Mish's Global Economic Trend Analysis

Margin Requirements Double on Yuan Currency Trades; China Recap
Hoisington 4th Quarter Review: Failure of the Fed, How QE Acts to Contract the Economy
Wholesale Trade Down 1%, Inventories Down -0.3% but Inventory-to-Sales Ratio Rises
Multiple Jobholders Artificially Boost "Full-Time" Employment: Does the Sum of the Parts Equal the Whole?
Third Strong Payroll Number +292,000; Unemployment Unchanged at 5.0%

Margin Requirements Double on Yuan Currency Trades; China Recap

Posted: 08 Jan 2016 04:45 PM PST

As volatility increases, so do margin costs. Consider this image of an email from FXCM forwarded by reader Jacob.

click on image for sharper view

The margin on Yuan (CNH) on Forex has doubled from $50 to $100, the most of any currency pair. The Hong Kong Dollar (HKD) also trades at $100 margin.

For comparison purposes, margin on euros is $26. Margin on Swiss Francs (CHF) is $97.50, no doubt reflecting the surprise peg drop by the Swiss central bank.

Here is the Complete List mentioned in the above image.

FXCM wants to be prepared in case of another sudden Yuan devaluation.

China Recap

Mike "Mish" Shedlock

Hoisington 4th Quarter Review: Failure of the Fed, How QE Acts to Contract the Economy

Posted: 08 Jan 2016 01:17 PM PST

Lacy Hunt at Hoisington Management emailed their 6-page fourth quarter report (not yet posted on the Hoisington Website).

As always, the report is well worth a good look. One particular section caught my eye. It's on the failure of QE to produce the expected growth. Here are a few excerpts.

In a paper presented at the Fed's 2013 Jackson Hole Conference, Robert Hall of Stanford University and Chair of the National Bureau of Economic Research Cycle Dating Committee wrote "an expansion of reserves contracts the economy."

Causal Mechanism Explains Counter-Productiveness of QE and Forward Guidance

This empirical data [the Jackson Hole presentation] notwithstanding, a causal explanation of why QE and forward guidance should have had negative consequences was lacking.

This void has now been addressed by "Where Did the Growth Go?" by Michael Spence (2001 recipient of the Nobel Prize in economics) and Kevin M. Warsh (former Governor of the Federal Reserve), a chapter in a new book Growing Global: Lessons for the New Enterprise, published in November 2015 by The Center for Global Enterprise.

Their line of reasoning is that the adverse impact of monetary policy on economic growth resulted from the impact on business investment in plant and equipment.

In particular, they state: "We believe the novel, long-term use of extraordinary monetary policy systematically biases decision-makers toward financial assets and away from real assets."

Quantitative easing and zero interest rates shifted capital from the real domestic economy to financial assets at home and abroad due to four considerations:

First, financial assets can be short-lived, in the sense that share buybacks and other financial transactions can be curtailed easily and at any time. CEOs cannot be certain about the consequences of unwinding QE on the real economy. The resulting risk aversion translates to a preference for shorter-term commitments, such as financial assets.

Second, financial assets are more liquid. In a financial crisis, capital equipment and other
real assets are extremely illiquid. Financial assets can be sold if survivability is at stake, and as is often said, "illiquidity can be fatal."

Third, QE "in effect if not by design" reduces volatility of financial markets but not the volatility of real asset prices. Like 2007, actual macro risk may be the highest when market measures of volatility are the lowest. "Thus financial assets tend to outperform real assets because market volatility is lower than real economic volatility."

Fourth, QE works by a "signaling effect" rather than by any actual policy operations. Event studies show QE is viewed positively, while the removal of QE is viewed negatively. Thus, market participants believe QE puts a floor under financial asset prices.

According to a Spence and Warsh op-ed article in the Wall Street Journal (Oct. 26, 2015), "... only about half of the profit improvement in the current period is from business operation; the balance of earnings-per-share gains arose from record levels of share buybacks. So the quality of earnings is as deficient as its quantity."

The Fed Has Hurt Business Investment

It is certainly not news in this corner that QE has been counterproductive, but I have never seen a better explanation as to precisely why than the above excerpts.

