Monthly Archives: September 2016

the September 7th Job Openings and Labor Turnover Survey (JOLTS) report

September 9, 2016 By in Federal Reserve, JOLTS report, Uncategorized Tags: , , , , , , , , Leave a comment

The Bureau of Labor Statistics of the Labor Department released its latest JOLTS report on Wednesday.

The main results:

–nationwide job openings are now at 5.9 million, the highest figure in the 16 year history of the report.  This is substantially above the 4.5 million level of 2006-07.

–the rate of new hires has been flat for about two years at just over 5 million monthly.  While this is 5% – 10% below the rate of 2006-07, the very high number of job openings would have been consistent with an unemployment rate of 3% ten years ago.  This seems to me to be a point in favor of the idea that the main impediment to filling jobs is finding workers with needed skills.

–3 million workers are voluntarily leaving their jobs monthly.  This is a sign they’re confident of finding employment again without much difficulty.  That’s back to the pre-recession levels of 2006, and almost double the recession lows.

All of this argues that the US is at or near full employment.  On the other hand, however, there’s little sign of the upward pressure on wages that this situation would have produced in the past.

 

Whatever the reason for slow-rising wages, it seems to me there’s no reason in the employment figures for the Fed to maintain anything near the current emergency-room-low level of short-term interest rates.

 

 

Henkel and Sanofi bond issues

September 8, 2016 By in Uncategorized Tags: , , , , , , Leave a comment

Henkel and Sanofi, two European industrials, just completed successful multi-billion euro bond offerings.  Both are reported to have attracted wide interest.

What’s striking to me is that parts of both issues carry negative yields.

Henkel 

The Sanofi website has yet to be updated, but the Henkel issue looks like this:

–€500 million in two-year bonds with an annual coupon of 0.0% and a yield to maturity of -0.05% (meaning that the bond was issued slightly above par)

–€700 million in five-year bonds with a coupon of 0.0% and a yield to maturity of 0.0%

–$750 million in three-year Euromarket (meaning issued outside the US) bonds with a coupon of 1.5%, and

–£300 million in six-year bonds with a coupon of 0.875%.

How can these new issue yields be so low?  

Three reasons:

–for each category, bonds in the secondary market are already trading at these levels,

–global bond investors believe that market yields will become more negative from where they are today, generating capital gains–small ones, in all likelihood, but gains nonetheless–for today’s buyers,

–bond managers don’t really believe yields will get more negative but know that if they are holding cash they’ll be left behind in the dust by competitors who are buying issues like these.  So they hold their noses and participate.

My guess is that there’s a liberal dose of #3 in managers’ thinking.

my thoughts

First is me reminding myself that what I really know about is stocks, not bonds.

The yields for €, £ and $ tranches are all roughly in line with their respective sovereign 10-year bond yields, taking Germany as the € exemplar, yielding -0.09% (Greek ten-year eurobonds yield +8.5%, by the way).

To the degree that these are rational economic commitments, and not just driven by the fear of missing out, buyers must believe that euroland rates will remain low for an extended period of time

They think there’ll be continuing mild weakness in sterling vs. the euro.

They believe that US rate rises over the next couple of years may be significant, given that the pickup over 3-year treasuries is 60 basis points.   The same is true for sterling bonds, but I’m attributing some of that to currency fears.

 

 

 

 

the Hanjin Shipping bankruptcy

September 7, 2016 By in chaebols, Uncategorized Tags: , , , Leave a comment

Last week Hanjin Shipping (HS), a subsidiary of the Korean Hanjin Group, one of that country’s big industrial conglomerates, filed for bankruptcy.

Korean chaebol conglomerates, their analogue of the Japanese zaibatsu/keiretsu, have traditionally been highly financially leveraged, at least in part on the assumption–again along Japanese lines–of unlimited financial support from the nation’s banks.

