Category: zerohedge

One year ago, when the political push to raise the minimum wage hit a crescendo, the CEO of Starbucks had some words of caution. Howard Schultz told CNN that minimum wage “should go up across the country”, however he warned that “it will be very difficult for small business in the country at a $15 level to pay those kinds of wages.” What about for his own company? “For Starbucks come January 1 we are taking wages up across the country and we will pay above the minimum wage in every state we operate. Starbucks is way above the minimum wage. I have always looked at total compensation.” 

His conclusion: “I have always believed that our success as a company is best shared.“

 

One year later, something “unexpected” has happened as a result of the Schultz’ all too eager push to “share” his company’s success by hiking minimum wages, namely the realization by the company’s employees (if not so much the CEO, management and certainly shareholders) that total compensation is a function of two things: hourly wages and number of hours worked.

As Reuters reports, an online petition accusing Starbucks of “extreme” cutbacks in work hours at its U.S. cafes, hurting both employee morale and customer service, has been signed by more than 9,000 people. Suddenly Starbucks’ eagerness to raise its wages becomes all too clear: after all, it would merely have to reduce work hours, to keep profitability humming.

The world’s biggest coffee chain, trying to address cooling growth at its U.S. shops, recently introduced technology that allows customers to order and pay from mobile devices. That service aims to boost sales and reduce bottlenecks in stores; it also aims to reduce work hours. 

In short: Starbucks is finding itself in a sales and profit squeeze (its shares have gone nowhere for the past year), and having been such a fervent supporter of minimum wage hikes, is now far less willing to “share” its success as a company, especially if it means a stagnant stock price for the foreseeable future.

Starbucks CEO Howard Schultz and other top brass have spoken with Jaime Prater, a Southern California barista and the online petition’s creator, the Seattle-based company said. It declined to give details but Starbucks spokeswoman Jaime Riley said it is not uncommon for Schultz to reach out to members of its 160,000-strong U.S. workforce. She said that Starbucks has a software system that determines labor needs based on business trends.

In which case, one wonders what the company’s attempt to squeeze out every last penny from the bottom line by implementing “extreme” cutbacks to work hours says about business trends in the US, and the economy in general.

But back to the disgruntled employees who don’t share Schultz’ optimism that this is all merely orindary course of business. Comments on the petition painted a picture of broad discontent at the company known for offering better wages and benefits than other chains, including healthcare coverage, retirement account contributions and paid vacation days.

Prater and many signers say they noticed cutbacks in U.S. staffing hours after Starbucks in April reported a deceleration in quarterly cafe sales growth. Several of them said store managers were under pressure to comply with the dictates of Starbucks’ software system.

Translated: boost profits by reducing overall pay.

Almost 7,000 signers of the petition described themselves as employees, according to Prater. They did not give their full names and Reuters was not immediately able to confirm that signers worked for Starbucks. 

“The labor situation has gone from tight to infuriating,” Prater said.

One central California store has seen its labor allotment shrunk by about 10 percent, even though sales are up, its manager, who asked not to be identified for fear or reprisal, told Reuters. Similar complaints were heard from many signers of the online petition.

“No matter what we do to save on labor at my store, the system tells us EVERY SINGLE DAY that we are at least 8 hours over in labor for the day and have to cut even more,” wrote signer Aaron I. “We’re suffering, & so are our customers. It’s not working,” wrote Leslie S, a self-described shift manager.

But… just one year ago an euphoric Howard Schultz said he was so eager to raise minimum wages. What he forgot to add is that he is just as eager to cut work hours if it means preserving profitability.

“Mobile orders have increased sales and created more need for labor, yet the company is cutting labor,” wrote Makenna S, a shift supervisor.

And the punchline: like other restaurants and retail companies, Starbucks is wrestling with the effects of local minimum wage increases. Some petitioners said Starbucks had not boosted pay for existing workers in areas where minimum wages have increased – creating a situation where new hires are paid about the same wage as more experienced peers.

The longer we look at it, the more it appears that the CEO was not exactly genuine in his enthusiastic support for minimum wages.