Digging a little further, and following the op-ed reference above, I located the Wall Street Journal commentary The Fed Has Hurt Business Investment by Michael Spense and Kevin Warsh.

On his recent book tour, former Federal Reserve Chairman Ben Bernanke stated that low long-term interest rates are not the Fed's doing. Low rates result from a shortage of good capital projects. If there were good investment projects, he explained, capital would flow and interest rates would rise. Mr. Bernanke insists that the absence of compelling investment opportunities in the real economy justifies continued, highly accommodative monetary policy.

That may well be true according to economic textbooks. But textbooks presume the normal conduct of policy and that the prices of financial assets like stocks and bonds are broadly consistent with expectations for the real economy. Nothing could be further from the truth in the current recovery.

During the past five years earnings of the S&P 500 have grown about 6.9% annually. As the table nearby shows the current profit picture pales in comparison to prior economic expansions, in which earnings grew significantly faster. Moreover, only about half of the profit improvement in the current period is from business operations; the balance of earnings-per-share gains arose from record levels of share buybacks. So the quality of earnings is as deficient as its quantity. The current economic expansion is also unusual because the stock market and other financial assets have boomed in spite of relatively muted profit gains.

What explains the apparent divergence between earnings and asset prices? The unusual conduct of monetary policy.

A Little Humility, Please, Mr. Summers

In a follow-up Wall Street Journal opinion piece Michael Spense and Kevin Warsh take on Larry Summers in A Little Humility, Please, Mr. Summers.

In a recent op-ed for this newspaper, we proffered an explanation for a phenomenon that most macroeconomic models cannot adequately explain: Why is investment in U.S. financial assets so strong and investment in the real economy so modest?

Former U.S. Treasury secretary and Harvard president Larry Summers took issue with our views on his blog. He was one of the principal architects of the U.S. government's fiscal and regulatory response, and is among the foremost defenders of the recent conduct of monetary policy. So, Mr. Summers is understandably a fierce defender of the current regime. But his breathless defense of the consequences of extraordinary monetary policy reveals a troubling immodesty.

We would suggest more humility in considering the full consequences that may arise from the new tools and tendencies in the conduct of monetary policy.

First, Mr. Summers mischaracterizes what he calls the "Spence-Warsh doctrine." He sets out the straw man for his censure, stating Spence and Warsh believe "overly easy monetary policy reduces business investment." This is an interesting proposition, but it does not happen to be the one we make. Instead, we posit something quite different: "QE [quantitative easing] has redirected capital from the real domestic economy to financial assets."

By conflating low interest-rate policy with the use of QE, Mr. Summers apparently believes that these policy tools are similar in application and effect. We disagree. We believe that QE is fundamentally different in kind than standard-issue low rate policy. And QE, we argue, appears to work through different transmission mechanisms than the standard conduct of monetary policy. Event studies in the U.S. and abroad suggest that QE appears to have far great effect through the asset price channel than the lending, credit and confidence channels. As a result, risk assets like stocks respond to QE more robustly than does the real side of the economy.

Weakest Expansion Ever

Spence and Warsh go on with three other points disputing nonsense by Larry Summers.

It's a welcome breath of fresh air that I previously missed. Here is a chart from the article.

Squawk Box Confessional

Summers, Bernanke, Yellen and their ilk ought to explain former Dallas Fed Richard Fisher confession on Squawk Box "We Frontloaded a Tremendous Market Rally".

In his confession, Fisher admits "We frontloaded a tremendous market rally to create a wealth effect ... The Federal Reserve is a giant weapon that has no ammunition left."

The alleged "wealth effect" is an illusion. It will vanish, with severe consequences, either in the next big downturn, or via a long drawn out process like Japan.

Ben Bernanke stated "In theory, QE does not work, in practice it does."

Bernanke, like summers is wrong. If anyone in this world needs a dose of humility, it's Bernanke and his "we saved the world" nonsense.

The Fed is largely responsible for the Dotcom bubble, the housing bubble, and the current bubble (none of which they have seen in advance), and none of which they have admitted any responsibility over.

Looking Ahead

I predict Janet Yellen will resign as Fed chair for health reasons.

