Category: zerohedge

Moments ago it was Goldman, and now here is Bank of America, which until today had expected at least two hikes in 2016 but following “a string of disappointing data”, it too has thrown in the towel.

From the otherwise very cheerful Ethan Harris, so cheerful in fact that he forecasts no recession over the next decade.

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Fed call: it is a story for September

Following a string of disappointing data, the April jobs report has pushed us to change our Fed call. We are now looking for the Fed to hike once this year – in September – versus our prior forecast of a hike in June and December. Why the change?

• There has been a loss of momentum in the US data, even controlling for distortions to 1Q GDP.
• We believe the Fed is engaging in “opportunistic reflation”, targeting inflation above 2%.
• Although financial conditions have improved, there are still concerns about an uncertainty shock related to the markets, UK referendum and US elections.

We still believe the Fed is engaged in a normalization process and look for the Fed to hike again in March next year after moving rates higher in September. But the Fed has emphasized the asymmetry of policy, which means this hiking cycle will be even slower than we had initially believed.

Focusing on today’s jobs report, nonfarm payrolls of 160,000 and net revisions of -19,000, showed a slower trend for job growth. However, the 3-month trend is still a healthy 200,000, and the 6-month trend is a bit higher at 220,000. Moreover, there is some room for optimism: April nonfarm payrolls have shown a tendency to be revised upwards in subsequent months by an average of 26,500 (see Nonfarm payrolls myths and realities for more information).

The unemployment rate held steady at 5.0% amid a sharp 316,000 decline in household employment, but a sharp contraction in the labor force-the participation rate ended its 6-month uptrend and pulled back to 62.8% from 63.0%. A bright spot in an otherwise rainy April jobs report was wages: average hourly earnings climbed 0.3% mom, which pushed up the yoy pace by 0.2pp to 2.5% yoy. While still a modest pace of wage growth, it is up from the 2% trend that we’ve seen for most of the recovery, suggesting narrowing slack in the labor market. Additionally, the average workweek ticked back up to 34.5 from 34.4.

To be clear, the jobs report was not the sole factor for the revision to our call for the Fed. It was simply the last of a string of softer indicators that has prompted us to change our forecast. But remember, the economy is still expanding, inflation is still accelerating and the Fed is still normalizing.

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Well that escalated quickly.. After 3 VIX-smash saves this week, the selling pressure won (for now) as a dead-cat-bounce after the dismal jobs data has sent S&P 500 back into the red for 2016 (joining Nasdaq and Small Caps) with Dow and Trannies getting close…

 

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The pain for specialty pharma companies continues.

Yesterday afternoon, Endo International PLC – an “Irish” company that was one of the last tax inversions completed before the Treasury cracked down on the practice – reported not only that its losses deepened in its latest quarter, pressured by an asset impairment charge, but also slashed guidance citing higher competition and lower generics pricing.

The company said it now expects total revenue for the year to be between $3.87 billion and $4.03 billion, down from a previous range of $4.32 billion to $4.52 billion. The company also warned that its EPS would plunged from a range of $5.85 to $6.20 to between $4.50 and $4.80, a cut in guidance of more than 20%.

The stock has since imploded, down nearly 40% overnight.

 

The pain, however, is especially acute for a lot of hedge funds, because as Goldman reminds us after the spectacular blow ups of Valeant and Allergan, and recently, the plunge in uber hedge fund hotel AAPL, Endo itself is one of the stocks that has the highest hedge fund concentration in the S&P.

 

Who are these hedge funds? Most of the usual suspects including Visium, Viking, Paulson, Brahman, MSD and of course countless bank prop desks as listed below.

 

So if we report next week that the “smart money outflows” have continued for a record 15th week, we will know who the weekly scapegoat is for the latest redemption deluge as panicking hedge funds are forced to liquidate other assets to cover for their massive P&L blow ups in ENDP this morning.

 

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We already know that the quantity of the April jobs was disappointing, but what about the quality? Well, on one hand the BLS reported that based on the Household Survey, in April 253K full time jobs were lost so there’s that. But what did the Establishment Survey, which is the far more massaged one and thus the one that algos pay the most attention to, show?

