Tag Archives: economy

the August 2014 Employment Situation

September 8, 2014 By in employment, Employment Situation report, wage gains Tags: , , , , , , Leave a comment

Last Friday, the Bureau of Labor Statistics released its monthly Employment Situation report at 8:30 am Eastern time.  The figures were at least mildly disappointing.

The country added +142,000 new positions during the month, +134,000 of them in the private sector, +8,000 in government.  That broke the string of extremely positive, over-+200,000 months of job gains.  Revisions to prior months’ data were also negative, subtracting a net of -28,000 positions from the reports for June/July.

Other statistics, like the unemployment rate, the work week, the pace of wage gains…, were basically unchanged.

Although the figures weren’t great, they weren’t horrible, either.  And, of course, they’re subject to possibly large revisions over the coming two months.

For equity investors, the most interesting aspect of the report is that, despite its elevated level, the US stock market shrugged off the so-so news and ended the day higher.  This would have been the perfect excuse for a selloff had short-term traders been feeling bearish.  However, just the opposite happened.

Abe’s arrows: implications for the EU

September 5, 2014 By in Current Market Thoughts, economics, EU financial crisis, Recent Market Action, Strategy Tags: , , , , , , Leave a comment

Japan’s Shinzo Abe began his three economic arrow campaign–intended to rescue his country from a quarter-century of economic malaise, shortly after taking office in December 2012.

The arrows consisted in:

–sharp depreciation of the currency

–massive deficit spending, and

–supposed structural reform of a highly government-protected and increasingly inefficient industrial base.

I’ve thought from the outset that Mr. Abe would not be able to muster the political courage/clout to fire a meaningful third arrow.  Unfortunately, this has proven to be the case so far.  As a result, the “arrows” have given a huge economic gift to the entrenched industries of yesterday that dot the Japanese landscape, at the cost of lowering the living standards of the average Japanese citizen and a massive decrease in national wealth.

 

Demographically, the EU resembles the Japan of ten or fifteen years ago.  Each member country has a profound belief in its own exceptionalism that derives from its geographical and cultural heritage.  Economically,  Europe has also seen a generation of political/cultural elites staunchly defending the status quo, lining their own pockets while living standards for the average citizen deteriorate and the industrial/financial national wealth is frittered away.

The easy comment–one I’ve made a number of times–is that the EU, and more specifically Continental Europe, is a new instance of the Japanese disease slowly starting to unfold.

However, though the heavy betting has to be that the Continent will follow down the same path blazed by Japan, could the economic result be different from that of the Land of Wa?

Maybe so.

–For one thing, Europe has the fate of Japan as a cautionary tale.

–Europe also has the example/leadership of Germany.

–Organized labor is a distinct political force in Europe, rather than simply an arm of management, as in the case in Japan.  This can present its own set of problems, but at least there’s a voice at the bargaining table demanding that increased profits be shared with workers.

–The least well-functioning parts of Europe have already substantially reformed themselves once in the recent past, when they vied for entry into the euro–although admittedly backsliding occurred almost instantaneously after admission.

I think the place to look for signs of deviation from the Japan road map is Italy, where Prime Minister Renzi is attempting to make basic economic improvements.

investment significance?

I think there’s at least a short-term opportunity to profit from holding European multinationals.  Whether this is simply a “trade,” meaning we have to be seriously looking to exit in maybe a year, or more than this will depend on Europe’s ability to break the grip of the status quo.  Watch Italy.

 

 

 

the euro at $1.30–what’s a stock investor to do?

September 4, 2014 By in currency effects, Current Market Thoughts, EU financial crisis, negative interest rates Tags: , , , , , Leave a comment

The €, which had been on a steady rise vs the US$ since spending time at around the $1.20 level two years ago, has been sliding again, after peaking at $1.39 in May.

Several related reasons:

–anemic economic growth, which has conjured up in investors’ minds the specter of deflation and begun to evoke comparisons of the EU with 1990s Japan

–political troubles with Russia and Ukraine, which have created higher uncertainty and lower trade flows, and

–further cuts in interest rates by the ECB to address the persistent economic weakness.  Today’s include a reduction in the equivalent of the Fed Funds rate from 0.15% to 0.05%, and in increase in the penalty fee for keeping deposits with the ECB (instead of lending out the money) from 0.1% to 0.2%.

The important thing for equity investors to note is that the financial markets are reacting to the bad economic developments by selling the currency rather than by selling €-denominated stocks and bonds.  The latter two have been rising in € terms, rather than falling.  The decline against the $ and £ has been about 6% since the peak in May, and about 4% against the yuan.

The currency decline will likely end up being a much larger spur to economic growth than the interest rate cut, which is all about numbers that are basically zero already.  But currency declines rearrange the focus of growth, as well as promoting growth overall.  Export-oriented and import-competing industries are relative winners: purely domestic companies, like utilities, are relative losers.   Typically, too, the currency decline comes in advance of the positive equity reaction.

So, I think it’s time to look at Continental Europe-based multinationals again.  This “good” news doesn’t apply, of course, to their UK-based counterparts, since sterling has been steady as a rock against the dollar recently.

The flip side of this coin is that US- or UK-based multinationals that have large businesses on the Continent have lost a significant amount of their near-term allure.

 

 

why the Fed is looking at/for wage gains

August 19, 2014 By in economics, employment, Uncategorized, wage gains Tags: , , , , , Leave a comment

This is Jackson Hole week, when the world’s central bankers convene in Grand Teton National Park in Wyoming to compare notes.  From their meetings, we’ll get a better sense of what the architects of the current emergency-easy money policy are thinking and planning.