Summers is so damn arrogant and so damn wrong that he must be considered the front-runner to replace Yellen.

Greenspan, Bernanke, and Yellen have pushed the global economy to the edge of a cliff. It would be fitting in a sense, if Summers, carrying out the exact same policies, pushes us over the edge.

Mike "Mish" Shedlock

Wholesale Trade Down 1%, Inventories Down -0.3% but Inventory-to-Sales Ratio Rises

Posted: 08 Jan 2016 11:53 AM PST

There more bad news in wholesale trade and inventory numbers today. Bad news should have been expected, but as usual it wasn't.

Wholesale trade inventories declined 0.3% vs. an Econoday Consensus Expectation of 0.0%. Moreover, last month's inventory number was revised down from -0.1% to -0.3%.

Wholesale inventories fell a sizable 0.3 percent for a second straight month in November. Sales at the wholesale level fell an even sharper 1.0 percent in the month and, despite the decline in inventories, drove the stock-to-sales ratio up to 1.32 vs 1.31 in the two prior months. A year-ago, the ratio was at 1.23 in what is confirmation that inventories in the sector remain heavy. Inventories of farm products and petroleum rose due to weak sales while inventories of furniture and metals fell on strong sales. Previously released data on the factory sector show a 0.3 percent inventory contraction in November. The missing piece, retail inventories, will be posted following next week's retail sales report.

Wholesale Trade

Mike "Mish" Shedlock

Multiple Jobholders Artificially Boost "Full-Time" Employment: Does the Sum of the Parts Equal the Whole?

Posted: 08 Jan 2016 10:13 AM PST

The ECRI has an interesting study out today that pretty much confirms what I have said about Obamacare boosting part-time employment at the expense of full time jobs.

Please consider Multiple Jobholders Boost "Full-Time" Employment.

The latest jobs report far exceeded consensus expectations as the economy added 292,000 nonfarm payroll jobs.

But a closer look at the details reveals why concerns remain about the health of the labor market.

In December, year-over-year (yoy) growth in multiple jobholders rose to an 11-month high, while yoy growth in single jobholders eased to a three-month low. Specifically, since May the number of multiple jobholders has increased by 752,000, while single jobholders have increased by 429,000. In other words, multiple jobholders have been responsible for 64% of the net job gains since last spring. The disproportionate importance of multiple jobholders – forced to cobble together a living – shows why the labor market is weaker than it seems.

Notably, as long as these multiple jobholders log 35 hours of work per week — no matter how many part-time jobs that takes — they are considered full-time.

Does the Sum of the Parts Equal the Whole?

I confirmed the ECRI's statement about combining multiple hours from multiple part-time jobs into one allegedly full-time job with the BLS a long time ago.

Moreover, the discrepancies go far beyond what the ECRI reports to the point of double-counting in the reported payroll numbers.

I commented on this possibility on October 21, 2015 in Does the Sum of the Parts Equal the Whole?

Double Counting Part-Time Jobs?

I remain firmly convinced the BLS is double counting part-time jobs. And in a recent phone conversation, a BLS analyst admitted it was possible.

I asked a simple question: Why don't you sort out duplicate social security numbers?

The answer I received was "we would like to but we do not have access to the data for privacy reasons".

A decent sort-merge algorithm could hash this out easily, but only if the BLS had access to Social Security numbers.

So here we are wondering why the sum of the parts exceeds the whole overall, while we frequently see the opposite effect month over month.

The much-maligned BLS is in the spotlight, but in actuality it appears as if the BLS does not have access to the data they need to produce valid numbers.

Are major discrepancies like these better than no numbers at all?

Strong Jobs Report?

When I commented today on the "Third Strong Jobs Report", please make a note that strength is relative to what was discussed above.

I cannot accurately measure jobs, nor apparently can the BLS.

ADP could do this easily, with a social security merge program, but ADP has not responded to multiple inquires by me.

Finally, please bear in mind that if you worked as little as 1 hour, including selling trinkets on EBay, you are considered "employed".

I would like to see a breakdown of how many hours people are actually working in these part-time jobs, but that data is not available either.

Strength is Relative

It's important to put the strength of some of the jobs numbers into proper perspective.