As for the cherry on top: some employees said take-home pay had also taken a hit because tipping has fallen substantially amid broad customer adoption of the “Starbucks Rewards” program, which allows customers to pay with a loyalty card or mobile phones. 

* * *

And just like that, the grim picture of the “minimum wage hike effect” is starting to be appreciated by all, and explains why over the past few months even the BLS has reported that average work hours have been shrinking, incidentally something we warned about over a year ago when the topic of minimum wage increases first emerged. Because as was obvious all along, the simple math is that as mandatory wages rise, there is far less “success” to be shared.

To be sure Starbucks is neither the first nor the last corporation to show its true colors. One year ago we reported that “Economics 102: WalMart Cuts Worker Hours After Hiking Minimum Wages“, and just four weeks ago we followed up that “Half Of Washington DC Employers Have Cut Jobs, Hours Due To Minimum Wage Increases – And It’s Going To Get Worse.”

The Starbucks news confirms just that; expect much more.

Meanwhile, we can only hope that more realize that politicians pandering to populism by conducting a phony “war on inequality” via minimum wage propaganda is merely serving their corporate overlords. Because as Starbucks employees are the latest to learn the hard way, as wages go up, all in comp is rapidly dropping while layoffs are rising. Maybe next time Obama mandates a minimum wage to show how much he cares about the “little worker”, he should also issue an executive order requiring minimum hours too. Naturally, that would merely unleash even more central-planning hell, but in a world in which the central banks already control everything, why the hell not?

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By EconMatters

We are starting to price back in a December Rate hike by the Federal Reserve, slowly but surely we are coming off the zero bound for this market event. We now stand at 22% and rising for a December Fed Funds Rate Hike of 25 basis points to (50-75 basis points).

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Submitted by Michael Shedlock via MishTalk.com,

Deutsche Bank shares have collapsed to lows deep under crisis lows and collapse of Lehman in the Great Financial Crisis…

What’s going on?

An investigation of Deutsche Bank’s “Passion to Perform” balance sheet provides the clues.

 

The above clip from Deutsche Bank’s First Quarter 2016 Statement.

Details in red from page 61 (PDF page 63) of the 126 page report.

Key Liabilities

• €559 billion deposits
• €562 billion negative derivatives
• €151 billion long term debt

World’s Most Systemically Dangerous Bank

Zero Hedge commented on the World’s Most Systemically Dangerous Bank.

Here’s the key chart.

Deutsche Bank Share Price

What Went Wrong?

Deutsche Bank’s price to book value is 0.251.

Effectively the market suggests Deutsche Bank is worth 75% less than book value. Why?

1. Is it derivatives?
2. Are bank assets over-inflated?
3. Other assets prices inflated?
4. Liabilities understated?
5. What about Brexit?

Brexit is the easiest explanation to throw out. Share prices started collapsing a second time starting at the beginning of 2014.

The bank has always been heavy in derivatives. Although recent activity may have led to losses or more scrutiny, it’s relatively easily to discard that as the primary answer.

Banking Sector Malaise

Instead of pondering the obvious problems, what about other things?

1. Targe2 imbalances starting to matter
2. Italian banking woes starting to matter
3. Rising chance that Eurosceptic leaders take control of Italy.
4. What if Eurozone intrabank balances are in question?

My best guess is that Deutsche Bank share prices reflect all of the above but something in the second set of reasons, or something we still do not fully understand is the primary reason behind the collapse.

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The seeds of European disconent are spreading. One week after Britain voted to separate amicably with the EU, the president of the Czech Republic, Milos Zeman, called for a referendum on his country’s membership in the EU and NATO. Demonstrating a shocking grasp of what democracy truly is, while Zeman wants to remain in both organizations, he wants the public to have a chance to “express themselves” something which sends a spike of terror through the hearts of all unelected Brussels bureaucrats.

Meanwhile, support for the EU is waning in the central European country. In April, a poll conducted by the CVVM institute showed that just 25% of the population is satisfied with their membership in the bloc, as cited by Reuters. Twelve months earlier, that figure had stood at 32%. And so, following on Britain’s vote to exit the EU, Zeman now wants to give the Czech public the chance to decide their own future, as skepticism about the merits of remaining in the bloc continues to rise.

