Saturday, June 15, 2013

Weekly Indicators: interest rates warning edition

 - by New Deal democrat

May monthly data reported this past week included industrial production, which was flat, and capacity utilization, which declined. Retail sales, on the other hand, increased sharply again. Producer prices increased, due mainly to gasoline. Consumer confidence as to the present declined, but future expectations, a leading indicator, increased significantly.

Let's start this week's look at the high frequency weekly indicators with the recent activity in interest rates:

Interest rates and credit spreads
  •  4.99% BAA corporate bonds up +0.09%

  • 2.12% 10 year treasury bonds down -0.02%

  • 2.87% credit spread between corporates and treasuries up +0.11%
Interest rates for corporate bonds had generally been falling since being just above 6% in January 2011, hitting a low of 4.46% in November 2012. Treasuries established a 2% high in late 2011, falling to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012. In the last month interest rates have backed up steeply, but until the last two weeks spreads were falling to almost a new low.

Employment metrics

American Staffing Association Index
  • 92 unchanged w/w, down -0.1% YoY
Initial jobless claims
  •   334,000 down -12,000

  •   4 week average 345,250 down -7250
Tax Withholding
  • $70.7 B for the first 9 days of June vs. $67.0 B last year, up +3.7 B or +5.5%

  • $146.4 B for the last 20 reporting days vs. $136.9 B last year, up $9.5 B or +6.9%
In the last month, the ASA has deteriorated to being negative compared with last year. After having a great 20-day comparison two weeks ago, for the second time in a row this week tax withholding had close to its worst YoY comparison in several months. Initial claims remain within their recent range of between 325,000 to 375,000.


Railroad transport from the AAR
  • -7800 or -2.8% carloads YoY

  • +100 or +0.1% carloads ex-coal

  • +6300 or +2.5% intermodal units

  • -1600 or -0.3% YoY total loads
Shipping transport Rail transport has had four negative weeks in the last several months. This week was mixed.  The Harpex index has been improving slowly from its January 1 low of 352. The Baltic Dry Index remains above its recent low and increased smartly this week.

Consumer spending Gallup's YoY comparisons remain extremely positive, as they have been for the last half a year.  The ICSC varied between +1.5% and +4.5% YoY in 2012, while Johnson Redbook was generally below +3%.

Housing metrics

Housing prices
  • YoY this week +7.2%
Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase made yet another 6 year record.

Real estate loans, from the FRB H8 report:
  • -0.2% w/w

  • up +0.1% YoY

  • +2.3% from its bottom
Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last several months the comparisons have completely stalled.

Mortgage applications from the Mortgage Bankers Association:
  • +5% w/w purchase applications

  • +6% YoY purchase applications

  • +5% w/w refinance applications
Although they rose this week, refinancing applications have decreased sharply in the last month due to higher interest rates, but purchase applications continue their slightly rising trend established earlier this year.

Money supply

  • +3.4% w/w

  • +1.2% m/m

  • +12.6% YoY Real M1

  • +0.2% w/w

  • +0.3% m/m

  • +5.9% YoY Real M2
Real M1 made a YoY high of about 20% in January 2012 and had generally been easing off since, but recently has increased again.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012. It has increased slightly in the last few months and has stabilized since.

Oil prices and usage
  •  Oil $97.85 up $1.82 w/w

  • Gas $3.66 up +$0.01 w/w

  • Usage 4 week average YoY -0.4%
The price of a gallon of gas, after declining sharply in March and April, rose again in May, and has steadied in the last couple of weeks. The 4 week average for gas usage remained slightly negative.

Bank lending rates The TED spread is still near the low end of its 3 year range.  LIBOR has made a 3 year low.

JoC ECRI Commodity prices
  • down -1.37 to 123.45 w/w

  • +7.03 YoY
This week we again have the pattern of gradual deterioration that began in February. But checking one year ago today, I see that we were in the midst of our summer swoon, nearly at contraction. This week indicators were certainly mixed but not flashing any imminent danger signs.

Once again temp staffing is becoming a larger concern as it declined again and remains below last year's rate. This week it was joined by the worst possible combination of interest rate moves - declining treasury rates vs. increasing corporate rates - which is what I would expect to see on the cusp of a recession. Because spreads were neear 12 month lows in the last few weeks, we don't have that signal yet. Real estate loans and commodities were neutral. Gas usage remains negative but may continue to reflect increased efficiency. Gas prices increased significantly but we haven't moved into a constrictive price range yet. This week like last week tax withholding had its worst comparison in months. Rail was mixed, up or down slightly depending on whether you include or exclude coal shipments.

The biggest positive remains very strong consumer spending. Jobless claims remain positive as well. More positives included house prices, YoY purchase mortgage applications, money supply, and overnight bank rates.

For the third week in a row, the message for me remains that if the data were actually rolling over, I would want to see a sustained increase in jobless claims and a sustained deterioration in consumer spending. That still isn't happening.

Have a nice weekend.

Friday, June 14, 2013

Weekend Weimar, Beagle and Pit Bull

It's that time o' the week.  I'll be back on Monday; NDD will be here tomorrow.