As the chart at the bottom reveals, following the March job gains which were driven by low paying education/health and retail trade as well as the better paying construction worker jobs, in April retail trade saw a big drop (as we predicted would happen last month), construction work likewise exhausted its growth, while the old standbys of Education and Health and Leisure and Hospitality continued to increase, rising by 54K and 22K respectively. The biggest job growth category, however, was Professional and Business services (which typically includes part-time jobs although we break it out), which saw a 56K increase in April, the biggest move higher for this job group in years.

An interesting rebound was observed in manufacturing jobs, which after tumbling by almost 30K last month, saw a modest 4K increase in April.

On the other end, a surprising drop was seen in government workers, which declined by 11K, while the 8K drop in minin and logging workers was very much as expected as the shale drama continues.

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Submitted by John Mauldin via MauldinEconomics.com,

GDP growth has only two basic components: growth in productivity and growth in the workforce size. That’s it. There are two and only two ways you can grow an economy: increase the (working-age) population or productivity.

There is no magic fairy dust you can sprinkle on an economy to make it grow. To increase GDP you have to actually produce more. That's why it's called gross domestic product.

Therefore—and I'm oversimplifying quite a lot here—a recession is basically a decrease in production (as, normally, population doesn't decrease). Two clear implications emerge: The first is that if you want the economy to grow, there must be an economic environment that is friendly to increasing productivity.

Productivity growth, unfortunately, is slowing down in much of the developed world and there’s no reason to think the trend will change soon.
 
Let me offer a few rather disconcerting charts showing the continuing decline in productivity and major shifts in demographics that are worsening the situation.

Annual productivity growth is below the 1947–2005 average of 2.1%

Productivity grew at an annual rate of less than 1% in each of the last five years. The average annual rate of productivity growth from 2007 to 2015 was 1.2%, well below the long-term rate of 2.1% from 1947 to 2015.

 
Productivity grew only 0.6% over the last two years

The next chart shows that actual productivity has grown less than 0.6% in the last two years. The numbers suggest that productivity growth has become hard to achieve in the developed world.

Part of the problem for the developed world is that the services sector makes up much of its economy.

Getting higher productivity in dry cleaners, restaurants, and hairdressers is much harder than it is in manufacturing or in agriculture. While productivity grows in the services sector, that sector alone cannot deliver significant increases in the overall productivity rate.

Now, let’s look into major demographic trends to understand the roots of this slowdown.

Working-age populations are shrinking and the dependency ratio is growing

Here’s a chart from Eurostat on the projections for the EU population from 2014 to 2080.

Some 65.9% of the EU was aged 15–64 in 2014, or what we might call “prime working age.” The number shrinks steadily to around 56% by 2050 and then levels out.

Why does it level out? The forecasters basically assume that birthrates won’t drop much lower and that there is a limit on how long people will live. But in this next chart, we see the steep rise in the percentage of the elderly compared to those of working age, all over the developed world.

 
The number of children (ages 0–20) changes only slightly in the decades to come.

The big change occurs in the top two segments on the previous chart, those aged 65–79 and 80+. Combined, they will grow from 18.5% of the population in 2014 to 28.7% in 2080.

In 2014, 66% of the EU working population supported the 34% who were not working because they were either too old or too young. By 2040, the EU is projected to have 58.5% working to support 41.5% who are dependents. About two-thirds of the dependents will be those age 65 and over.

Active labor force in the US has plunged

The number of people aged 15 to 65 doesn’t really equal the number of workers. We measure the number of actual workers by something called the participation rate.

The participation rate is a measure of the active portion of an economy's labor force. It defines the percentage of the population that is either employed or actively looking for work.

Let’s look first at the actual Civilian Labor Force Participation Rate for the United States.

This rate has been falling since 2000. A big part of the drop-off reflects Boomers retiring, but there is something odd going on besides it.

We see a decline in the participation rate of 25 to 54 year-olds (prime working age), though the rate for this group had risen continually for 50 years.

