Guest Post: The "Labor Hoarding" Effect

Since the end of the recession businesses have been increasing their bottom line profitability by massive cost cuts rather than increased revenue.  Of course, one of the highest "costs" to any business is labor.  One way that we can measure this view is by looking at corporate profits on a per employee basis.   Currently, that ratio is at the highest level on record. The problem that businesses are beginning to face currently is that while they have slashed labor costs to the bone there is a point to where businesses simply cannot cut further.   At this point businesses have to begin to "hoard" what labor they have, maximize that labor force's productivity (increase output with minimal increases in labor costs) and hire additional labor, primarily temporary, only when demand forces expansion. The issue of "labor hoarding" also explains the sharp drop in initial weekly jobless claims. This is likely obscuring the real weakness in the underlying economy.  Without an increase in the demand part of the equation businesses are likely to continue resorting to further productivity increases to stretch the current labor force farther to protect profitability.  However, as we may currently be witnessing, businesses may be reaching the limits of what they can do.

Deutsche Bank: "We Fully Understand Why The Authorities Wouldn't Want Free Markets To Operate Today"

"Is it healthy that the default/insolvency cycle is being sedated in so many large economies? Surely the financial system and life in general has prospered through history on the basis of creative destruction. Indeed all the good looking and intelligent readers of this note are products of survival of the fittest. Economic growth over time is helped by a regular cleansing. So are low defaults helping to lock in low growth for years to come across many large economies? Clearly there are other factors at work here but we think that what's great for credit investors isn't necessarily good for the global economy. A bit of a paradox. We would stress that we fully understand why the authorities wouldn't want free markets to operate today as the risk of a huge global default and unemployment cycle would still be very high. However their intervention has a cost in our opinion."

The Depressing Effect Of QE

It is rather like sitting in the middle of the desert. We have $100 billion of new sand being pumped in by the Fed each month. Our desert doesn't get much wider as defined by new issuance and so one dune is heaped on another, the compression continues and yields, even from here, will decline. Our sand trap is a fabulous world for borrowers and issuers and a miserable world for investors. The general thinking usually stops here but there is more to this story than that. Over a period of time wealth declines as the bonds markets hold five times the assets of the equity markets and so the lack of yield, of income, begins to take its toll on consumer spending, on corporate revenues and then on profits and on the ability of those dependent of savings to maintain their standard of living. The continual flow of money has helped the banks and helped corporate borrowers but it has not filtered down to the savers and, in fact, their position has been lessened by what the Fed has done.

Greek Unemployment Hits New Record High, Youth Jobless Rises By 5% In One Month To 64.2%

The Greek economic depressionary catastrophe continues to merrily chug along. Hours ago, Greek Elstat reported that February unemployment rose to a new record high of 27.0%, with the January number revised from 27.2% to 26.7%, up from 21.9% in February 2012, and almost as if unlike the Greek BLS is not even trying to fudge numbers anymore and wants to show a deteriorating situation (or, as it was called in the Old Normal - "reality"). Looking at the Shadow economy, the number of people who are inactive, or "neither worked neither looked for a job", hit 3,358,649. This number is just shy of the total people employed, meaning in 2-3 months, the Greek shadow economy will be greater than the official, taxed-one. A gender breakdown shows that females have never had it worse with 31% unemployment, compared to 24.1% for men. But the most stunning number was the number of unemployed Greek youths (15-24), which hit a record 64.2%, the highest number on record, and a mindblowing 5% increase from the 59.3% youth unemployment reported in January, and a 10% increase from a year ago.

Guest Post: The Reflationary Rally: How Much Better Off Are We Really?

The U.S. stock market rally has recently passed its fourth anniversary after the terrifying lows of March 2009. During that time, massive and unconventional reflationary policy from the Federal Reserve has managed to lift the S&P 500 to new all-time highs. But perhaps even more improbably, it has finally (for now?) built a floor under U.S. residential real estate prices. This 'Less Bad' Recovery continues in other ways as well. Jobs have been created. Not good jobs. Not high paying jobs. Not full time jobs. But some rudimentary sets of tasks and responsibilities that could be called jobs. There has also been deleveraging. But here, too, the scale of debt reduction is nothing close to the unadjusted figures often touted in the media. Americans, and more generally, OECD citizens, remain highly burdened by debt. When combined with poor wage growth, this explains the continued suppressed demand so pervasive in developed nations. And of course, oil prices as expressed through prices at the pump remain stubbornly elevated and are likely to persist at their new elevated level. Combined, these factors have kept a lid on consumer confidence and make for a precarious disparity between the stock market and the real economy. Welcome to the Great Constraint - a growing failure to thrive.

The Price Of Copper And 11 Other Recession Indicators That Are Flashing Red

There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession.  The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story.  If historical patterns hold up, the economy is heading for a very rocky stretch. But most average Americans are not that concerned with the performance of the stock market.  They just want to be able to go to work, pay the bills and provide for their families.  During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes.  If we have another major recession, that will happen again.  Sadly, it appears that another major recession is quickly approaching. The following are 12 recession indicators that are flashing red...

Guest Post: The Widening Chasm

An independent, critical account of the American economy would soon raise questions about the structural causes of inequality by asking cui bono, to whose benefit is the system arranged? If we can honestly say that the system's primary source of inequality is a dynamic economy that rewards the top 10% who are best able to deploy skills and capital, then that suggests one set of potential remediations. If however we find the system is unequal largely as a result of its cartel-state structure, then that suggests a political and financial reset is needed to clear the deadwood of corruption, malinvestment and state/central bank manipulation of statistics, finance and credit. We had to destroy the economy to save it. Indeed.