Until then ...

What Is the "Shadow Insurance" Industry?

     Over the last month, international tax planning and captive insurance -- two areas of law and tax planning typically shrouded in mystery -- have come to the forefront of the news cycle.  Unfortunately, both areas are typically poorly reported on not because of journalistic negligence or incompetence but due to the sheer complexity of the topics at hand.  Tax law is typically only taught in detail at the graduate legal level and captive insurance is not taught at all.  Moreover, the legal issues involved with captive insurance span a very broad swath of law including contracts, business entities, estate planning, tax planning, and insurance – three of which (estate planning, tax law and insurance) are in and of themselves legal specialties.   

     Recently, superintendent of the New York State Department of Financial Services began an investigation into the use by large insurance companies of captive insurance companies.  The purpose of this article is to provide the reader with a basic explanation and outline of captive insurance – what it is, how it came about and the current state of the law.  In addition, at the end I’ll talk a bit about the recent New York regulatory situation.  I’d be remiss at this point if I didn’t engage in a bit of self-promotion by stating that if you’d like to learn more you can purchase my book U.S. Captive Insurance Law or visit my firm's website.  At minimum, it will cure you of your insomnia.

            A captive insurance company is an insurance company owned by the insured.  The case law defines a captive as a “wholly-owned insurance subsidiary.”  While it may seem like insurance is always available, it can actually be harder to get than you’d think.  For example, if you own property in an area prone to being hit by hurricanes you’ve probably discovered that insurance coverage is very expensive.  Here are two additional real-world examples: due to the large amount of tort litigation in the 1970s, product liability coverage was impossible to get and in the mid-1980s, Congress amended the risk retention act allowing doctors to form risk retention groups because medical malpractice coverage had become extremely expensive.  Both of these industries are obviously important to the US economy, but their inability to procure insurance threatened their economic viability.  

            Even though companies started using captives for legitimate business reasons, the IRS had their doubts about this concept due to a very important technical legal reason: they were concerned that for tax purposes the captive was a “reserve.”  The key difference between a reserve and an insurance company is payments to a reserve are not deductible while insurance premiums are.  This key tax issue obviously meant there was a great deal of money riding on the legal outcome of captive litigation, which can be chronologically divided into four: periods: the reserve cases from the early 20th century, the early captive cases in the 1950s, the initial IRS victories from the late 1970s to the Humana case in 1987 and the IRS losses from Humana to the UPS case in the early 2002.  By the time of the UPS case, the writing was essentially on the wall that courts would accept certain types of captive structures.  At this point the IRS issued two Revenue Rulings which are essentially statements from the Treasury Department outlining how they will treat commonly occurring transactions.  In these rulings the IRS provided two legal safe harbors for captive insurance, essentially stating, “if you’re going to do this, here’s how you should do it.”

            While captives are typically associated with offshore tax planning, they are now an “onshore” phenomena: over 30 states have a captive insurance statute allowing for the formation of a captive in their jurisdiction.  While Colorado passed a statute in the early 1970s, Vermont’s statute passed in the late 1970s has become the de facto US model code or industry standard.  Some of the bigger captive jurisdictions are Vermont, Delaware and Utah.    

            So, let’s sum up so far.  Captives started in the 1950s because of deficiencies in the insurance market.  While the IRS challenged these structures for legitimate legal reasons, they were arguing against a historical tide.  Now, when properly structured and run, a captive insurance company is a valuable risk management tool used by over 5,000 US companies.

            Now let’s turn to the more recent events to see what’s going on.  The following excerpt is from Bloomberg:

Carriers in New York had $48 billion in “shadow insurance,” according to the report from Benjamin Lawsky, superintendent of the New York State Department of Financial Services. Lawsky has been investigating since July transactions that life insurers conduct with subsidiaries, known as captives.

Insurers use the captives to decrease the amount of capital they’re required to hold, Lawsky said in the report. The department said 17 New York-based firms use such transactions, without identifying them. The captives, which are typically based in other jurisdictions, are sometimes capitalized with letters of credit or intra-company guarantees, which can leave the parent responsible for claims if losses mount.

In essence, this is a question about capital and capital requirements.  According to the Third Edition of Barron’s Dictionary of Finance, capital is the “difference between the company’s asset and liabilities.”  This value protects the interests of the company’s policy holders in the event it develops financial problems.”  Ideally, capital should be in cash or a cash equivalent for fast access in the event it’s needed.  But while all US states allow a captive to use a letter of credit for capital, the real issue is the reserves backing the LOCs.  Under Basil II, the US requirement is 10% while for an offshore bank it’s between 1%-3%.  It is the difference in the reserve requirements among issuing institutions that has New York concerned.  And if a captive is backed by a personal or corporate guarantee you’ve potentially got bigger problems.

            So let’s play this out in a catastrophic situation.  Large US insurer has shifted some liabilities to a “web” of offshore captives.  While these captives are capitalized with letters of credit, the capital backing those letters is less stringent.  As a result, in the event a wave of liabilities hits the company, the possibility of capital being depleted increases.  This is the nightmare scenario concerning the New York authorities.

