Archive - Jun 2013 - Story

Yesterday's multi-year record-breaking rally in JPY stunned a few carry-traders around the world and the overnight session in Japan suggested things were not going quite according to plan. But have no fear. A perfectly hum-drum jobs report - not Goldilocks by any means in terms of its suggesting good growth (which most should want) or bad growth (which markets want) - was enough to spark an incredible 270 pip (so far) sell-off in JPY. This is a major nation's FX rate - not a penny stock, not a banana republic, not a tech IPO!!

While Wall Street is implicitly conflicted in its actions, there is also another group of individuals who are also just as conflicted - corporate executives. Today, more than ever, corporate executives are compensated by stock options, and other stock based compensation, which are tied to rising stock prices. There are billions at stake in many cases and the game of "beat the Wall Street estimate" is critical in keeping corporate stock prices elevated. Unfortunately, this leads to a wide variety of gimmicks to boost bottom line profitability which is not necessarily in the best interest of long term profitability or shareholders. Today we will discuss four tools that have been at the heart of the surge in profitability since 2009 and why such profitability has failed to boost the economy. While the Fed's ongoing interventions since 2009 have provided the necessary support to the current economic cycle it will not "repeal" the business cycle completely.  The Fed's actions work to pull forward future consumption to support the current economy.  This is turn has boosted corporate profitability as the effectiveness of corporate profitability tools were most effective. However, such actions leave a void in the future that must be filled by organic economic growth.  The problem comes when such growth doesn't appear.

In the latest installment of another long-running series, we look at the age bracket distribution of those who are lucky enough to get new jobs each month, versus those who aren't. It should come as no surprise that once more the majority of new jobs created in the month of May went to the oldest age-group cohort, those 55 and older, which saw an increase of 203,000 jobs in May, more than every other age group bracket. The result: with an all time high 31,488,000 workers aged 55-69, Americans are far more busy working in their older years than retiring (or gambling in the rigger stock market casino).

Almost all recoveries from recession have included rapid employment growth – until now. Though advanced-country central banks have pursued expansionary monetary policy in the wake of the global economic crisis in an effort to boost demand, job creation has lagged. As a result, workers, increasingly convinced that they will be unable to find employment for a sustained period, are leaving the labor force in droves. Rather than changing its approach, however, the Fed has responded to slow employment growth by launching additional rounds of QE. At some point, the Fed must realize that its current policy is not working. The US economy has not responded to the Fed’s monetary expansion, because America’s biggest problems are not liquidity problems.

The time has come to look at the quality component of the 175K jobs added in May, so without further ado, let's drill down at where the growth was. Without much surprise, we find that as in months past, the bulk of the growth continues to be concentrated in the lowest wage jobs: Leisure and Hospitality added the most jobs in May, 43K; Retail Trade jobs rose by 28K; Education and health added another 26K;  Temp jobs: the lowest of all paying jobs added another 26K.

In summary - of the 175K jobs, 122K was to low wage occupations.

After the knee-jerk reaction, we are seeing significant USD strength that is monkey-hammering commodities...

The following charts should clarify a few things with regard to 'real' money being put to work - as opposed to headline-reading, liquidity-feeding algos across every asset class - following this morning's rather hum-drum payrolls print.

Those hoping for a decisive jump or plunge in the NFP number will be disappointed with the May NFP printing at 175K, on expectations of 165K, even as the April number was revised from 165K to 149K, and a net March-April revised change of -12K. The Unemployment rate was 7.6% higher than the expected 7.5%, driven by a tiny increase in the Labor Force Participation rate from 63.3% to 63.4%. The number of unemployed workers increased from 11659K to 11760K, the highest since February. Ironically, the U-6 unemployment rate for May declined from 13.9% to 13.8%, matching the lowest number of 2013. But once again it is the quality component of the jobs that was weak with Average Hourly Earnings missing expectations of a 0.2% increase (up from 0.2% last month), instead staying flat to the April number. The manufacturing renaissance continues to be delayed courtesy of a -8,000 drop in Mfg jobs in May. Finally birth-death added 205K jobs to the unadjusted number.

It’s always a bit amusing to meet an investor making money in the markets right now who actually thinks it’s because he’s smarter than everyone else. Everyone knows the Fed’s quantitative easing program calls for them to buy $85 billion worth of bonds and mortgage backed securities each and every month. And the connection to market performance is clear. But, as is clear with USDJPY, Nikkei, and European sovereigns, the end of this exuberance is beginning to happen. All of this indicates that the leveraged investing herd seems to be squaring positions, going to cash, and paying back some of the USD-denominated debt they’ve borrowed. So far it’s all been an orderly move lower. And herein lies the trouble. Few investors are spooked right now because there is so much calm in the markets. But that calm can quickly turn into anxiety, which can quicly turn into all-out panic. It’s taken years (since 2008) to print so much money. This means that a market panic will unwind years’ worth of liquidity in a matter of weeks. It’s a financial tsunami that no investor should underestimate.

So what are the scenarios for various potential outcomes? In simple terms we think a number close to or above 200k will intensify the tapering debate over the next few weeks. This is unlikely to be risk positive but there will be some offset from the strengthening of the recovery. However we think the tapering fear will dominate in a risk off trade. A number just above 150k might ease some of these fears but it won't completely eliminate them. A number between 75k and 150k will probably be the sweet spot for markets as the Fed will be pushed slightly off the agenda. Bonds will likely rally taking the risk complex with it. A number below 75k, although unlikely, would definitely reduce taper fears but might worry markets on growth and is unlikely to be as positive as a number between 75-150k. These scenarios are obviously fairly crude and have to be seen in conjunction with the revisions.

Artist's impression of course. Now: who can't wait to become a not so secret NSA agent and wear Google (spy)Glass everywhere?

• Reports on surveillance of Americans fuel debate over privacy, security (Reuters)
• Apple to Yahoo Deny Providing Direct Access to Spy Agency (Bloomberg)
• Misfired 2010 email alerted IRS officials in Washington of targeting (Reuters)
• Spy vs Spy: Cyber disputes loom large as Obama meets China's Xi (Reuters)
• When NSA Calls, Companies Answer (WSJ)
• How the Robots Lost: High-Frequency Trading's Rise and Fall (BBG)
• Japan's Pension Fund to Buy More Stocks  (WSJ)
• ‘Frankenstein’ CDOs twitch back to life (FT)
• China’s ‘great power’ call to the US could stir friction (FT)
• Toyota Tries on Corolla Look That’s Just Different Enough (BBG)

In our first Chart of the Day we present the Caracas stock exchange performance since 2012. It puts the action in the Nikkei (and BitCoin) to shame. It also explains why anyone selling $29.95 newsletters equating the "market" with the economy is a charlatan. Finally, it shows that in the great race to achieve a "wealth effect" utopia, one may not have toilet paper, but one will always have a soaring stock market.

To get a sense of the momentous volatility in Japan, consider that the Nikkei225 is more or less in the same numeric ballpark as the Dow Jones, and that each and every day now it continues to have intraday swings of more than 500 points! Last night was no different following swing from 13100 on the high side to 12548 on the low, or nearly 600 points, with all this ridiculous vol culminating in a close that was just red however for a simple reason that the rumor of the Japanese Pension Fund reallocation taking place hit shortly before the close sending the USDJPY higher by 200 pips...  only for the news to emerge as an epic disappointment when it was revealed that the GPIF would raise its target allocation to domestic equities from 11% to... 12%. So much for the "Great Japanese Rotation."