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3 Things: Steel, Sentiment, & Productivity
Submitted by Lance Roberts via STA Wealth Management,
Strength Of Steel
Yesterday, I discussed the issues surrounding the Fed's ongoing determination to hike interest rates despite evidence of a weakening economic environment. To wit:
"The Federal Reserve raises interest rates to slow economic growth to keep an economy from overheating which would potentially lead to a sharp rise in inflationary pressures. Since commodities are the basis of everything that is bought, consumed or other utilized; if there were indeed inflationary pressures on the rise commodity prices should be on the rise. As shown, this is clearly not the case."
Last night, the World Steel Association released its June crude steel production report that showed volumes declining to 136 million tons. This is a drop of 2.4% from a year ago.
The decline in steel production, and subsequently the components that go into making steel like iron ore and coking coal, are further evidence that economic activity is far weaker than most analysts currently estimate. This is particularly the case in the U.S. where production of crude steel in June fell by 8.5% on an annualized basis.
Furthermore, the crude steel capacity utilization ratio for the 65 countries that the WSA tracks was 72.2% which is 3.5% lower than a year ago.
It is widely believed the Q1 slump in economic activity was simply a weather/seasonal adjustment error problem. However, there is mounting evidence from other economically sensitive sectors such as retail sales, manufacturing and commodities that there is more to the story.
Steel production is just the latest clue in the solving that puzzle, however, a look at reports (and charts) of basic material companies have been signaling the decline for quite some time. The latest comes from Caterpillar this morning as they once again report a dismal quarter and even worse forecast.
"While economic conditions in the United States are modestly positive, the global economy remains relatively stagnant. Many of the key industries we serve remain weak, and we haven't seen sustained signs of improvement. Continuing economic weakness in China and Brazil, as well as uncertainty in the Eurozone and over Greece, haven't helped confidence. Prices for commodities like coal, iron ore, and oil are not signaling an improvement in the short term."
As Jim Cramer explains:
"The only conference call you will ever need, is Caterpillar, it is my gospel, my go-to call on which many of my decisions are based... I trust Caterpillar's long-term vision... it is a superb evaluator of what's happening in each of the countries it sells in and gives you the most thorough description of each economy."
The message is pretty clear.
Extreme Bearish Sentiment In A Bullish Market
I discussed earlier this week that many of the internal measures of the market were clearly deteriorating even though the market itself remained within a bullish trend and close to recent highs.
However, while the market itself remains "bullish" the sentiment of investors, both individual and professional, has not. The chart below shows the composite index of bullish sentiment smoothed with a 4-month average. While bullish sentiment is decidedly "not bullish" currently, this is not necessarily a "bullish" sign. As noted by the blue vertical dashed lines, declines in bullish sentiment from previous extremes have been normally seen just before the onset of a bigger correction.
Combined with the deterioration in underlying momentum, breadth, and trend; the suggestion is that "risk" is elevated. As I stated previously:
"For investors, it is not the time to become complacent or dismissive of market action. While recent price declines have not violated or changed the current bullish trajectory of the market, it does not mean that such will not eventually become the case."
Economists Can't Explain Lack Of Productivity
There was a time when the U.S. built stuff. Following WWII, the U.S. was a manufacturing powerhouse that built virtually everything the world needed to rebuild itself. After all, the majority of the major global manufacturing centers of the world from Japan to Russia were devasted by the conflict.
Today, however, in the demand by consumers for ever cheaper prices of goods and services, much of the manufacturing has been outsourced to countries with lower costs. In other words, the U.S. has been exporting inflation and importing deflation by reducing the cost of products and services consumed by Americans.
While outsourcing has reduced costs, it only partially explains the decline in productivity. The biggest culprit in the decline of productivity has been the rapid acceleration of labor-saving technologies. Technological advances in automation, drones, robots, software and hardware have allowed people to do more with less. But wait, that is an increase in productivity, right? Correct.
The problem is that the rise in these technological advances ultimately displace workers. In other words, if one person can now do the work of two or three, then there is in effect less productivity because you have reduced the demand for labor. This goes a long way in explaining the inexorable rise in individuals sitting outside the labor force.
Furthermore, the structural shift in employment from manufacturing to service has also reduced the demand for labor. Service related jobs do not have the same economic multiplier effect that manufacturing related jobs do.