The issue here is not the use of a captive insurance company; it’s the capitalization of the captive that is concerning the regulators.  Captives are now an accepted and often used risk management tool.  However, this case does highlight the need (as with any financial tool) to use them correctly.  And it also shows that once again, New York state and its various institutions appears to be the real regulator of US markets while the FRB and SEC sit on the sidelines.


Gold Consolidating At Low Levels

The overall chart for gold is still extremely bearish.  Prices are below all the EMAs and are using the shorter EMAs for technical support.  Although rising, the MACD is still negative, as is the CMF.

But most importantly, prices are consolidating in a triangle consolidation pattern -- a pattern that has been forming for for the last month or so.

Thursday, June 13, 2013

Slow Export Growth and Weakening Manufacturing

First, consider this graph of the monthly export totals from the US:

After dropping sharply during the recession, exports came roaring back.  However, their overall rise has really stalled first around the $130 million/month area.  Also note that in the latter half of 2012 the overall increase was weaker than before.  This time corresponds to the weakness in the EU.

On the ISM manufacturing index, note that we see a drop in early 2011.  There is a slight downtrend from that time to now, with the numbers now fluctuating around the 50 level.

Retail sales a welcome positive surprise; good initial claims too

- by New Deal democrat

May retail sales posted a very unexpected +0.6% increase over April. Since CPI probably increased about +0.2% in May, this means that real retail sales increased ~+0.4%. The dark cloud in that silver lining is that presumably the savings rate fell to a new post-recession low, but we won't find that out for another couple of weeks.

Meanwhile initial claims decreased to 334,000. Once again this is within the range of a normal expansionary reading. Since the recent weekly high of 363,000 initial claims passed out of the 4 week average, that now declined to 345,250. This is still about 10,000 above what I would want to see in a normal expansionary environment.

While growth has still been not nearly good enough, it remains surprising just how resilient the economy has been.

Employer Behavior is Still Weak

The following includes the latest JOLTs survey:

The red line shows total employer hires.  There are few important points about this data.  First, it really hasn't increased that much over the duration of this recovery.  It fell to 3.6 million at the very end of the recession while rising to 4.4 million in the latest report.  Also note the level has been stagnant for a little over a year -- not a good development.  An most importantly, the current level is the lowest level seen in the last expansion which was itself called a jobless recovery. 

The good news on the chart is that openings continue to increase.  But the current level is still at low levels relative to the previous expansions.

Short version: employers are just not in a hiring mood right now.

Wednesday, June 12, 2013

Little Upward Pressure on Oil Prices

From Bloomberg:

The International Energy Agency trimmed demand forecasts for OPEC’s crude in the second half of the year amid signs of slowing growth in China as output from the producer group rose to a seven-month high. 

The Organization of Petroleum Exporting Countries will need to provide an average 29.8 million barrels a day in the second half, the IEA said today in its monthly market report, lowering its assessment from the previous report by 200,000. That would require OPEC to cut output by 1.1 million barrels from the 30.9 million it pumped in May, according to the report. The agency kept its global oil demand estimates for this year unchanged. 

“While Europe’s economic woes are taking a toll on demand, there are mounting signs that China’s oil use, like its economy, may have shifted to a lower gear,” the Paris-based adviser to 28 oil-consuming nations said. 

On the oil chart, notice that the 96-98 prices level is still providing resistance.

Copper ETF Breaks Key Support

The JJC chart has two key levels right now. The first is is in the lower 43 area -- the price level established early last November.  Prices tried to advance through this level three times in May and June, only to fall back.  The second important price level is the 40-40.5 area which was prividing support for prices.  Prices moved through this level at the beginning of the week.  Also note the continued underlying weakness of the technicals: The MACD stalled at 0 and has had a neutral reading for the last month; prices are below all the EMAs, including the key 200 day EMA.  

Market/Economic Analysis: UK

The UK has one fundamental problem: incredibly weak GDP growth.  Here are two relevant charts:

The top chart shows the overall level of GDP which shows the UK economy's overall level of GDP is still below its pre-recession peak.  The second chart shows the reason for this slow growth: they're had five quarters of Q/Q GDP contraction.

The main culprit has been a continued decline in manufacturing and, as a result, investment:

The top chart shows manufacturing has contracted in 6 of the last 7 quarters while the top chart shows a continual decline in manufacturing.

As a result of manufacturing's decline, there is no need to make capital investments.  Hence we see that gross fixed capital formation has declined in 5 of the last 8 quarters.

However, there are signs that overall activity may be picking up.  The following is from the Bank of England's latest policy minutes:

13 The preliminary release of Q1 GDP had shown a 0.3% increase, all of which had been accounted for by the services sector. In line with the usual pre-release arrangements, the Governor informed the Committee that industrial production had risen by 0.7% in March, on the back of a 1.1% increase in manufacturing output. The level of production in February had been revised down, however.
Nonetheless, the pattern of growth over Q1, together with the increase in the April CIPS/Markit indices, suggested that the level of overall activity at the beginning of the second quarter was likely to have been higher than the Committee had previously anticipated, and Bank staff’s projection for the
preliminary estimate of Q2 growth was 0.5%, although there was a sizable margin of error around such a forecast. Looking further forward in 2013, there was the possibility of a stabilisation in oil production in the North Sea and in the output of the construction sector.

