For many months, if not years, we have been beating the drum on what we believe is the most hushed, but significant story in the metamorphosis of the US labor pool under the New Normal, one which has nothing to with quantity considerations, which can easily be fudged using seasonal and birth death adjustments, and other statistical "smoothing" but with quality of jobs: namely America's transformation to a part-time worker society. Today, one of the very few economists we respect, David Rosenberg, pick up on this theme when he says in his daily letter that "the use of temps is outpacing outright new hirings by a 10-to-1 ratio." And unlike in the old normal, or even as recently as 2011, temp hires are no longer a full-time gateway position: "Moreover, according to a Manpower survey, 30% of temporary staffing this year has led to permanent jobs, down from 45% in 2011.... In today's world, the reliance on temp agencies is akin to "just in time" employment strategies." Everyone's skillset is now a la carte in the form of self-employed mini S-Corps, for reason that Charles Hugh Smith explained perfectly well in "Dear Person Seeking a Job: Why I Can't Hire You." Sadly, that statistic summarizes about everything there is to know about the three years of "recovery" since the recession "ended" some time in 2009.
Wholesales inventories were revised lower for the previous month but met current expectations with a modest 0.3% rise. However, under the surface (as ever) things are not quite as muddle-through-like. Wholesale 'sales' plunged by their most since March 2009 with Lumber (but but what about the housing recovery) dropping the most MoM in durables and Farm Products dropping the most YoY among non-durables. This plunge in sales pushed the relatively stable Inventory-to-Sales indicator up to its highest in 19 months.
Josh Barro of Bloomberg has an interesting theory. According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason. It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis. Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child. CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.
To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.
A question on the minds of many people today (increasingly those who manage or invest money professionally) is this: How do I preserve wealth during a period of intense official intervention in and manipulation of money supply, price, and asset markets? As every effort to re-inflate and perpetuate the credit bubble is made, the words of Austrian economist Ludwig Von Mises lurk ominously nearby: "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner, as the result of a voluntary abandonment of further credit expansion, or later, as a final and total catastrophe of the currency system involved." Because every effort is being made to avoid abandoning the credit expansion process -- with central banks and governments lending and borrowing furiously to make up for private shortfalls -- we are left with the growing prospect that the outcome will involve some form of "final catastrophe of the currency system"(s). This report explores what the dimensions of that risk are.
Hmmm… Should we be impressed?
June macro data is giving a 'cleaner' picture of the economic state of our great nation. With seasonal affectations (unusually warm weather and the rebound in auto production) out of the way, June macro data has very much surprised consensus to the downside as BofAML's economics team notes that 14 of the last 20 June indicators has come in below expectations. Over the next several weeks we will get more 'hard' data for June. The most important will be retail sales, industrial production and the durable goods orders report. Retail sales look likely to disappoint as weak chain store sales offset the modest tick higher in auto sales. And given the collapse in the ISM, we expect manufacturing production and durable goods orders to be soft. This data will determine if the FOMC has enough ammo to ease aggressively on August 1st (or wait til September 13th) which we expect to only be an extension of forward rate guidance to mid-2015 from late-2014 (and not the panacea of NEW QE). BofAML remains more concerned with the consensus outlook for H2 - particularly Q4 (with 14% YoY EPS growth expected despite just a 1% GDP growth rate) - as the recession in Europe and high level of uncertainty ahead of the US fiscal cliff will likely lead to slowing growth in H2. And for those hanging their hats on the housing recovery, it will not be enough to save the rest of the economy - Housing construction is now only 2.3% of GDP compared to more than 6% prior to the crisis. This means we need a decisive turn to significantly matter for GDP growth. In addition, we believe it would take a sustained period of price increases to reverse the negative wealth and confidence effects of the housing collapse. Households remain skeptical about the home as a store of wealth or an investment.
- EU talks up Spanish banks package, markets skeptical (Reuters)
- China’s Import Growth Misses Estimates For June (Bloomberg)
- The monkeyhammering continues: Paulson Disadvantage Minus Fund down 7.9% in June, down 16% in 2012 (Bloomberg)
- Draghi pledges further action if needed (FT)
- JPMorgan Silence on Risk Model Spurs Calls for Disclosure (Bloomberg)
- Norway's Statoil to restart production after govt stops strike (Reuters)
- Top Fed officials set table for more easing (Reuters)
- Euro-Split Case Drives Danish Krone Appeal in Binary Bet (Bloomberg)
- Obama Intensifies Tax Fight (WSJ)
- Europe Automakers Brace for No Recovery From Crisis (Bloomberg)
- Boeing’s Air-Show Revival Leaves Airbus Nursing Neo Hangover (Bloomberg)
- Libor Woes Threaten to Turn Companies Off Syndicated Loans (Bloomberg)
Who Are the Biggest Manipulators of All?