In the household survey, if you work as little as 1 hour a week, at virtually anything, you are considered employed.
In the household survey, if you work three part-time jobs, 12 hours each, the BLS considers you a full-time employee.
In the payroll survey, three part-time jobs count as three jobs. The BLS attempts to factor this in, but they do not weed out duplicate Social Security numbers. The potential for double-counting jobs in the payroll survey is large.

Household Survey vs. Payroll Survey

The payroll survey (sometimes called the establishment survey) is the headline jobs number, generally released the first Friday of every month. It is based on employer reporting.
The household survey is a phone survey conducted by the BLS. It measures unemployment and many other factors.

Third Strong Payroll Number +292,000; Unemployment Unchanged at 5.0%

Posted: 08 Jan 2016 08:29 AM PST

Initial Reaction

For the third consecutive month we see a strong headline payroll number. The Bloomberg Consensus estimate was 200,000 jobs and the headline total was 292,000. The unemployment rate was steady to 5.0%, the lowest since April 2008.

BLS Jobs Statistics at a Glance

Nonfarm Payroll: +292,000 - Establishment Survey
Employment: +485,000 - Household Survey
Unemployment: -20,000 - Household Survey
Involuntary Part-Time Work: -63,000 - Household Survey
Voluntary Part-Time Work: +72,000 - Household Survey
Baseline Unemployment Rate: +0.0 at 5.0% - Household Survey
U-6 unemployment: +0.0 at 9.9% - Household Survey
Civilian Non-institutional Population: +189,000
Civilian Labor Force: +466,000 - Household Survey
Not in Labor Force: -277,000 - Household Survey
Participation Rate: +0.1 at 62.6 - Household Survey

Employment Report

Please consider the Bureau of Labor Statistics (BLS) Current Employment Report.

Total nonfarm payroll employment rose by 292,000 in December, and the unemployment rate was unchanged at 5.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment gains occurred in several industries, led by professional and business services, construction, health care, and food services and drinking places. Mining employment continued to decline.

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment Change from Previous Month by Job Type

Click on Any Chart in this Report to See a Sharper Image

Nonfarm Employment From Previous Year by Job Type

Hours and Wages

Average weekly hours of all private employees was unchanged at 34.5 hours. Average weekly hours of all private service-providing employees was unchanged at 33.4 hours.

Average hourly earnings of private workers rose $0.02 to $21.22. Average hourly earnings of private service-providing employees rose $0.02 to $21.02.

For discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January 2014, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I retain this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will add the charts back.

Table 15 BLS Alternate Measures of Unemployment

click on chart for sharper image

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 5.0%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 9.9%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Some of those dropping out of the labor force retired because they wanted to retire. The rest is disability fraud, forced retirement, discouraged workers, and kids moving back home because they cannot find a job.

Strength is Relative

It's important to put the strength of some of the jobs numbers into proper perspective.

In the household survey, if you work as little as 1 hour a week, even selling trinkets on EBay, you are considered employed.
In the household survey, if you work three part-time jobs, 12 hours each, the BLS considers you a full-time employee.
In the payroll survey, three part-time jobs count as three jobs. The BLS attempts to factor this in, but they do not weed out duplicate Social Security numbers. The potential for double-counting jobs in the payroll survey is large.

Household Survey vs. Payroll Survey

The payroll survey (sometimes called the establishment survey) is the headline jobs number, generally released the first Friday of every month. It is based on employer reporting.
The household survey is a phone survey conducted by the BLS. It measures unemployment and many other factors.

If you work one hour, you are employed. If you don't have a job and fail to look for one and you are not considered unemployed, rather, you drop out of the labor force.

Looking for jobs on Monster does not count as "looking for a job". You need an actual interview or send out a resume.

These distortions artificially lower the unemployment rate, artificially boost full-time employment, and artificially increase the payroll jobs report every month.

In December 2015, the ECRI reported year-over-year (yoy) growth in multiple jobholders rose to an 11-month high, while yoy growth in single jobholders eased to a three-month low.

For further discussion, please see Multiple Jobholders Artificially Boost "Full-Time" Employment: Does the Sum of the Parts Equal the Whole?

Mike "Mish" Shedlock

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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