The WSJ recently discussed the perplexing issue surrounding the rise in technology and the fall in productivity.
"U.S. productivity, meanwhile, has hit the skids. From 1948 to 1973, it grew at an annual average of 2.8%. The rate through the 1980s slowed to half that, even as computers spread through the economy, driving everything from welding robots in auto plants to bank ATMs.
From 1995 to 2004, it finally looked like the digital age was paying off: Productivity growth rates closed in on post-World War II highs of near 3%. Then average gains fell to 2% from 2005 to 2009; since 2010, they have dipped below 1%.
Ms. Yellen, in a speech in May, said that over time "sustained increases in productivity are necessary to support rising incomes."
Innovation in technology reduces the need for labor. More individuals are sitting outside the labor force increase the demand for available jobs. Increased competition for available jobs suppresses wage growth. It is a virtual spiral that continues to apply downward pressure on an economy based nearly 70% on consumption.
Importantly, what small increases there have been in unit labor costs have primarily come at the expense of higher benefit and healthcare costs rather than an increase in wages. As discussed previoulsy, for roughly 80% of the working labor force, wages have declined over the last five years.
Janet Yellen is right that wages will have a hard time increasing without a pick up in productivity. The issue is that innovation IS the problem, not the solution. That is unless we begin to include the productivity of robots.
Just something to think about.
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BINGO!
Start throwing your wooden shoes at the robots !
The issue is that innovation IS the problem, not the solution. That is unless we begin to include the productivity of robots.
Finally someone on here says it. However, innovation is not a problem itself - innovation is great - the economic system of the last couple hundred years is simply well outdated.
I've said it for years...
What do you do when only 30% of the population is needed to support the lifestyle of the entire population?
What happens when fully autonomous vehicles hit the streets in the very near future?
Martin Ford's book, "The lights in the Tunnel", which deals with this exact subject, suggests creating a sliding tax rate that takes into account the percentage of labor utilized in relation to the corporate profits?
Say you have a computer company that employs 5 peope and books 100 miliion in profits you get hit hard , versus a manufacturing plant that employs 1000 people and books the same profit.
His reasoning is that 5 people with 20 million each are not going to spend as much as 1000 people with $10,000 each , resulting in a lower velocity of money
Many many unsupported statements in this piece like: "Innovation in technology reduces the need for labor." That has never occured in history. The biggest innovations in history occured in the late 1800s and early 1900s. Farm machines replaced 75% of all human labor in the United States. No mass unemployment. Everyone moved into the new technology.
Unemployment has one cause: government. Not technology.
Wall Street STOLE ALL THE MONEY! They use money to create fraudlent derviatives...that serve no purpose but to generate bonuses and steal money. Give me an example of what utlity shorting CDS has? Or printing $4 Trillion to buy bonds from a bankrupt country to then offshore the money in some tax haven. We need a money movement tax! These scams of Apple and Google moving their "Intelligecal Property Off-shore" so they can make money offshore shore is a scam. They take all the talent of people monetize it...and steal it! The crooked banks should have been allowed to fail...and we would be in good shape. Instead criminals like Dimond and Blankfein are billionaires for having destroyed the economy! All stock trades should be taxed. If it is worth trading a profit should be taxes...not some scam trade where billions of shares are endlessly churned for no useful purpose! I am no fan of taxes...but the idea of Goldman et al paying zero taxes for running scams is criminal!
interesting comment that raises the question: just where is all th e global money thats been created the last several years? Is most in the hands of banking execs?
An ordinary corp exec making 5 mil a year is vilified for that in some quarters and in others laughed at for chump change earnings.
Who has all the money and we are talikng about trillions, not just the typical billions.
I recall that in 1999, a bunch of morgan stanley execs --100 of them, left the company with a payoff of 103 million each in stock. We look back now and we see they did not really earn it. A certain amount of arrogance was in them for being so rich for doing nothing.
next, I am headed to my dentist who wil charge me $145 for 30 minutes just to clean and check teeth. I thought he was making good money but he too is a pauper compared to the schmucks that fucked up not just the US but the world economies to line their pockets.
Listen, money is free, they should pay us to consume - not shuffle paper.
Give people that do something useful like nurses and sandwich makers free houses.
The cat is out of the bag, $79 Billion per month for a year for Wall Street.
Send me my tax free $3 million already.
