Tag Archives: money

the Employment Situation–now scanning the horizon for wage increases

October 6, 2014 By in employment, Employment Situation report Tags: , , , , , , , , Leave a comment

the Employment Situation

Last Friday morning the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation report for September.  The numbers were good– +248,000 new jobs added in the economy, +236,000 of them in the private sector.

Revisions were also favorable.  July figures were boosted from +212,000 to +243,000, and the worrisome +142,000 number posted for August was revised up to +180,000.

With last month’s poor employment gain showing now being interpreted as simply a hiccup in the reporting system rather than an indicator of a slowdown in hiring, the stock market’s attention is beginning to turn toward the wage gain information in the ES, rather than the employment numbers themselves.

wage gains?

what counts aw wages in the ES?

The figure itself appears to me to be pretty solid.  It’s derived from actual gross wage figures reported by the large number of substantial private sector firms who are participants in the BLS Establishment survey.  There is some government estimation, in the sense that the participating firms are thought to be representative of the economy as a whole.  But the data aren’t estimations.  They’re the real, complete salary figures.

The figures are gross, in the sense that they are before any deduction for taxes or benefits.

They’re salary figures only.  They don’t include payroll taxes that employers pay.  They also don;t include health or retirement benefits that employees may receive.

the current rate of wage gains…

…is 2% per year.

In one sense, this suits the Fed just fine.  The absence of sharp upward pressure on wages means the central bank doesn’t have to hurry to raise interest rates to stave off potentially runaway inflation (in the US, inflation is almost completely about wage gains).  The low number implies that employers can easily find all the qualified workers they need to grow their businesses either from new entrants into the labor market or from the currently unemployed.  They don’t need to poach new hires from rivals by offering very large pay increases.

On the other, it’s kind of eerie that the Fed can have had the monetary stimulus taps more wide open than ever before for over five years and not have wages be rising faster than this.

The wage gain numbers will increase in importance to Wall Street in the coming months, I think, as the Fed prepares to start raising the Federal Funds rate from the current level of zero.

My sense of the consensus belief is that:

–rates will being to rise next Spring,

–the “normal” rate is not the 4.0%-4.5% the Fed was talking about in 2012-13, but rather 2.5%-3.0%, and

–the Fed Funds rate could be halfway back to normal by the end of 2015–meaning five or six quarter-percent moves next year.

 

massive redemptions at PIMCO? …I don’t think so

September 30, 2014 By in bond market, Getting financial advice, How your broker gets paid, mutual fund holders and financial advisors, securities markets Tags: , , , , , Leave a comment

Late last week, bond guru Bill Gross, founder and public face of PIMCO, resigned from that firm to go to work for a much smaller rival, Janus.  This has led to speculation that the departure of Gross, who crafted the superior long-term record of the PIMCO flagship Total Return bond fund, would cause the loss of as much as 30% of the $1.8 trillion PIMCO has under management.

I don’t think the outflows will be anywhere near this bad, for a number of reasons:

1.  PIMCO deals in load funds, meaning that retail investors must pay a fee to buy them.  Two consequences:

–owners find the fact of the fee, not necessarily the size of it, a psychological barrier to sale.

–the load-fund client typically places a sell order through his broker.  The fact he can’t just go online in the middle of the night and redeem is another barrier to sale.  When called, the financial adviser can make reasoned arguments that persuade the client to hold on.  The broker may also convince the client to move to another bond fund in the PIMCO family, so that money leaves the Total Return fund but stays in the group.

What’s to stop a broker from using the Gross departure to call all his clients and tell them to take their money from PIMCO and place it with a different family of load funds–thereby generating another commission for him/her?  Generally speaking, such churning is illegal.  The transactions might even be stopped by the broker’s own firm.  Worse yet for the broker, this kind of call is pretty transparent as a fee grab.  It might also invite questions about where the broker was when the Gross performance began to deteriorate.

2.  My experience in the equity area is that while no-load funds can lose a third of their assets to redemptions in a market downturn.  Under 5% losses have been the norm with the load funds I’ve run.  Even smaller for 401k or other retirement assets.

3.  Money has already been leaving PIMCO for some time.

–Bill Gross’s performance has been bad for an extended period.

–He’s been acting like a loose cannon.

–Mohamed El-Erian’s leaving PIMCO was particularly damaging.  I think most people recognize that Mr. El-Erian is a professional marketer, not an investor.  But he was being paid a fortune to replace Gross as the public face of PIMCO.  Why leave a sweet job like that  ..unless the inside view was frighteningly bad?

At some point, however, PIMCO will have lost all the customers who are prone to quick flight.

PIMCO will try hard to get clients to stay.  It will presumably concede that it waited much too long to rein Mr. Gross.    But, it will argue, a seasoned portfolio manager at PIMCO, Dan Ivascyn, has now taken over the Total Return fund.  Supported by the firm’s broad deep research and investment staff of more than 700 professionals, Ivascyn will stabilize performance.  So the worst is now over.  In fact, Gross’s departure may have been a blessing in disguise.

4.  Arithmetic.  About $500 million of PIMCO’s assets come from its parent, Allianz.  Presumably, none of that will leave.  Third-party assets total about $1.3 trillion.  A loss of 30% of total assets would mean a loss of over 40% of third-party assets.  That would be beyond anything I’ve ever seen in the load world/

5.  Although individuals are prone to panic, institutions act at a more measured pace.  It would certainly be difficult to persuade institutional clients to add more money now, but it should be easier to persuade them to allow the assets they now have at PIMCO to remain, while keeping the firm on a short leash.

In sum, I can see that in the wake of the Gross departure, PIMCO could easily lose 10% of the third-party assets it has today.  I think, however, that the high-end figures are being put out for shock value and without much thought.

