Morning Musings From Art Cashin

Via UBS Financial Services

Dollar Dictates Yet Again. Bonds Bother A Bit – While the pundits and the papers try to force fit the economic data to the market action, currency controlled again.

Quite simply, you could credit the better numbers in the ISM service sector and in Pending Homes sales for moving stock prices higher. With a little finesse you could even credit that data with sending crude prices higher (economic recovery, etc.).

It is less easy to credit that data with helping to push gold higher. Today’s rule of thumb is that if the Troika (oil, gold and stocks) is moving in the same direction, the catalyst is currencies. If the Troika is up, odds are that it’s based on a weakening in the dollar. Conversely, if the Troika is down, you can bet the dollar is probably firming.
Is that boring and frustrating? You bet it is! But it is the dominant force in today’s markets.

Okay! Back to yesterday’s action.

Thanks to softness in the dollar, crude, gold and stock futures were all strong Monday morning. That firm outlook held through the NYSE opening and stocks moved even higher. Shortly before 11:00, the Dow climbed to within 12 points of the much hyped 11,000. Before they could put on the party hats and uncork the champagne, the greenback rained on the parade.

The dollar (DXY) bottomed out and began to inch higher. The move was mild and so was the reaction in the Troika. Stocks eased off the highs and basically churned sideways as did oil and gold.

When the results of the ten year TIPs auction were announced, the yield on the ten year moved slightly above 4%. That firmed the dollar a bit more putting more mild pressure on the Troika.

Then the dollar flattened out and the Troika regained 70% of the auction induced pull back. The Easter Monday holiday closings around the globe held the volume to under 900 million shares.

Once again, it was a waste of carfare and clean shirt.

A Chinese Labor Shortage? – Andy Lees, UBS’s sharp-eyed observer in London, pointed out a new report last week. It’s titled “What Does The Lewis Turning Point Mean For China”. It was published on March 17th by the Chinese Center for Economic Research and the Center For International Economics in Australia. Our copy is about 25 pages of heavy duty economics.

The Lewis Turning Point refers to a thesis by Sir William Arthur Lewis on changes in the labor supply in developing nations. Lewis received a Nobel Prize in Economics for his work.

His thesis was that developing nations often start out with what looks like an unlimited supply of labor (poor, uneducated farmers, etc.). As the nations develop, more of that unlimited supply is pulled into the workforce.

Eventually, it reaches a kind of tipping point – or what he called a turning point. The turning point doesn’t come when you run out of labor – but way before – as the importance of labor starts to put upward pressure on wages.

Here’s some of what Andy wrote about the report:

The existence of “unlimited labour supply” has boosted household savings, it has kept labour costs low and competitive, and has supported corporate profits. As we reach the Lewis turning point, an emergence of labour shortage will likely lower Chinese GDP growth and lift inflation. Wage growth, especially for unskilled workers, will accelerate, impacting Chinese competitiveness resulting in significant structural changes worldwide.

The report says that China’s terms of trade will improve as a result of the labour shortage, ie whilst Chinese exports cost more in international markets, their competitiveness would be under pressure. Resource constraint however will mean that both raw material prices rise as well as the cost of labour. Overall therefore it suggests that the Lewis turning point may signal the beginning of a period of relatively high inflation, very different to what China has become used to for the past decade.

China has been a factor mobilisation story, and the labour shortage will lead to slower GDP growth. The current account surplus, which was the result of the population dividend, will also fall. According to modelling, investment does slow or fall in nominal terms, but less than GDP, and therefore the investment ratio increases as China tries to compensate for the shortage of labour with more capital.

While there are still hundreds of millions in rural China yet to be tapped, Lewis’s work suggests a turning point is still possible. We’ll watch for signals, such as wage hikes in the provinces.

If, by chance, China is at, or near, a Lewis turning point, that could have enormous implications on U.S. Treasuries and the refunding of the looming multi-trillion dollar deficits. May you live in interesting times.

Cocktail Napkin Charting – Yesterday, the napkins suggested that resistance in the S&P looked like 1185/1188. Yesterday’s intra-day high was 1187.73. Today, resistance looks like 1192/1195. Support is probably 1175/1178.
Their Performance Was Spot On – Thanks to the efforts of our ham radio pal and of the incomparable Wonder Woman, we’ve reconstructed the sunspot data. For March 11th through the 17th, the numbers were: 31, 36, 32, 30, 28, 21, 28. For the period of March 18th through the 24th, the numbers were: 28, 24, 25, 25, 17, 26, 27. Finally, for March 25 through the 31st, the numbers were 25, 27, 30, 33, 32, 32, 23.

The good news is that we have not fallen back to those “zero” days of a couple of months back. The less than stellar news is that most days saw less than a handful of spots. We are still “spot deprived” by historical standards. Keep an eye on the Weather Channel even though we, in the Northeast, are enjoying warm temperatures.

Consensus – The dollar will likely continue to rule the day. Watch rates, particularly around the 1:00 auction and the 2:00 release of the FOMC minutes. Welcome to the new Wall Street. Stay very nimble.

Trivia Corner

Answer - The lowest number to meet all the criteria is "59."

Today's Question - Here's a weighty problem - Billy Taylor got a job in a deep sea fishing supply shop. They have 10 bins with lead weights of various shapes. The weights in 9 of the bins all weigh exactly 1 pound (16 oz.). The weights in the remaining bin all weigh exactly 17 ounces. Bill's new boss gives him a challenge. Using a single scale that weighs in pounds and ounces (up to 99lb. 15 oz.), tell which bin has the 17 ounce weights - in only one weighing. (You can use as many weights as you want.) (Hint the solution is elegant, logical and requires no algebra.)


On this day in 1808, a German emigrant who had come to America twenty-four years earlier founded a new  company. There was nothing remarkable about that, other immigrants were founding companies. And, there was nothing remarkable about the name of the company. It was "The American Fur Company."

But the Founder's name became remarkable. It was John Jacob Astor. And, when he died some 40 years later, he was the wealthiest man in the new and vibrant America.

Conventional history tells us the wealth was the result of shrewd trading, business opportunities, and a knack for monopolistic combinations. A less conventional theory (that has somehow lasted nearly two centuries) holds that Astor's success was the result of a lucky land purchase.

That theory maintains that Astor got quite lucky when he began building on a piece of property owned by a former Manhattan businessman. The earlier Gothamite was a guy named William Kidd or Captain Kidd as he became known. And, cynics think that Astor's fortune may not have been based solely on savvy business acumen, rather it could have been the result of finding a few trinkets in a chest or two on the property.

To celebrate, explain to someone on the next barstool that wealth in America is based on hard work and perception. But talk fast. After Happy Hour the price per drink goes up by two doubloons.

The markets failed to dig up any buried Treasury, Monday. That was not for lack of digging, however.