Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
Wall Street makes heroes of CEOs who slash jobs. Especially of those who parachute into the executive office. The more people get axed, the better. The knee-jerk reaction can be phenomenal. Citigroup’s massacre of 11,000 souls caused its stock to jump 8% before tapering off a bit.
By the irony of coincidence, we also learned that wages adjusted for inflation had dropped 1.4% in the third quarter—a continuation of the brutal 12-year-long real wage decline that has hollowed out the middle class, pushed many people into the lower classes, and devastated the poor, though it has largely spared the top 5% [The Pauperization of America].
Other big US corporations already bathed in layoff glory this year. In May, H-P announced 27,000 job cuts, about 7% of its worldwide workforce. AMR is still trying to figure out how many people it will axe, maybe 11,000. In February, PepsiCo picked up some brownie points with plans to slash 8,700 workers, after J.C. Penney had said it would shed 5,500 workers.
Citi, the third largest bloat bank in the US by assets and the recipient of multiple bailouts by the government and the Fed, wasn’t a trailblazer. Its 11,000 planned layoffs bring the worldwide tally of 30 big banks to 171,000 since early last year, according to a Reuters analysis—and that doesn’t include the job cuts at innumerable smaller banks and brokers. The new CEO, Michael Corbat, had to show the world that he wasn’t lagging behind, that he was on top of it, that he was doing something. So he fired off a broadside rather than continue plinking at 150 people here and 3,000 there.
The announcement was successful—though the stock’s intraday high of $37 was just a reminder of where it had been: $557 in December 2007, before it fell of a vertigo-inducing cliff. On that chart, the movements over the last few years are barely perceptible squiggles.
In its press release, Citi said that it would undertake “a series of repositioning actions” that would “reduce expenses and improve efficiency.” The result would be “streamlined operations and an optimized consumer footprint.” But it would cost some serious money, or rather “repositioning charges” of $1.1 billion. When implemented in 2014, revenues might drop $300 million per year, but it would hopefully save $1.1 billion per year.
The wishes of a bank that has gotten way too big, unwieldy, and unmanageable. And dangerous. But instead of attacking its real problems, it introduced new jargon into the corporate lexicon: “repositioning actions” for job cuts and the corresponding “repositioning charges.”
There was talk in the press release of improving “productivity”—the passion of successful businesses. Which brings us back to the irony of coincidence: the release of the Productivity and Costs report by the Bureau of Labor Statistics: productivity jumped 2.9% during the third quarter.
Getting work done for less keeps companies alive in a competitive world. It preserves jobs—those jobs that didn’t get slashed in the process. It was a good report. Fed governors will slap each other and the Chairman on the back: hourly compensation rose 0.9%, so that workers feel as if they made a tiny bit more and are thus content, but it’s a form of deception as inflation once again outpaced their wage gains. Real wages dropped 1.4%.
For the vast majority of American workers, real wages peaked around the year 2000 and have since declined significantly, though nominal wages have risen, just not as fast as inflation. When the Fed speaks of inflation as a “target,” it aims at the earnings power of American workers—and it has been hitting it with stunning accuracy. The Fed has its reasons: declining real wages raise corporate profits and makes labor in the US more competitive with labor in countries like Mexico or China.
A competition that takes place more in the executive’s mind than in Mexico or China. He or she decides where to source components, where to invest and build plants and train a workforce, where to partner with suppliers. Many factors figure into this equation, prominent among them the cost of labor—and the curious fact that cutting headcount charms Wall Street more than creating American jobs.
Particularly interesting in this scenario is that the top 5% are just about back at their real wage peak, with the top 20% getting closer. But the remaining 80% are drifting ever lower (excellent graph by Doug Short). To maintain their standard of living and consume enough to keep GDP positive, as everyone expects them to, the bottom 80% have to borrow from the future—which the Fed, the great enabler, encourages them to do with their Zero Interest Rate Policy.
With ugly consequences, however, not only for consumers suffocating under piles of debt but also for life insurance companies; ZIRP demolishes their predicable return on investment and bleeds their reserves. So, during the off-hours on Sunday, when even astute observers weren’t supposed to pay attention, the National Association of Insurance Commissioners approved new rules that would allow life insurance companies to lower their reserves—at the worst possible time—having already forgotten all about the financial crisis. Read.... “Future Generations Have To Deal With The Financial Carnage”.
Speaking of Mexico: when President Obama met with the new President of Mexico, Enrique Pena Nieto, the press focused on issues ranging from energy to climate change. But the Mexican economy is outperforming the US economy, and the real immigration concern is Americans illegally moving to Mexico. Read.... Californians Are The New Wetbacks Headed For Mexico.