Wall Street firms are running out of retail brokers

June 27, 2014 By in Getting financial advice, How your broker gets paid, Investment firms, mutual fund holders and financial advisors, Where are the customers' yachts? Tags: , , , , , , , Leave a comment

In the post-recession world, traditional brokerage/investment banking firms have become much more interested in the steady income that can come from providing financial advice to individuals.  This is partly due to the demise of proprietary trading, partly a new respect for recurring income.   But Wall Street is finding it hard to maintain its retail sales forces.

One would think that with the Baby Boom beginning to retire, and having 401ks and IRAs rather than traditional pensions to support them in their “golden” years, there would be a lot of demand from this quarter for professional investment advice.  Yet, brokerage firms are finding it hard to recruit salesmen.  The demographics of the big (or “full service,” as they’re called) brokerage forces themselves are also telling:  lots of over-fifties, few under-thirties.  Why is this?

In general:

1.  The internet has replaced financial services as the destination of choice for ambitious college graduates.

2.  Brokerage firms have traditionally been hostile toward women, thereby eliminating half the possible job candidates.

3.  Being a financial adviser is–something I kind of get, but kind of don’t–a relatively low status position, down there with used car salesman.

Specifically:

4.  People under the age of, say, fifty (maybe it’s sixty, though) would prefer to deal with a discount broker over the internet than face-to-face with a traditional brokerage salesman.  I have no short answer as to why, but they do–even when introduced to an honest, competent broker by their parents.  Of course, maybe that in itself is the kiss of death.

5.  Traditional brokerage firms have decimated their research departments as cost-cutting measures during the recession.  This eliminates the only reason I personally would consider a traditional broker.

6.  A broker typically gets a little less than half of the commission revenue he generates (see my post on how your broker gets paid for more detail).  The rest goes to the firm, which uses part of that to pay for offices, recordkeeping, and marketing…   For many years, however, firms like Fidelity, Charles Schwab or other, more low-profile companies have been willing to provide established brokers with back-office support for a small fraction of that amount.  I’m not current on today’s arrangements, but while I was working a broker could easily increase his “net” commission from 45% to 80% by switching to one of these firms.  Yes, he might have to provide his own office, but the headline is that he could increase his income by 78% with the move.

 

What’s new about this situation isn’t that it’s happening–this has been going on for well over a decade–but that traditional brokers are finally concerned.   Their retail business model is broken, however, and I don’t see it getting fixed any time soon.  My question is how Baby Boomers are going to get the financial advice they need to manager their money during retirement.

 

 

 

 

 

 

 

The financial crisis and the renminbi

June 16, 2014 By in Asian economic development, China, economics, emerging markets, reserve currency, securities markets, Stock ideas Tags: , , , , , , , , Leave a comment

As I apparently never tire of writing, the financial crisis that came to a head five years ago has resulted in an extended period of emergency ultra-low interest rates.  The tried-and-true idea behind this is to give economic activity a boost by making loans carrying negative real interest rates readily available.  “Free” money should make anyone with a pulse willing to borrow and spend.

In the past, these low-interest periods engineered by the Fed lasted at most a year.  We’re now into year six of the current episode.

One result of this extremely long emergency period is that fixed income investors are currently lapping up low-coupon Italian, Greek…even Iraqi..sovereign debt.  And crazy (in my view) fixed income products like contingent convertibles, no-covenant junk bonds and pik (payment in kind) junk bonds, where interest is paid in new bonds, not cash, are all finding eager buyers, as well.

Another is that savers living on interest payments (increasingly Baby Boomers), who are in effect subsidizing the financial rescue, are suffering.  In fact, Millennials have just surpassed Boomers as the most important single demographic force in the US economy.

All of this is well-known.

Another development, though, which may turn out to be the most important in the long run, has escaped notice so far.  It’s the increasing acceptance of the Chinese renminbi in world trade and in investment.

Fifteen, or even ten, years ago, China was content with the fact that all of its trade was effectively done in dollars.  Beijing let Treasury bonds pile up in its coffers, to the point where it rivaled–and the surpassed–Japan as the largest creditor of the US.  It had become uneasy about this situation even before the financial crisis.  Stunned by the meltdown of 2008-09, China decided to offer its currency as a substitute for the dollar.

Until the past year or so, the renminbi has drawn pretty close to zero interest.   This is partly because at first it wasn’t easy for either foreigners or Chinese parties to use the renminbi in trade.  Also, foreigners can’t spend “offshore” renminbi in China itself.

Yes, the renminbi is easier to use today.  But I think a big reason the renminbi is suddenly extremely popular now is the very low-interest rate environment we’re in.  Multinationals with Chinese operations can save 3% – 5% by settling Chinese trade transactions in renminbi.  In other circumstances, this might not be worth the hassle.  But if your cash balances are earning effectively zero and if you have to buy a pik bond or Iraqi debt to get a 5%+ yield, then switching from dollar to renminbi trade settlement is a relative bonanza.

This movement seems to be feeding on itself.  It’s causing very rapid growth in renminbi use, admittedly from a low base.  I don’t think this development has any important immediate investment consequences.  But it could end up making a profound (negative) impact on the dollar and the euro if it continues–as I expect it will.  The ultimate result would be to make renminbi earners much more attractive as investments than they currently are.

The big investment question is when the inflection point will come, when the renminbi will begin to be regarded as a viable alternative to the dollar as the world’s reserve currency.  Perception will likely precede reality by a long stretch   …although I don’t think the tipping point will come this year or next.  I view this as something important to keep in mind, however, so we can recognize what’s happening if this trend develops faster than I now think it will.