Friday, July 6, 2012 – That’s Just the Way It Is

That’s Just The Way It Is
by Sinclair Noe

DOW – 124 = 12,772
SPX – 12 = 1354
NAS – 38 = 2937
10 YR YLD -.05 = 1.54%
OIL – 3.10 = 84.12
GOLD – 21.50 = 1583.40
SILV -.60 = 27.20
PLAT – 28.00 = 1451.00

We make a big deal out of the monthly employment outlook report.  It is a natural mistake. We think the report can tell us whether the economy is improving and, if so, by how much. Employment is fundamental for consumption, corporate profits, tax revenues, deficit reduction, and financial markets. People place too much emphasis on the official report, which is really only an estimate; there will be revision.  In about eight months, we’ll have an accurate count from state employment offices, but by then no one will care. There are several approaches to analyzing employment. And then there are seasonal factors. And you will be told there are different numbers that require your attention. And when you cut through all the noise and confusion, the monthly jobs report for June was a gain of 80,000 – and it just plain and simple sucked. 

The Labor Department said non-farm payrolls expanded by just 80,000 jobs in June, marking the third straight month employment has grown by fewer than 100,000 positions. Job creation was too weak to bring down the 8.2 percent unemployment rate. Job creation averaged 75,000 per month during the second quarter, compared with an average increase of 226,000 in the first quarter. Economists estimate that roughly 125,000 jobs are needed each month just to hold the jobless rate steady. U-6, an alternate measure of labor under-utilization that includes part time workers and marginally attached workers, increased slightly to 14.9%.

The manufacturing sector added 11,000 workers and construction employment edged up 2,000, the first gain since January and further evidence the housing market is steadying. Hiring slowed sharply in the services industry, with retailers cutting 5,400 workers from their payrolls. Of course the Federal government is still losing workers (52,000 over the last 12 months and another 7,000 in June alone), but it looks like state and local government employment losses might be ending, or at least slowing.

On the positive side; average hourly earnings rose 6 cents, the biggest gain in four months, and 156,000 workers entered the labor force. In addition, a measure of total hours worked hit its highest level since November 2008.

You will probably hear all sorts of wild explanations of the jobs report over the weekend. Maybe they are making the jobs report look better with the birth/death calculations; maybe it looks worse because of the seasonal calculations. Forget it. Take the numbers at face value and compare apples to apples and oranges to oranges. 

Now, who’s to blame for this mess? Well, the Federal Reserve is legally required to minimize unemployment, but anyone counting on the Fed’s policy-making committee to begin another round of “quantitative easing” when it meets at the end of the month should keep in mind a few reasons for caution. Fed officials were not expecting the unemployment rate to decline. They predicted last month that the rate would stand between 8 percent and 8.2 percent at the end of the year. They seem to be satisfied with that number. Maybe that is the new normal. 

The closer we get to a presidential election, the greater the potential political advantages of lying low and waiting another few months. The Fed is a nonpartisan body insulated from political pressure. So is the Supreme Court. I have some oceanfront property for sale in Arizona. 

On the other hand, the surest trigger for Fed action during this long crisis has been the fear of deflation. The central bank has consistently responded when the predicted pace of inflation drops too far below the 2 percent annual rate that officials consider most healthy. Or some sort of problem, like maybe… Europe.

Investors are giving the thumbs down towards solutions presented at the latest European summit .  Spanish yields went back above 7%, while Italian bonds are above 6%.  German two year government bonds fell to zero and briefly turned negative. 

Core-countries are reneging on providing unconditional help to the periphery.  Finland’s Finance Minister says: “Finland is committed to being a member of the eurozone, and we think that the euro is useful for Finland. Finland will not hang itself to the euro at any cost and we are prepared for all scenarios. Collective responsibility for other countries’ debt, economics and risks; this is not what we should be prepared for.”

Merkel is under increasing pressure from officials in her native Germany.  The CSU, the Constitutional Court, and now the President of the Bundesbank are making it clear that political will in Germany has been exhausted.  A referendum must take place.  Meanwhile, the Greek government is set to collapse again soon; they’ve given up on a plan to modify the terms of its bailout agreement until the government passes more reforms.   The ECB cut interest rates, but it isn’t enough for the QE-addicted market. Euro-area unemployment climbs to a record 11.1% in May. 