14 Recent indicators of expenditure had been broadly positive. Retail sales had risen on the quarter and, accounting for seasonal factors, there had been a 16% increase in new private car registrations in the three months to April compared with the previous three months. Broad money holdings of the corporate sector had increased by around 10% at an annual rate in Q1, perhaps as a prelude to greater business investment. And, in line with the usual pre-release arrangements, the Governor informed the Committee that both imports and exports of goods had risen strongly in March.

As the GDP chart above shows, consumer spending hasn't been a problem.  It's been positive for the last 6 quarters.  Manufacturing has been the economic stick in the mud.  But that might be changing.  First, is the news from the Markit survey

The UK manufacturing sector continued its positive start to the second quarter of 2013. After returning to growth in April, May saw operating conditions improve at the fastest pace in over a year, with growth of production and new orders both accelerating. The domestic market was the main driver of new order inflows, although new export business also contributed with a modest increase.

At 51.3 in May, up from a revised 50.2 in April, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) posted its highest reading since March 2012 and remained above the neutral 50.0 mark for the second straight month.

The expansion of manufacturing output was broad-based in May, with growth registered by the consumer, intermediate and investment goods sectors. The strongest performance was seen at consumer goods producers. UK manufacturers generally linked higher output to improved new order inflows, successful new product launches and efforts to clear backlogs of work.

Here are the charts from the report:

The top chart shows that the overall Markit number has again moved into positive territory.  However, it is the lower chart that shows all three manufacturing sectors -- consumer goods, investment goods and intermediate goods -- are again printing in positive territory.

This is corroborated by the latest UK manufacturing report.  Although the latest numbers show a .2% drop, this followed two months of increases:

Despite the April fall, the figure is stronger than it was at the start of the year and provides an early indication that manufacturing output, which makes up just over 10 per cent of the economy, will lift GDP in the second quarter.
“The fall in manufacturing output does follow large rises in February and March and the underlying position is probably one consistent with some small forward momentum,” said David Tinsley, UK economist at BNP Paribas, a bank.

Let's turn to the UK charts.

Overall, the UK ETF is still in an uptrend.  There are two trend lines supporting the current rally.  Prices are approaching both.  While momentum is dropping, the risking CMF is positive. 

It's still way too early to get excited about he UK.  We've only got a few months of data compared to a horrendous track record over the last three years.  Also remember this is an economy that is providing a great example of why austerity is a bad idea. 

Tuesday, June 11, 2013

Gas prices probably caused Americans to lose ground in May

. - by New Deal democrat

We now have final gas price information for May. While prices increased dramatically from the beginning of the month, the average price for May was only about 1% higher than the average price for April:

In order to get the range of likely outcomes for inflation as a whole for the month, we can divide by 10 (blue) or 16 (green) and then add 0.1%. Here's a graph showing that outcome for the last 12 months (CPI in red):

The above CPI reading is not seasonally adjusted, but in May the adjustment is minimal, so seasonally adjusted consumer price changes are probably the same. In other words, CPI is likely to rise +0,2% +/-0.1% for May.

We know that average wages rose less than 0.1% in May, and retail sales are predicted to rise only 0.1% as well. In short, gas prices caused average Americans to fall behind last month.

Is the Monthly Economic Number Really Bullshit?

On Friday, I wrote the following about the monthly BLS data release:

OK -- I disagree with the birth/death model argument, but that's beside the point.  The monthly NFP data point -- and all of the hoopla that surrounds it in various forms -- is pure bullshit.

First, this was a bit of an over-reaction on my part.  What I meant to say was the hoopla associated with this statistics release is bullshit.  Every month, starting on about Wednesday, everything stops in anticipation of the report.  The excitement and tension builds with the financial world literally stopping by Friday morning.  Then, a ton of people (primarily political flunkies) who have no business analyzing the report do so, issuing proclamations from on high.  By Monday we all settle down forgetting the madness that is the monthly NFP release until the next round in 30 days. 

Just as importantly is the NFP report is subject to several revisions, meaning the number that has the most impact -- the headline number in the initial release -- could be revised to the point of being non-recognizable to the people who first heard it.  Now -- all economic numbers have this problem.   But very few economic numbers inspire the level of focus as the monthly NFP data.