Germany Under Pressure To Create Money

Currently, central banks around the world are walking in lock step down a dangerous path of money creation. Led by the Federal Reserve and the Bank of Japan, economic policy is driven by the idea that printed money can be the true basis of growth. The result is an unprecedented global orgy of currency creation. The only holdout to this open ended commitment has been the hard money bias of the German-dominated European Central Bank (ECB). However, growing political pressure from around the world, and growing dissatisfaction among domestic voters have shaken, and perhaps cracked, the German resolve. While German capitulations in the past have been welcome occurrences, in this instance the world would be better served if the Germans could stick to their guns. However, it seems presciently, that the ECB is looking for ways around Germany's oppostion to outright monetization by securitizing SME loans and buying ABS directly on to their own balance sheet.

Guest Post: Debunking The Keynesian Policy Framework: The Myth Of The Magic Pendulum

The policy approach that no one dares to question - "In the long-term, we need to fix our public finances. We’re on an unsustainable path that needs to be corrected to protect younger and future generations. But in the short-term, we need to focus on growth. The economy stinks and people are suffering. Any attempt to lower debt in these conditions would be folly. On the contrary, the government needs to provide more stimulus to promote growth" has no support to its key premise in business cycle history, the idea that the economy will return to full employment and stick there, allowing ample time for debt reduction. Once stimulus is removed, expansions often struggle to continue for much longer. And if the stimulus is replaced with restraint, it seems logical that the expansion’s expected life shortens further. In other words, there is no Magic Pendulum. What’s the typical life of an unassisted expansion? Based on the data presented here, I’ll call it two years.

Generation J(obless): A Quarter Of The Planet's Youth Is Neither Working Nor Studying

We recently discussed the 'dead-weight' problem of youth unemployment in developed economies. The Economist estimates that the world's population of NEETs (not in employment, education, or training) is a stunning 290 million - or around one-quarter of the world's youth. Sadly, many of the 'employed' young have only informal and intermittent jobs. In rich countries more than a third, on average, are on temporary contracts which make it hard to gain skills. Young people have long had a raw deal in the labour market. Why is this so important? A number of studies have found that people who begin their careers without work are likely to have lower wages and greater odds of future joblessness than those who don’t. A wage penalty of up to 20%, lasting for around 20 years, is common. The scarring seems to worsen fast with the length of joblessness and is handed down to the next generation, too - leading to a vicious cycle that weighs on growth dramatically. With a stunning 71% now expecting to work in their 'retirement' in the US, it would seem the opportunity for the jobs and wealth transfer to the younger generation is being blocked by a generation hamstrung by an increasingly repressive Federal Reserve.

JOLTS Jolts Jobs Report Cheerleaders, Implies Worst Job Growth Since September 2010

The biggest surprise from the JOLTS report is not in any of the standalone series, but in the time progression of the Net Turnovers number, which is simply the total new hires less total separations. Historically, the Net Turnover number tracks the total monthly nonfarm payroll change (establishment survey) on a almost tick for tick basis. Not this time. In fact as the chart below showed, the upward revised March NFP number to 138K, which preceded the even more optimistic, and much cheered April print of 165K, which sent the S&P and the DJIA soaring to new all time highs on Friday, not only did not get a confirmation, but in fact the JOLTS survey for Net Turnovers  - which came at only 46K in March compared to a revised 138K jobs added per the establishment survey - implied that the real NFP number in March should have tumbled to a level last seen in September of 2010!

A Hard Look At Europe

In the beginning there were a handful of core nations equal in partnership and full of the excitement of a new venture. Much of the esprit was a desire to band together and compete against the United States for economic dominance and world power. Now we find the EU headquarters no longer staffed by equals but a useful front for Berlin which resides in another country. This point is critically important to understand. Yes, sure, the Germans will smile and nod and give way on agricultural supplements and on fishing rights and trivial matters but when it gets down to it and the decision is important; Berlin will have its way. The fact that the equity markets have done fabulously and that the interest rates for European sovereign debt have done remarkably well all rest on one thing and one thing only; the creation of money and a massive amount of it. Europe, and the rest of the world for that matter, has been transformed by the printing of money. The dislocation between economies and markets is huge and the glue is the twenty-four seven machinations of the printing presses. Politicians in Europe and America have taken a back seat to the heads of the world's central banks. Lastly, as I stare out at the horizon, you should understand the German viewpoint of the State. You win by being in control and control must always be exercised and never relinquished.

Surprising German Factory Orders Bounce Offset ECB Jawboning Euro Lower; Australia Cuts Rate To Record Low

The euro continues to not get the memo. After days and days of attempted jawboning by Draghi and his marry FX trading men, doing all they can to push the euro down, cutting interest rates and even threatening to use the nuclear option and push the deposit rate into the red, someone continues to buy EURs (coughjapancough) or, worse, generate major short squeezes such as during today's event deficient trading session, when after France reported a miss in both its manufacturing and industrial production numbers (-1.0% and -0.9%, on expectations of -0.5% and -0.3%, from priors of 0.8% and 0.7%) did absolutely nothing for the EUR pairs, it was up to Germany to put an end to the party, and announce March factory orders which beat expectations of a -0.5% solidly, and remained unchanged at 2.2%, the same as in February. And since the current regime is one in which Germany is happy and beggaring its neighbors's exports (France) with a stronger EUR, Merkel will be delighted with the outcome while all other European exporters will once again come back to Draghi and demand more jawboning, which they will certainly get. Expect more headlines out of the ECB cautioning that the EUR is still too high.