By now, it seems clear that the US earnings season will be softer than was forecast a couple of months ago. In fact, there was more negative guidance during the second quarter than any time in this cycle and Morgan Stanley, like us, believes these soft results and weaker guidance are not fully discounted into a QE-hungry market. Lower oil, a stronger dollar (e.g. a one-standard deviation appreciation in the US Dollar against a basket of currencies decreases expected S&P 500 earnings by 2.6%), lower 10-year yields and a preponderance of evidence of lighter growth from economically sensitive companies are reasons for a lower view of Q2 EPS than we previously expected as UBS notes the 'official' US Q2 reporting season kicks off in earnest today with Alcoa followed by over 3,000 global companies reporting in the next two months. At the sector and stock level UBS sees particular risk around some of the higher rated areas such as consumer staples and consumer discretionary, where relative multiples are high and expectations are demanding and while they see consensus estimates for 2012 global EPS growth have been falling - at 9.7%, they remain too high given the Eurozone crisis / policy response; deteriorating global macro data; and the corporate profit cycle - and in that order of importance.
Not much going. Markets treading water in sync. Going RN, simply on lower levels. The calm before the Storm?
Minor data week, which will leave market action subject to jitters and rumours, technicals and charts. Tricky auctions of the week will be the one for EUR 8bn Italian bills on Thu and Italian 3 YRS to close the week on a Friday 13th (amount still open; were EUR 3bn 3s and 1.5bn 7 and 8 –year bonds last month). One will bear in mind that the holiday season, which slowly but surely starts to kick in, will further diminish what’s left of liquidity, exacerbating any given move.
The terrible trinity of a China harder-than-soft landing, a European depression/crisis, and now a US slowdown are all tied together in a burdensome bow by Punk Economics' David McWilliams in his latest must-watch macro clip. While people apparently still worship at the alter of retail, the Irishman notes that they are missing these three oncoming trucks. From the Politburo paniccing as "since dropping its Maoist fundamentals, the only legitimacy it has is growth" with "prosperity (not equality) for all" the latest slogan as he rhetorically asks "what's the Chinese for 'it's the economy stupid" as he notes that despite two rate cuts in a month, the problem is too much capacity (so building more simply makes things worse) - pushing commodities down. He rotates to the US where Obama's election-critical recovery is fading away noting the current impotence of the Fed to fix things in the real world. As the much-hyped recovery evaporates in the US, the euphoria of the latest EU Summit has vanished and McWilliams dives into the details of the desperate to-and-from between Germany and its neighbors (adding that France is economically all mouth and no trousers) "either Germany pays for everyone or the Euro falls apart" as he explains the dilemma facing massive refinancing needs of Italy and Spain with little to no growth and illiquidity - with German savings the ultimate arbiter (though poltically impossible given Merkel's election next year). "Even if the Germans paid for everything right now... it still wouldn't solve the core competiveness problem" leaving the world indeed stuck between a German rock and a global hard place. Eight minutes well spent for a succinct world view - and its not encouraging.
When that canned remarks by Fed Doves is all that is left as a hope-based upside "risk catalyst", as was just defined by Citi's Steven Englander, things are really sad for those who have to justify their excess testosterone by trading every uptick (Econ Ph.D. dissertation on the topic most certainly in progress).
European equities have been grinding lower throughout the European morning, with basic materials seen underperforming following the release of a multi-month low Chinese CPI figure, coming in at 2.2%, below the expected 2.3% reading. The focus in Europe remains on the Mediterranean periphery, as weekend reports from Spanish press suggest that the heavily weighted Valencia region may be pressed into default unless it receives assistance from the central government. The sentiment is reflected in the Spanish debt market today, with the long-end of the curve showing record high yields, and the 10-yr bond yield remaining elevated above the 7% mark. News from an EU council draft, showing that Spain is to be given extra time to meet its deficit targets did bring the borrowing costs off their session highs, but they do remain stubbornly high at the North American crossover. The gap between the core European nations and their flagging partners continues to widen, as Germany sell 6-month bills at a record low of -0.0344%. As such, the 10-yr government bond yield spread between the Mediterranean and Germany is seen markedly wider on the day.
This scathing assessment of Obama’s economic policies is by no means an endorsement of Mitt Romney or his economic plan, since he has never provided a detailed economic plan. After four years of a Romney presidency, the national debt will also be $20 trillion as his war with Iran and handouts to his Wall Street brethren replace Obama’s food stamps and entitlement pork. There was only one presidential candidate whose proposals would have placed this country back on a sustainable path. The plutocracy controlled corporate mainstream media did their part in ignoring and then scorning Ron Paul during his truth telling campaign. The plutocracy wants to retain their wealth and power, while the willfully ignorant masses don’t want to think. The words of Ron Paul sum up what will occur over the coming years as the interchangeable pieces of this corporate fascist farce drive the country to ruin. The politicians, bankers and corporate titans running this country are too corrupt and cowardly to reverse the course on our path to destruction. The debt will continue to accumulate until our Minsky Moment. At that point the U.S. dollar will be rejected and chaos will reign. The Great American Empire will be no more. At that time sides will need to be chosen and blood will begin to spill. Decades of bad decisions, corruption, cowardice, ignorance, greed and sloth will come to a head.
The verdict of history will not be kind to the once great American Empire.
A preview of the key events in the coming week (which will see more Central Banks jumping on the loose bandwagon and ease, because well, that is the only ammo the academic econ Ph.D's who run the world have left) courtesy of Goldman Sachs whose Jan Hatzius is once again calling for GDP targetting, as he did back in 2011, just so Bill Dudley can at least let him have his $750 million MBS LSAP. But more on that tomorrow.