Let's stipulate the following point: the jobs market is one of the most important economic indicators out there, if not the most important.  An economy that is primarily based on consumer spending cannot move forward without a healthly jobs market.  But, as the Atlanta Fed has correctly pointed out, the jobs market is composed of several different, measurable components.
  • Employer behavior: not what they're saying, but what they're doing relative to the jobs market.  Are they advertising open positions?  Are they actually hiring once those positions have been advertised?
  • Confidence: do businesses have enough confidence in the future to increase their hiring plans?  Are people confident enough in the jobs market to quit a job (with the most likely reason being that jobs are easy to get)?  More broadly, what opinion of the jobs market is held by both business and potential employees?  
  • Utilization: of all the people in the work force,is the economy effectively and efficiently using their talents?  Are people "just getting by" or are they really contributing to the overall development of the economy?
  • Leading indicators: where are we in the business cycle?  What is the likely direction of the jobs market in the next 3, 6, and 9 months? 
The point is there are a myriad number of components to a well-functioning jobs market.  A healthy market inspires confidence so that employers are willing to increase their hiring plans.  A longer period of confidence (multiple years, ideally) would lead to more efficient utilization of the labor force.  These developments could by objectively observed in employer behavior and the leading indicators.

The point of this is the monthly NFP ritual completely masks the complexity of the jobs market.  And that's something I'm finding more and more aggravating.  

South American ETFs Are Selling Off

Consider the following weekly price charts:

The Chilean ETF has an uptrend connecting the mid-2012 and end of 2012 lows.  Prices broke that trend a few weeks ago and are now below the 200 week EMA.  Additionally, they are sitting at price support established in mid-2012.  Momentum and volume readings confirm the break-down.

The Mexican ETF actually broke trend earlier this year, but consolidated sideways between the 70 and 76 price level.  Prices have bee moving lower for the last few weeks, breaking price support established earlier this year.  Momentum is dropping and volume is flowing out of the market.

The Columbian ETF broke its uptrend earlier this year.   Over the last few weeks we've seen some volume spikes as the selling has accelerated.  Momentum is dropping and money is flowing out of the market.

Peru's ETF had a solid uptrend that lasted over a year and a half.  But prices moved lower about 6-7 weeks ago, printing strong bars lower.  Also note that momentum is declining and the CMF is negative.

Brazil has been trading at low levels for the last year because of a slowing economy.  However, prices have dropping sharply over the last few weeks, bringing momentum down and leading to a slightly negative CMF reading.

Monday, June 10, 2013

The Japanese Sell-Off In Perspective

Since Abe's election in November, the Japanese ETF has rallied strongly, rising from a low of 8.75 to ~12.50, for a net gain of about 43%.  Prices dropped through support at the beginning of June on very strong volume, indicating that traders were concerned about the strength of the rally relative to the underlying economic fundamentals (essentially asking have we risen too far too fast).  Prices fell to the 200 day EMAn which is also near the 50% Fib level.

The weekly charts shows that prices have found support around the 61.8% Fib level for the mid-2012/mid-2013 price levels.

My guess is we'll continue to see a thinning out of the rally trade as people take more of a wait and see attitude about Abe's policies.  However, news like this certainly won't hurt:

Japan has revised up its first-quarter economic growth to 1 per cent, giving Prime Minister Shinzo Abe a boost as he seeks to strengthen his grip on power in next month’s upper house elections.
Government data released on Monday showed that the economy expanded at an annualised rate of 4.1 per cent between January and March, lifted by strong household spending and a pick-up in private residential investment. That was much higher than the preliminary estimate of 3.5 per cent, which was already the fastest rate recorded by any Group of Seven economy.

How Bad Is John Hinderaker's Economic Analysis? This Bad

John Hinderaker of the Powerline blog really wants to be taken seriously as an economic analyst.

He should really stop trying.  No, really.  He's that inept.

Case in point is his latest analytical failure, "How Bad Is Obama's Economic Record on the Economy?  This Bad."  He uses the NY Times articles,  "Many Rival Nations Surge Past the U.S. in Adding New Jobs." as the basis for his analysis.

The following should be noted at the start: international economic growth comparisons are extremely tricky and usually not a good idea.  The reason is simple: each country is unique, making a comparison an "apples to oranges" situation.  For example, comparing the US to practically any other economy runs into a problem of comparing the world's largest economy by far (the US is over twice the size of the next largest single country) to a much smaller economy.  And what if the country in question is part of the south-south trade, benefiting from the commodity boom of the last 10-15 years (Canada) while the other is not?  Or one country has a lower unit labor costs (Mexico) than then other?  You get the point.

Also note that we're dealing with employment which is probably the most complicated economic indicator out there.  As I've recently noted, Macroblog -- the blog of the Atlanta Fed -- has a much better read on this set of statistics with its spider chart.  But this level of nuance is beyond Hinderaker's capabilities.

While noting that US employment growth has lagged other countries, the Times article does a very good job of explaining why:

A big part of the problem, economists say, is just how big a hole the American economy fell into in the first place. Not only did the global economic downturn begin here, it also enveloped the housing market and the banking system, sectors that were largely spared in many other countries. 

“Canada didn’t really have much of a housing bust,” Mr. Katz said.


Although the construction field gained 69,000 jobs in the first five months of 2013, with 5.8 million jobs in May, that was still nearly two million fewer jobs than in 2007, according to the Labor Department.  