And now we delve into an even stranger phenomenon. Young people, 20 to 24, are increasingly opting out of the workforce.

Research tells us that a lot of those people are still going to school. But there are other things happening here, and we need to try to understand them.

Look at this chart from the Atlanta Fed.

Notice how many young people are out of the labor force because they are taking care of family. That brings us back to the increasing dependency ratio I talked about earlier. It also shows that shrinking working-age populations already have a visible impact on economic growth.

Central banks are powerless

Here’s a chart that wraps up everything.

This one shows the percentage change in the labor force participation rate year over year. The rate has declined since the late 1970s, except for a few years of very modest growth within the last 16 years.

The trends we have looked at are not likely to change much, which means we are facing a long period of restrained GDP growth throughout the developed world.

This demographic cast iron lid on growth helps explain why the Federal Reserve, ECB, and other central banks seem so powerless.

Can they create more workers? Not really. They can make a few adjustments that help a little—confident consumers are more likely to have children, but it takes time to grow the children into workers.

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Goldman’s muppet crushing ways continue.

Recall that just three days before today’s deplorable jobs number, Goldman revised its payrolls forecast higher, saying that “we expect a 240k gain in nonfarm payroll employment in April. We increased our forecast from an initial estimate of 225k published last Friday as a result of the improvement in the employment component of the ISM non-manufacturing survey released this week.”

Oops.

Well, jobs is not all that Goldman was wrong about, and moments ago the bank that was convinced the Fed would hike rates at least three times in 2016 just threw in the towel, and no longer see a June rate hike, instead forecasting that the next rate hike will take place in September. As a reminder, the market no longer see any rate hikes in 2016, which is of course par for the course not only for the “one and done” Fed, but for Goldman which come rain or shine is certain to keep steamrolling muppets.

Full Goldman note:

Soft April Employment Report, Change in Fed Call

 

BOTTOM LINE: Nonfarm payroll employment increased by 160k in April, less than expected by consensus forecasts. Average hourly earnings gained 2.5% from a year earlier. The unemployment rate was unchanged at 5.0%. In light of weaker-than-expected payrolls and recent Fed communication, we no longer expect a rate increase at the June FOMC meeting. We now forecast the next rate hike will come in September.

 

MAIN POINTS:

 

1. Nonfarm payroll employment increased by 160k in April, less than expected by consensus forecasts. Employment growth for the prior two months was also revised down by a net 19k. The deceleration reflected a pullback in construction (+1k vs +41k previously), retail (-3k vs +39k) and government (-11k vs +24k). Payback from weather-related gains in payrolls in earlier months may have depressed employment growth last month, particularly in the construction sector. Other details in the establishment survey were slightly more encouraging.

 

2. Average hourly earnings rose 0.3% in April (vs. +0.3% consensus) and were up 2.5% on a year-on-year basis, an increase from 2.3% in March. The year-over-year increase was boosted in part by upward revisions to February months. Average weekly hours rose to 34.5 after two months at 34.4 and aggregate weekly payrolls—the product of employment, average hourly earnings, and average weekly hours—rose 0.8% on the month.

 

3. The household survey showed a 316k decline in employment in April, following a string of very strong gains in recent months. Despite the decline in employment, the unemployment rate remained at 5.0% (4.984% unrounded) due to a two-tenths decline in the labor force participation rate to 62.8%. The U6 underemployment rate fell 0.1pp to 9.7%, mostly due to a decline in involuntary part-time employment.

 

4. With payrolls, unemployment claims, consumer sentiment, vehicle sales, and a number of business surveys in hand, our preliminary read for the April Current Activity Indicator is +2.0%, up from +1.9% in March.

 

5. In light of weaker-than-expected payrolls and recent Fed communication, we no longer expect a rate increase at the June FOMC meeting. We now forecast the next rate hike will come in September.

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In addition to the troubling trend revealed by the yet again declining labor participation rate as a result of hundreds of thousands of Americans dropping out of the labor force (and lack of entrants), one other recurring concern we have had with the jobs report is that new job growth has disproportionately gone to elderly workers, those 55 and over at the expense of young (16-24) and prime aged (25-54) workers.