And in Jolly old London, the largest  lender to small and medium-sized businesses in Britain is a bank called Barclays, which is in the midst of a rate rigging scandal of epic proportions. The bank was fined $450 million dollars and then they started spilling the beans. The chairman resigned to save the CEO. The CEO made a public threat to drag the central bank into the mire. And the previous government. And the Treasury.   The theory that collusion with the central bank(s) to keep LIBOR low so as to show that there really was no cataclysm in the banking industry, apparently so that there would not be such radical actions as holding them to account for their incompetence and criminality, is the one rings true to me.

Next morning, the CEO resigned and the chairman re-installed himself to “oversee transition”. The police, who said they could not prosecute, now say they might. And while all this was going on, employees of the bank are expected to continue doing business that might effect the business people who actually do work in the UK economy. 

Barclays has admitted they rigged Libor interest rates. They did it frequently. They say other banks did it too.  The US Department of Justice accepts that Barclays traders manipulated rates on hundreds of occasions. The Libor market is massive, about $800 trillion dollars, and it affects pretty much everything associated with interest rates. And so far the US government has had almost nothing to say about this. The US banks have been totally silent about this. Maybe regulators are too compromised to intervene meaningfully, with politicos bought, regulators lip-locked with perps. 

The fabrication of LIBOR data doubtless had many many victims capable of suing. The class action bar has a great opportunity to make a lot of money. As many as 20 big banks have already been named in various investigations or lawsuits alleging that LIBOR was rigged. So, maybe the lawyers will do what the regulators won’t. Either they will be proved correct, and thus the thin end of the wedge is in, or they will be aghast to find that the courts simply shove them back to the do nothing regulatory system of misrule, forcing a higher stakes confrontation. 

Whatever happens, right now we know that the core of the global financial system has been compromised and corrupted. It can’t be trusted.

 If there is not a major change in the weather very soon we could be looking at widespread crop failures throughout the United States this summer.  Record heat and crippling drought are absolutely devastating crops from coast to coast. More than 2,000 record high temperatures have been matched or broken in the past week alone.  The lack of rainfall nationally has caused drought conditions from coast to coast.  If temperatures continue to stay this high and we don’t start seeing more rain, farmers and ranchers all over the nation are going to be devastated.  

Right now is a crucial period for corn.  It is time for pollination and rainfall is desperately needed. The US Department of Agriculture had been expecting a record corn harvest this year, but now the outlook is rapidly changing.  The Department of Agriculture now says that 22 percent of all US corn fields are in poor condition, and that number could rise significantly unless current weather patterns change.

The corn in some areas of the country may already have been permanently damaged. Corn supplies are declining at the fastest pace since 1996 as a Midwest heat wave damages the world’s largest harvest for a third consecutive year.  Bloomberg News reports that stockpiles were probably 3.168 billion bushels (80.47 million metric tons) on June 1, 47% less than on March 1. 

So what does all of this mean? It means that food prices are going to rise. Over the last month, the price of corn is up about 27 percent. The price of September wheat is up about 26 percent since the beginning of June.

JPMorgan Chase was ordered by a federal judge to explain why it shouldn’t be compelled to turn over e-mails sought by U.S. regulators in a probe of potential energy-market manipulation. The Judge  gave JPMorgan until the end of the day on July 13 to respond. The Federal Energy Regulatory Commission, or FERC, sued JPMorgan to release 25 e-mails in an investigation of possible manipulation of power markets in California and the Midwest by J.P. Morgan Ventures Energy Corp.

I know, all this Libor talk has you worn out. Next week that will change. Next week kicks off earnings season for the banks. We can start talking about Debit Valuation Adjustments, which is bank talk for making money by losing money by reflecting changes in the fair valuation of liabilities. So, the worse a bank performs, the better their earnings. All right kids, this may be hard to believe, but once upon a time companies were valued based upon their ability to produce something of value and earn a profit. Once upon a time we looked at things called PE ratios, a measure of profit per share, and once upon a time, the numbers were based upon reality.  

Sweet dreams.

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