Remember that at the height of the Great Recession, the US was losing jobs at a 600,000/month clip.  Here's a chart of the total establishment data to highlight the issue:

The US lost over 8 million establishment jobs from 2008-2010.  And remember that on the other side of the job losses is a balance sheet recession which takes far longer to recover from.

To highlight the Times' point, here's a chart of construction and manufacturing jobs:

Construction job losses (red) are scaled on the left and manufacturing job losses (blue) are scaled on the right. Construction lost over 4 million jobs -- accounting for nearly half of the losses while manufacturing (the blue line) lost over two million jobs.  Both areas are subject to slow growth in the current environment for two unrelated reasons: housing is only now just starting to make its economic comeback and manufacturing is now far more automated meaning the labor need isn't nearly as high.  That means blue collar employees need to change jobs or in some cases careers to obtain employment.  But regardless it also means that the pace of jobs growth for both of these sectors that saw massive job-cuts will be very slow.

And we should also highlight the drop in government employment that's occurred during this time:

Total government employment has dropping between 600,000-700,000 over the same period.  And remember that most of these loses are occurring at the local level as such non-essential people as teachers, police officers and firefighters are laid off. 

Hinderaker offers this analysis of the above issues: "The Times offers several possible explanations for our poor performance, while avoiding the most obvious one: we have an utterly inept government, which, on top of its incompetence, places little value on economic growth."

Actually, no.  The Times explains the problem by providing economic nuance which isn't Hinderaker's strong suit.  They also use data.  

But that's beside the point.  The real coup de grâce of Hinderaker's piece is his international comparison of the US to Mexico and Canada.  And why is that?  Because they are fundamentally different economies than the US.  First, Canada is a raw material exporter.  That means that over the last 10-15 years the global commodity boom (with raw materials exporters selling anything that wasn't tied down to China) has been very good to Canada.  As Wikipedia notes, "Canada is unusual among developed countries in the importance of the primary sector, with the logging and oil industries being two of Canada's most important."  It's also why Canadian negotiators ate US negotiator's lunch during NAFTA negotiations. 

And then there is the fact that Canada completely avoided the financial meltdown that occurred in the US.   I'll let Barry explain that one:

I was reminded of this while reading a Real Time Economics post on Why Canada Can Avoid Banking Crises and U.S. Can’t. It discusses a new paper (and forthcoming book) by Charles Calomaris and Stephen Haber. The thesis is that Canada has a French legal history, which created a “highly-centralized federal government which controlled economic policy making and had built-in buffers for banker interests against populist forces” as the primary reason for its stability in banking.


Back to Canada: The legal backdrop is a fascinating concept, one I want to explore further. But I cannot help but wonder if this line of thinking came about to avoid the obvious issues in the US, namely, the crisis was driven in large part by the radical deregulation. 

In Canada for example, there are other factors beyond the French legal history worthy of discussion. Note that in Canada, bankers cannot lobby regulators. Unlike the US, their Supreme Court does not think corporations are people. In Canada, money is not speech. There are explicit limitations on Corporate political donations. And where as we have a revolving door between government service and the private sector, the restrictions are much greater in Canada. All of this adds up to a much more intensely regulated banking system than in the America.

Remember that this crisis -- just like the Great Depression -- started as the result of a US financial crisis.  This is a primary reason the US is in the middle of a sub-par recovery.  For further information read the chapter on the Great Depression from Milton Friedman's Monetary History of the United States.

And as I've noted before, I'm bearish on Canada for a number of fundamental reasons: (see here, here and here).  In fact, it appears they're about to enter their period where balance sheet issues will constrain growth.

And the final issue with Canada is that on a year over year basis, the US has consistently outperformed the Canadian economy in constant terms since NAFTA went into effect, as this graph from the St. Louis Fed shows.  This is in complete contrast to Hideraker's assertion.

And the comparison to Mexico is just plain stupid.  Why?  Because they're a second world nation with cheap labor relative to the US.  Not only does their inclusion in NAFTA mean that any non-NAFTA country is going to locate their manufacturing facilities there, but it also means it's cheaper for US companies to locate their manufacturing facilities just across the Mexican border, assemble goods south of the border and then ship products to the US.  Here's a chart comparing US and Mexican growth on a year over year basis since implementation of NAFTA on January 1, 1994:

The bars in blue are Mexican Y/O/Y GDP growth and show that for most of the last 20 years Mexico has outgrown the US.   And Mexico's economy appears to be hitting some problems (see here). 

And then there is this Hinderaker gem:  We have consistently fallen behind better-run countries like Germany and Australia.  Does he even know that
  • Both countries have universally available health care,
  • Germany encourages and welcomes unions  
  • Australia is a raw materials exporter who benefited from Chinese growth and is currently having problems as China slows
  • Germany encourages green energy savings
  • The German government actively discouraged companies from laying people off, thereby interfering in the free market
The countries that he says are all better run are far more left leaning then he actually.