This trend reverted itself in April. As the chart below shows, in April the household survey showed that when broken down by age group, a grand total of 270K jobs were lost, but it was the composition that was the issue because once again it was the prime-aged workers that took the brunt of the job cuts, as a whopping 284K workers aged 25-54 lost their jobs in the past month.

 

This means that while total workers aged between 16 and 54 are still some 3.5 million below where they were in December of 2007, during the same period workers aged 55 and over have grown by a whopping 8.1 million to a new all time high of 34.4 million, and as of this moment the oldest worker group comprises a record 22.8% of the total number of workers (per the Establishment survey) of 151 million.

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Submitted by Mike Krieger via Liberty Blitzkrieg blog,

This certainly isn’t a comforting statistic.

From Bloomberg:

After heart disease and cancer, medical errors kill more Americans than anything else, claiming a quarter of a million lives a year, according to a study by researchers at Johns Hopkins University.

 

If bungles and safety lapses in the hospital were accounted for as deaths from disease and injury are, they would be the third most common cause of death in the U.S., leading to more fatalities than respiratory disease, the report in the British Medical Journal argues.

 

The new estimate, published today, draws on four studies of deaths due to errors that have come out since the 1999 report. The authors extrapolate from those findings to reach their estimate of 251,000 annual deaths. Even that figure, they say, probably underestimates the actual toll, because it includes only deaths in hospitals, not in out-patient surgery centers, nursing homes, or other health care settings. 

While that article’s worth mentioning on its own, it’s particularly interesting in the context of a piece published yesterday at Wired titled, Why an Autonomous Robot Won’t Replace Your Surgeon Anytime Soon.

Here are a few excerpts:

The Smart Tissue Autonomous Robot could sew more evenly and consistently than even an experienced surgeon, according the report published in Science Translational Medicine. “It is a really nice piece of work. They’ve managed to push the envelope” says Ken Goldberg, director of UC Berkeley’s Center for Automation and Learning for Medical Robotics, who was not involved with STAR.

 

But in this case, STAR was still dependent on a surgeon to make the initial incision, take out the bowel, and line up the pieces before it fired up its autonomous suturing algorithm. “When you drive a car you use cruise control. The same logic would apply for surgical technology,” says Peter Kim, a pediatric surgeon on the STAR team. Just as cars have gained more autonomous functions—parallel parking, lane changes—STAR has been programmed to do other things like cut and cauterize, and Kim says they’re planning to do an entire supervised surgery like removing the appendix. But unlike Google’s autonomous car, which doesn’t even have a steering wheel, nobody is talking about a surgery robot with no human supervision.

 

If the technology behind STAR is going to make it into the hospital any time soon, according to Kim, it’ll probably be integrated into an existing platform. That could mean, for example, adding automated tasks to something like da Vinci, where the doctor still has final control. It makes sense, because the real advance behind STAR is software, not hardware. The robotic arm is just an arm from the German company Kuka, which makes robotic arms of all sizes for industrial use. What makes STAR unique is its ability to “see” inside the 3-D folds of soft tissue by using a 3-D lightfield camera—similar in concept to Lytro’s camera—that looks for fluorescent biomarkers injected inside the tissue. “The key to this paper is smart imaging technologies,” says W. Douglas Boyd, who specializes in robot-assisted heart surgery at the UC Davis Health System. “This is where the huge leap of advancement in these autonomous systems will be.”

 

But technical capability isn’t the only barrier to acceptance among surgeons. Mazor Robotics makes a robotic system that identifies where surgeons should insert bone screws into the spine. Their machine could have easily done the drilling too, but Mazor found that surgeons preferred to give the go ahead and hold the drill themselves. “We had the technical ability to do it, but you have to go one bit at a time,” says Christopher Prentice, Mazor’s CEO. “The key to robotics in surgery is to add value, and I believe it’ll be incremental value. It’s not someone who swoops in.” That was Johnson & Johnson’s mistake with its anesthesiology bot.