It's also a function of the collapse of new business formation. Small businesses are becoming extinct as financial repression and over regulation makes the bigger companies stronger and smaller companies weaker. A return to normalized monetary policy and also a return to the "era of big government is over" will go a long ways toward reversing the negative rate of new business start ups. That will lead to more jobs and more competition for labor and rising incomes.
Once the labor market is toppled, they believe robots will replace the working force. What happens when the robots are hacked and create $$ millions of rejected product. This will be fun to watch.
Unless they are meat-eating robots. That would bring equilibrium.
Just like gold, steel and copper are obsolete relics of the past. What we need is the latest iDoohickey made out of fairy dust and gnome underwear.
Things always change and technology moves forward, but the people we rely on to think about these things and plan for possible disruptions are the most clueless bunch around, both government and business sides of the equation, stupid reigns. My first job as an engineer in the 80's was with IBM, but that company died quite awhile ago and what's so bad is they aren't even close to being the worst offenders. Civilization is falling apart because nobody knows how to read the frigging service manual......
When Wall Street is given money by the USA to corner the market on Oil and ignore the law of supply and demand...this is what happens. They don't care if the destroy companies...heck they like it....bankrupt it...buy it back. Who doesn't love to borrow unlimited FED money to corner the market on commodities...time and again.
The benefit of productivity gains shoukd simply have led to fewer hours worked rather than better pay for some and no work for others.
NILF is the result of improving the gap between 'working' or staying home collecting government checks and subsidies
Automation has always improved the society that saves and invests its capital. Once you layer the dead hand of government, that society declines. Why this automation red herring is always raised is beyond me
Because its an easy scapegout for the statists and socialist that the stupid masses belief in.
IF the Fed's ZIRP policy has had the effect of adding capital investment which has, in turn, exacerbated supply of commodities, THEN raising rates should act to reduce supply and drive prices UP...all else equal.
Sorry boys and girls but more and more the indicators are pointing towards the end of growth. Contraction is the trend.
Story is just a reaffirmation of reality for ZH readers. Lost me at Jim Cramer (brainwaves flatlined). Went off to find some PM's and survival goods while they are still on fire sale. Time is growing short.
Lost me at Janet Yellen is right, work faster and wages could possibly maybe increase.
It is clear that the person writing the article did not actually live through the periods discussed (and has not actually experienced what has happened in the last 20 years) so he/she/it/other has no clue about what they are talking about.
The recent until very recent productivity gain in the US was almost exclusively due to labor arbitrage. The average worker in the US produced more per labor hour because they produced nothing. It was purchased overseas and market up ... the miracle of Apple and increased productivity explained. A $5 item becomes a $100 item by bringing it across the pacific ocean. MAGIC!!
Technology allows any unit to produce more of what was made in the past for less cost. Technology also allows new things to be produced that were never produced before. In the 1980 we did not have the internet and cellular phones and infrastructure ... and we did not have drones and huge server farms for storing spy data. Why? It was only made possible with advances in technology. And yet lawnmowers became less expensive to produce because of improved manufacturing technology and labor arbitrage.
Economists are morons.
Students of Systems Dynamics ( SEE: http://cassandralegacy.blogspot.jp/2015/06/the-limits-to-growth-and-gree... or http://thearchdruidreport.blogspot.com/) often point out that civilizations decline because the strengths that have allowed them to flourish eventually reach a point where their feedback begins to weaken the system as a whole. Just as yeast in a bottle of grape syrup multiply until their waste alcohol chokes them to death, so civilizations will grow until consumed by their own bad habits. And the correlate of this is, that because civilizations are creatures of habit, and their favorite survival strategies become ingrained as ideologies, when they first start to fail their first reaction is -- to do MORE of whatever it is that is killing them.
When the main limiting factor on human growth (and reproduction) was the lack of manpower to produce more food and infrastructure, mechanization and implementation of technology freed up scarce manpower to produce more. This was especially true in the sparsely populated American continent, rich in resources and lacking in sufficient warm bodies to exploit them. Thus Americans became leaders in innovation and use of technology to substitute for their lack of laboring peasants. Now that we have reproduced and immigrated to the point where laboring peasants are in plentiful supply, the adoption of ever more technology has two results: 1) it actually costs more than peasants, and 2) it increases the supply of starving peasants. Both of these results add to the pressure on a failing system.
I want to say one word to you. Just one word: Plastics
....................................(The Graduate)