And finally so long as we're comparing presidential records, let's compare non-farm job growth of Bush II with Obama.  Remember that according to Hinderaker Bush II was a genius of immense proportions (he has since scrubbed this from his blog probably due to embarassment, but nothing dies on the internet):

"It must be very strange to be President Bush. A man of extraordinary vision and brilliance approaching to genius, he can't get anyone to notice. He is like a great painter or musician who is ahead of his time, and who unveils one masterpiece after another to a reception that, when not bored, is hostile."

Bush was sworn in on January 20, 2001.  In February of 2001 there were 132,617,000 non-farm jobs in the US.  His last month of office was in January 2009 when there were 133,631,000 non farm jobs for a net gain of 1,014,000 jobs. 

Obama was sworn in in January of 2009.  In February of 2009 there were 132,936,000 non-farm jobs in the US.  In the last reading of employment (May 2013) there were 135,637,000 non-farm jobs in the US, for a net gain of 2,701,000 non-farm jobs.

For every job Bush II (the man of extraordinary vision and brilliance) created, Obama has created 2.66.  

Mr. Hinderaker, if Obama's performance is bad, what is Bush's?


Market/Economic Analysis: US

As usual, let's start with last week's data:

The good

The best piece of news last week was the employment report which showed an increase of 175,000 last month.  NDD correctly called it a mixed report that isn't good enough.

Auto sales gave us another piece of solid data, with a 2.7% increase m/m and 10% increase Y/Y.  For the graphs, see Calculated Risk.  Strong durable goods sales figures tell us the consumer has a certain level of confidence in the economic future.

The service sector of the economy picked-up: The NMI™ registered 53.7 percent in May, 0.6 percentage point higher than the 53.1 percent registered in April. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.5 percent, which is 1.5 percentage points higher than the 55 percent reported in April, reflecting growth for the 46th consecutive month. 

Construction spending also increased: The U.S. Census Bureau of the Department of Commerce announced today that construction spending during April 2013 was estimated at a seasonally adjusted annual rate of $860.8 billion, 0.4 percent (±1.6%)* above the revised March estimate of $857.7 billion. The April figure is 4.3 percent (±2.0%) above the April 2012 estimate of $825.1 billion. Note that residential construction increased at an 18% Y/O/Y clip, and total private construction is up 9% Y/O/Y. 

The trade balance registered -$40.4 billion  in the latest report.  Of particular interest here is the graph of US exports:

The last 12-14 readings have this number printing right around the $130 billion level.  This shows how the EU and Chinese slowdown are hitting US exporters and partially explains the weaker manufacturing numbers we're been seeing.

The bad 

The  manufacturing ISM number printed at 49.  This is actually in line with some of the weakness we've see in the regional manufacturing surveys over the last few months (see the latest Philly Fed index and Richmond Fed survey).  The internals of the report showed the slowdown was caused by slowing international markets and contracting government spending in the US.


We're still in a moderate expansion, as explained by the Fed in the latest Beige Book:

Overall economic activity increased at a modest to moderate pace since the previous report across all Federal Reserve Districts except the Dallas District, which reported strong economic growth. The manufacturing sector expanded in most Districts since the previous Beige Book. Most Districts noted slight to moderate gains in consumer spending and a moderate increase in vehicle sales. Tourism showed signs of strength in several Districts. A wide variety of business services expanded, and transportation traffic increased for producer, consumer, and trade goods. Residential real estate and construction activity increased at a moderate to strong pace in all Districts. Commercial real estate and construction activity grew at a modest to moderate pace in most Districts. Overall bank lending increased since the previous report. Credit quality and deposits increased, while credit standards were largely unchanged. Agricultural conditions remained mixed across Districts, as weather patterns varied. Overall activity in the energy sector was flat, and mining was down. 

Let's turn to the charts:

The 60 minute SPY chart shows that prices moved from 169-160 in a disciplined trend channel.  After hitting support right around the 50%  Fib level, prices moved strongly higher, breaking through the upper channel.

On the daily chart, note that prices hit support at the trend line the connects the early January and mid-April lows.

Both ETFs that track the belly of the treasure curve are still trading right at technical support.  However, a move lower looks more and more likely.  Consider the following news:

Investors have pulled a record $12.53bn out of global bond funds in the past week, beating a speedy retreat from fixed income holdings that can fall in value as interest rates rise.

Two-thirds of the total outflows came from US funds, where nervousness over the Federal Reserve’s next moves in monetary policy is at its height. EPFR’s data stretch back to 2001.

The dollar has fallen sharply over the last week, dropping a little over 3%.  Prices are now right below the 200 day EMA and resting on the 38.2% Fib level from the mid-July highs and mid-September lows.  We see a bit of a volume spike, but nothing indicating more than a standard sell-off. 

Sunday, June 9, 2013

A thought for Sunday: I'm not surprised, I watch the 'Investigation Discovery' channel

- by New Deal democrat

[Regular nerdy economic blogging will resumer tomorrow]

Revelations that the NSA is vacuuming up nearly every bit of digital information passing through US telecommunications systems have been on the front pages for the last few days, with most in Congress and the Administration reassuring us that (a) it is nothing to worry our pretty little heads over, and (b) a horrible breach of security that will help the terrorists. Unless the terrorists in question are dumb as doorknobs, this isn't telling them something they don't already know.