 

It’s the same with cars. No one is trying to sell you a fully autonomous car yet. But the cars we do drive are already becoming increasingly automated, first with cruise control and now with lane change and parking assist. You’ll be lulled into trusting the robot driver and robot surgeon. But lulling will be slow and incremental. You can’t put the cart before the robot.

We sure do live in fascinating times.

Sadly, however, as The Daily Sheeple's Joshua Kriase explains, unfortunately, there’s no reason to believe that these numbers will fall in the near future…

Before the 20th century, the average person would only go to the hospital as a last resort. That’s because hospitals were where you went to die. They were unhygienic hell holes staffed by unprofessional doctors who knew as much about medicine as you or I know about nuclear physics. Even when a healthy person was admitted to a hospital, there was a really good chance that they weren’t coming out alive.

 

A lot has changed since those dark days, but there are still plenty of ways to die in a hospital that are very preventable. In fact, so many people die from “medical errors” in our hospitals, that it’s become the third leading cause of death in America. It outranks car accidents, murders, and suicides put together, and by a wide margin. It’s only surpassed by cancer and heart disease as the leading causes of death. According a report published by The BMJ, over 250,000 people die from medical errors every year. They define these errors as:

 

“An unintended act (either of omission or commission) or one that does not achieve its intended outcome, the failure of a planned action to be completed as intended (an error of execution), the use of a wrong plan to achieve an aim (an error of planning), or a deviation from the process of care that may or may not cause harm to the patient.”

 

And the true number of deaths could be much higher. “Medical error” isn’t something that shows up on death certificates, and the people who do die from these mistakes are just the individuals that we know about.

 

While the study doesn’t mention this, there shouldn’t be any doubt that at least some of these numbers are related to America’s prescription drug epidemic. Americans are prescribed more drugs than anyone else on the planet, and while estimates vary, the deaths that are related to these prescriptions number in the tens of thousands. The statistics surrounding opioid drugs alone are harrowing.

 

Approximately 4,263 deaths were linked to opioid overdoses in 1999, but that number had climbed to 17,000 in 2011, and didn’t include those from benzodiazepine drugs such as Xanax and Klonopin. The numbers could be even higher because specific drugs weren’t named in about 25% of all drug deaths. The greatest increase in death rates occurred in Americans between 55-65 years old.

 

“The amount that [opioids] are administered by well-meaning physicians is excessive,” said Dr. Robert Waldman, an addiction medicine consultant not involved with the research. “Most physicians are people-pleasers who want to help and want to meet people’s needs, and they are more inclined to give people the benefit of the doubt until you are shown otherwise.”

 

Unfortunately, there’s no reason to believe that these numbers will fall in the near future. Between the proliferation of socialized medicine (which results in fewer doctors who are under more stress, and thus, make more mistakes), the rise of superbugs, and doctors who give out drugs like candy, someday soon going to the hospital may be just as hazardous for your health as it was before the 20th century.

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The market took one look at today’s dismal jobs data and marked down the data-dependent Fed’s rate-hike schedule to record lows. June odds are now at 4% – the lowest on record…

And even out to Feb 2017 there is a less than 50-50 chance of The Fed acting…

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In addition to the poor headline Establishment survey print which rose only 160,000 in April, coupled with a deplorable Household survey employment number which plunged by 316,000 for the month and below levels seen in February, an even more concerning development was the resumption in the deteriorating trend in the US labor force participation rate, which in recent months had been on a steady increase as far fewer workers were dropping out of the workforce (contrary to convention wisdom, this was not driven by new entrants into the labor force).

All that changed today, when the number of Americans not in the labor force soared by a whopping 562,000 in April, pushing the grand total of people not in the labor force back over 94 million and fast approaching the all time high of 94.6 million.

As a result, the participation rate, which recently had climbed to 63% or the highest since early 2014, has once again resumed its downward slope with the April print down to just 62.8% as the poor labor and demographic conditions once again emerge as a key driver within the US workforce.

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