I decided long ago that there wasn’t enough payoff for me as investor to spend the time it would take to understand the ins and outs of Korean economic politics.  So I don’t know know why HS was allowed to enter bankruptcy, or whether an effective rescue will ultimately be mounted by the Seoul government.  (The Financial Times says that the chairman of the Hanjin Group is going to inject $90 million into HS and that another $90 million in government loans is being made available, but that this falls short of the $500 million+ HS needs just to pay for unloading cargoes already on its ships.)

The bankruptcy itself seems to have occurred, whether by design or not, in a way that is creating maximum chaos for HS customers:

–HS ships are not being allowed to dock at their destinations, since ports are not likely to be paid docking fees.  Nor are HS ships already in port being unloaded, since dock workers are unlikely to be paid for their work, either.  So cargo in transit is effectively trapped on HS ships.

–some ships have already been seized by creditors, at least partly because HS didn’t take standard legal measures to prevent this

–the move comes close enough to the holiday selling season in the US to be threatening some domestic merchants’ efforts to stock their shelves

–the bankruptcy may disproportionately affect other South Korean chaebols, since HS handles 40% of Samsung Electronics’ exports and 20% of LG’s

Temporary supply chain disruptions aside, the HS bankruptcy is unlikely to do much to address worldwide shipping overcapacity. The ships themselves will continue to exist, although they will doubtless end up in the fleets of financially stronger owners–either third parties or a restructured Korean shipping industry.  What I find most striking about this is the lack of advance planning.

 

politics and the Federal Reserve

September 6, 2016 By in Uncategorized Tags: , , , , , Leave a comment

In my post last Friday on the Labor Department’s most recent Employment Situation report, I commented that I thought it unlikely that the Fed would raise short-term interest rates before the election in November.  How so?   …because the Fed worries about accusations that it would be intruding into the electoral process.

A reader commented that he thought such worries would be silly, either on my part or the Fed’s or both.  I thought I’d respond here.

I agree that it makes little difference for the economy whether the Fed Funds rate is at 0.25% or 0.50%.  In fact, one could easily make the argument that extreme money stimulus is no longer needed and that the US would be better off with higher rates rather than lower.

 

A generation ago, when controlling nominal short-term interest rates was the Fed’s sole policy tool, it was the norm for the sitting President to pressure the Fed in an election year to lower rates, or refrain from raising rates, in order to keep his party in power.  It was also normal for the Fed to acquiesce.  Monetary policy lore says that Gerald Ford was the first president not to do so–and he lost his reelection race.  This behavior also gave rise to the belief that an election year would usually be an up year for stocks, followed by difficulties during the first year of the next term, as the new president removed the extra stimulus.

 

The appointment of Paul Volcker as Chairman of the Fed with a mandate to get the runaway inflation of the late Seventies under control changed this situation, making the Fed the de facto government mechanism for implementing economically necessary but politically toxic decisions to slow the pace of growth.

 

Seeking not to return to its role as a tool of one political party or another, the Fed seems to outsiders to have developed a rule that it will not act within, say, four or five months prior to a presidential election, to either raise or lower rates.  One might otherwise argue that it is giving an economic boost to–or at least signalling its approval of–the sitting president by lowering rates.  It would signal disapproval by raising them.

 

However, as Alan Kaplan points out, the Fed is political.  One could easily maintain that the Fed has enabled the continuing failure of Congress to enact sensible fiscal measures to support economic growth.  (The other side of the argument would likely be that although members of Congress may have cultural agendas, the ones who show up at briefings by the Fed are shockingly ignorant about basic economics.  So they have no idea of how to craft prudent fiscal stimulus.)

One other issue.  The emergency-low interest rate policy we’ve had in place for eight years places the interests of borrowers ahead of those of savers.  Another political decision.  A generation or two ago the latter would have been the ultra-wealthy.  In today’s world, savers are Baby Boomer retirees, whose ability to establish a secure stream of interest income to support their lifestyles has been diminished by government policy.