I confess right here, one of my guilty pleasures is watching the 'Investigative Discovery' channel, which is basically 24/7 murder detective stories. If you watch, it doesn't take long to realize that modern police work invovles, almost from the very start of an investigation (1) obtaining video surveillance from all nearby cameras, and once a suspect is identified, (2) checking video surveillance of their vehicle to determine where they were at the time of the crime, and (3) checking their cell phone records to see what tower they (or their phone) was closest to. Usually this last item is limited to calls, but in a few stories it has been suggested that simply having the cell phone "on" is enough to determine what cell tower it is pinging off of.

This all makes for great detective work, but it ought to disabuse any viewer of any idea that a record of their motor vehicle travels isn't being stored on a server somewhere (how many expressways, toll booths, and traffic lights don't have cameras there days?), and every cell phone record is also being stored by a server at least by the telecommunication company transmitting the call.

If this is pretty obvious to me simply from watching a crime detection cable channel, I'm pretty confident it is known to every non-retarded terrorist and intelligence organization in the world.

So if you start from the presumption that every act you do using electronic transmission, and all of your travels along major public highways are being monitored and stored, you're almost certainly close to the truth. The only questions that remain are (a) is it legal? and (b) how comfortable are you with it?

Constitutionally a search warrant is only required if law enforcement authorities want access to your property or your body. Aside from that they can take all the fingerprints, documents, trash, and cotton swabs of DNA they want. There are some laws designed to limit that (e.g., wiretap authorizations), but that of course depends on legislation. It is simply not a Constitutional right.

The two sources of legal authority most noted for the total sweep of non-private data are the Authorization to Use Military Force after 9/11 and the Patriot Act. The former is the more sweeping, becuase it is wrapped in Congress's affirmative Article I, Section 8 authority to authorize international hostilities (normally we think of this as just "declaring War", but if you read the provision it is clear that it encompasses an entire cornucopia of selections that may be authorized or limited, such as Writs of Reprisal (a limited hostile act short of War. Reagan's retailiation against Ghaddafi for downing a civilian jetlliner over Lockerbie, Scotland,in the 1980's is a perfect example).

The September 2001 AUMF was both very limited and exceptionally broad. It was limited because it only authorizes force "against those nations, organizations, or persons he determines planned, authorized, committed, or aided the terrorist attacks that occurred on September 11, 2001, or harbored such organizations or persons". At this point 12 years later it is pretty clear that only two individuals ramain who fit under this heading: Mohammed al-Zawahiri, Bin Laden's Egytpian #2; and Mullah Omar, who headed Afghanistan's Taliban government that gave Bin Laden his base. Any 18 year old Jihadi now was a 6 year old little kid in September 2001, and as far as I am concerned, the AUMF can't reasonably re read to include him.

The problem with the AUMF is that Congress completely abandoned to the President the right to determine to whom the AUMF should apply, by the language "the President is authorized to use all necessary and appropriate force against those nations, organizations, or persons he determines planned, authorized, committed, or aided the terrorist attacks ". This is simply a complete abrogation of Congress's Constitutional authority, and it has been interpreeted by the Executive to include permanent hostilities against corporate style organizations worldwide with no exception for the domestic US.

To put it simply, there is no excuse for the September 2001 AUMF to remain in force except as a manhunt for two named individuals who were involved in that attack.

That leaves us with the Patriot Act, which is not clothed in any affirmative power to make War by Congress, and so does not (or at least should not) supercede other Constitutional protections.

Should the nearly total gathering of electronic information concern you? Imagine if the law enforcement authority gathering such information was your local police department, who ultimately answer (and maybe get appointed or promoted by) your local Mayor or Council. If you were involved in a dispute with your local government, say over zoning or development, how much faith would you have that your Mayor or Council wouldn't request from a friendly office records of your vehicle's movement about town, and your cell phone records, to find out who you've been meeting with and what plans you might be making.

If you wouldn't have total faith in your local political bosses, why should you have any more faith in state or national officials? I would say the chances of this power being used in order to spy on political opponents is, over time, roughly 100%. In fact, we already have an example in history of J. Edgar Hoover, who almost certainly did exactly that with the technology and abilities of the mid-20th Century, which made Congress and a succession of Presidents afraid to cross him. Whether you agree with them or not, there's pretty good evidence that domestic electronic surveillance was used against the "Occupy" movement. If you are not concerned by that, then how about if it is used against the NRA?

So we really don't need all the inner details of the NSA domestic spying programs. to "have the debate" Obama says he welcomes. How much of your private life (and I think your private life reasonably includes your personal phone calls and your everyday travels) are you willing to share with political officials and their law enforcement employees on a permanent basis? What kind of firewalls against abuse need to be erected? Personally, I think the requirement of specifically tailored search warrants reviewed by an impartial magistrate, and regularly made public, is the very least protection - in other words, a start. Between the 2001 AUMF and the Patriot Act, I do not believe it is presently factually accurate to refer to the US as a Republic. I would very much like to have that Republic back.