BOND BUYING: WELT
• TILLICH SAYS ECB BOND BUYING SIGNALS EFSF, ESM NOT ENOUGH: WELT
• TILLICH: ECB MANDATE SHOULD NOT INCL. UNLIMIT. BOND BUYING:WELT

Perhaps all those rumors of the Bundesbank's death were, as we expected, rather exaggerated.

As we continue spreading today's NFP report, here are two chart summarizing which sectors are hot, and which are not. In another indication of just how weak the US jobs market truly is, as the second chart from Bloomberg Brief confirms, the bulk of the job additions have been in low-wage sectors. The one highest paying, and thus greatest tax-generating, sector - financial jobs - will continue to bleed more and more workers as the credibility of the broken casino formerly known as the capital markets continues plumbing negative territory.

This chart probably needs no explanation. Number of employees engaged in the construction of buildings just dropped to 1,217,000 down from July's 1,220,000, and the lowest number in a year. Just as telling is that the number was a mere 5,600 workers above the depression lows of 1,211,400 recorded in May of 2011.

Sadly for the US labor force, today's number of reported unemployed people according to the Household Survey, which came at 12,544,000, or a drop from 12,794,000 (even as the number of employed declined as well from 142.2MM to 142.1MM), tells only half the story. As the following chart of the day, a bigger problem comes from the fact that in August another 8 million Americans were working part time, double what it was at the start of the Depression. Additionally, 5.2 million, also double the number 4 years ago, are marginally attached to the labor force. Combined, this adds up to 25.8 million, which is the real number of interest, even ignoring the nearly 400,000 who mysteriously dropped out of the labor force. As Bloomberg concludes, "It is likely firms have altered their hiring behavior following the recession, which has resulted in a low-wage bias that favors part-time and temporary workers." Sadly, this means that the change in the labor market is now secular, and the Fed will have to reassess everything it knows, just as it had to reevaluate its flawed understanding of Stock vs Flow, and why more and more are now calling for endless QE.

The NFP number was released at 8:30 am. At 8:40 am Goldman Sachs' Jan Hatzius hit "send" on a 356-word email to clients which was checked, vetted, and given the sign off by compliance, in which the Goldman head economist read through the NFP data, and concluded that "Probability of QE3 Next Week Now Above 50%." Curious why the risk assets first dropped then soared as if stung? Because today, once again, good is great, but worse is greater. Let the global liquidity tsunami continue!

Curious why the unemployment rate dropped from 8.3% to 8.1%, even as just 96,000 jobs were added? The labor participation rate declined from 63.7% to 63.5%, the lowest since 1981. It means that somehow in August the labor force declined by 368,000 people, which is a paradox since according to the household survey 119,000 jobs were lost in August, yet at the same time the unemployment rate dropped. Remember: it is an election year.

In August, two months ahead of the presidential election ahead of which this number will be one of the most critical and talked about, the US generated just 96,000 non-farm payroll jobs, on expectations of 130K additions, and compared to the July number of 163,000, now revised to 143,000K. Private payrolls rose by a modest 103,000, much lower than the expected number of 142K, and down from July's revised 162K. -15,000 manufacturing jobs were lost, compared to the expected +10K, and sadly just a little bit short of Obama's recent promise to add 1 million manufacturing jobs by 2016. Finally, while the unemployment rate came lower (surprise, surprise: this is what appears in newspapers) at 8.1%, far lower than expectations of 8.3%, and below last month's 8.3%, the broad total underemployment rate (U-6) continues to be sticky at 14.7%. Birth Death added 87,000, up from July's 52,000. The reason for the drop in the unemployment rate: labor force participation dropped to 63.5%, down from 63.7%. Oddly enough, this report leaves the NEW QE door open, even as Obama can take the accolade for a declining unemployment rate. Win-win for everyone.

In very real terms the ECB is now no longer an independent institution. The ECB has promised not to act unless the EU assents. The ECB is now totally subject to the whims of the politicians in Europe and whether the markets ignore this for the moment or not that is the truth of it. In promising redemption the ECB has also traded away its ability to act on its own and it will be interesting to see how this plays out.

When it comes to corporate cash flows, profitability and actual trade and product demand, central banks still appear to have little to very little ability to jawbone immediate results, as Fedex found out three days ago, and Intel has just confirmed.

• INTEL SEES 3Q REV $12.9B-$13.5B, SAW $13.8B-$14.8B, EST. $14.2B
• INTEL WITHDRAWS YEAR FORECASTS FOR GROSS MARGIN, REVENUE

Fear not: the ECB may still promise to bailout Intel revenues, if Intel only requests a bailout.