Conventional wisdom  is that in times of economic stress the central bank should lower interest rates to a point significantly below the rate of inflation–and keep them there until people and companies borrow the “free” money and invest in large enough amounts to launch an economic rebound.

One indicator that the Fed is watching carefully is the rate at which wages are rising.  In theory, employers only raise wages a lot when they’ve run out of available unemployed workers and can expand only by headhunting away people who are already employed elsewhere.  So wage increases at a faster clip than inflation mean it’s high time to tighten money policy;  sub-inflation wage gains–the kind we have now–mean there’s no rush.

Policymakers appear to be giving this rule of thumb a rethink, however.

For one thing, short-term interest rates have been at effectively zero for over half a decade.  You’d think unequivocal signs of economic strength should have been evident long before now.

There’s no sign I can see that central bankers have any sympathy for the plight of savers (read: the Baby Boom and the elderly), whose desire for safe and stable fixed income investments has been the chief casualty of the economic rescue effort.  However, they do seem to be concerned that the search for yield in a zero-interest-rate world has caused savers to buy exotic instruments (hundred-year bonds, contingent convertibles, for instance) that will likely suffer wicked losses as rates begin to eventually rise toward a normal 3.5% or so.  Is the cure worse than the disease, at this point?

Lately, the money authorities seem to be expressing a second worry.  Suppose the emergence of inflation-beating wage gains isn’t the reliable indicator it’s thought to be.  If so, the Fed may be distorting the fixed income market–and buying trouble down the road–for no good reason.

Why would sub-inflation wage gains be the norm, even in an expanding economy?

Maybe in past economic cycles, high wage gains were caused mostly by the tendency of union contracts to index wages for inflation, not by overworking headhunters.  Maybe the psychology of managements penciling in inflation-plus or simply inflation-matching annual wage increases for the workforce has gone by the boards in a world that has experienced two ugly recessions–the more recent one an epic decline–since the turn of the century.  …sort of in the way inflationary expectations have disappeared from the minds of current workers.  Again, if so, maybe interest-rate normalization should happen at a faster pace than currently planned.

We’ll likely hear more on this topic as this week’s meeting gets under way.

oil: the view at 30,000 feet

August 15, 2014 By in Energy, Industry Analysis Tags: , , , , , , , Leave a comment

Oil is either a very complex subject or a very simple one.

There’s a wide variation among various types of oil, the kinds of input a given refinery can process, the politics/stability of the countries that provide the different grades of oil to the market, and the regulatory regimes in different countries where refined oil products are used.

Nevertheless, there are general patterns that can be of investment significance.

In particular, I think it’s at least possible that we’re entering a period of extended oil price weakness, due to slow economic growth in the US, and to a lesser extent in the EU, plus the sharp rise in unconventional oil production in the US.

Here’s why:

supply/demand

In the short run, oil supply is relatively invariant.  Major oilfields are very expensive long-term projects designed to bring large deposits of subterranean oil to the surface.  Once the oil starts flowing, it can’t be stopped without risking major damage to the oil reservoirs.  This could mean a lot of extra drilling to reach now-isolated pockets of crude.  So capping wells to reduce supply generally isn’t done.

Same with oil demand.  In the absence of large price moves,  people will continue to use transportation fuel in the same way.  Industrial processes won’t change.  So this major portion of demand is pretty much locked in.  And until a shockingly large heating bill comes in the mail, people won’t turn the thermostat down.

Because both supply and demand are relatively inflexible, small changes in either can result in large changes in price.  We saw this a few years ago when oil spiked above $150 a barrel as desperate users bid up the price of scanty supplies.  But the opposite could equally well occur:  panicked producers, running out of storage space to put barrels of crude customers don’t want, offering large discounts to get someone to take them off their hands.

On the supply side, OPEC is the largest factor, accounting for about a third of world output.

On the demand side, the US is the world’s largest, and most profligate, petroleum consumer.  We use 20% of the world’s oil while representing less than 4% of the globe’s population.  As I invariably try to work into the conversation, the US is also the only developed country not to have an energy policy that promotes conservation.   The intent has been to protect an inefficient domestic auto industry that ended up imploding in the last recession anyway.  One unintended effect has been to help preserve OPEC’s immense economic power.

shale oil

What’s new in the supply/demand story is coming out of the US.  It’s the rapid rise in production of shale oil, which has lifted total US crude output from 5 million barrels a day in 2008 to just shy of 9 million now–with at least another one million b/d gain likely over the next year.

Arguably (read: this is what I think, but have no definitive evidence for), the main reason oil prices haven’t been spiking up despite turmoil in the Middle East is the steady new flow of US crude from places like North Dakota.

The International Energy Agency has just pared a bit from its estimate of oil demand over the coming year, based on slowdown in the EU.  Large-scale purchases of new, more fuel-efficient cars in the US may begin to put a lid on domestic gasoline consumption, which is the biggest part of US oil usage.  China, the #2 world oil user, with about half the consumption of the US, is also growing a bit more slowly than anticipated.

Will all this be enough to tip the world oil supply/demand balance in favor of oversupply (and significantly lower prices)?  Who knows?   …but maybe.

effects?

…a shot in the arm for stocks generally (other than the oils).  Lower gasoline prices would mean higher discretionary income for ordinary Americans, which would be a plus for mass-market consumer stocks.

Bet on this?   …no.  Just something to think about, to consider what we’d buy if signs of a weakening oil price began to emerge.