“I disagree with those who are for leaving the European Union,” Czech Radio quoted Zeman as saying on Thursday evening, according to Reuters. “But I will do everything for them to have a referendum and be able to express themselves. And the same goes for a NATO exit too,” he added. 

Czech president Milos Zeman

Needless to say, Zeman’s plans have not been well received across the EU, which is – at least on paper – reeling from the political and economic fallout of Britain’s decision to leave the bloc, a decision which however has sent stocks soaring in anticipation of more monetary easing and which has prompted Italy to use Brexit as a scapegoat to demand a bailout of its insolvent banks. Most prominently, in the wake of the vote, the leader of France’s far-right National Front party Marine Le Pen also called for a referendum on leaving the EU for her country.

Spain’s acting foreign minister, Jose Manuel Garcia-Margallo, said that the Czech Republic should not hold a referendum on EU membership, calling it “a very bad idea,” despite the fact that Zeman has publically stated that he wants to remain in both institutions.

That said, holding a referendum will be no formality as it would require that changes be made to the Czech constitution, and Zeman has no power to call the vote himself. As RT notes, if a referendum was to take place, the constitution would need to be amended, which would require a 60 percent vote of support from both houses of parliament.

In response to Zeman’s proposal, Czech Prime Minister Bohuslav Sobotka’s office said that the government has no intention of holding a referendum. However, Sobotka admits that changes to the bloc need to be made.

“We need to change the functioning of Europe as such and reduce the red tape. I would be pleased if we sent a clear signal in the early autumn at the latest about how we would like to change Europe positively,” he said on Tuesday, as cited by the Czech News Agency.

A signal yes, but anything to prevent the majority from expressing an opinion for the simple reason that a stunning article appears just several days ago in Foreign Policy, in which the author called for the “Elites to rise up against the Ignorant masses.”

Instead, the elites have a better idea: keep pumping stocks ever higher in hopes some of their wealth will trickle down to the same “ignorant masses” who should just be happy with their lot in life and ideally just keep quiet and never dare to question the status quo.

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It appears oil traders have no interest in rig counts anymore (for now). With an 11 rig increase – the most since Dec 2015 – the rig count continues to track the lagged price rise in WTI. However, the market has just shrugged it off for now…

 

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Submitted by Eric Bush via Gavekal Capital blog,

Equity correlations have spiked to the highest level in years presumably thanks to Brexit. The 20-day correlation between the GKCI DM index and the MSCI World Index is at the highest level since 2011.

 

The correlation between EM and DM stocks is at its highest level since 2010.

 

And the 20-day correlation between UK, French, and German stocks and the MSCI World Index is at the highest level we have ever seen going back to 2001, surpasing levels experienced during the European debt crisis. The same is true for the entire region as a whole actually.

 

Lastly, the 65-day correlation for UK stocks and the MSCI World Index is also at the highest level on record going back to 2001.

 

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In what turned out to be a case of morbid irony, last night we reported that Josh Brown, the 40 year old (non) driver of the Tesla which fatally crashed into a truck on May 7 in Florida while in self-driving mode when the car’s cameras failed to distinguish the white side of a turning tractor-trailer from a brightly lit sky and didn’t automatically activate its brakes, had as recently as a month earlier praised his “Tessy’s” autopilot feature in a YouTube clip.

Tesla Model S autopilot saved the car autonomously from a side collision from a boom lift truck. I was driving down the interstate and you can see the boom lift truck in question on the left side of the screen on a joining interstate road. Once the roads merged, the truck tried to get to the exit ramp on the right and never saw my Tesla. I actually wasn’t watching that direction and Tessy (the name of my car) was on duty with autopilot engaged. I became aware of the danger when Tessy alerted me with the “immediately take over” warning chime and the car swerving to the right to avoid the side collision.

He was so enamored with the feature, in fact, that as AP reported overnight, he was watching TV at the moment of the deadly crash.

Frank Baressi, 62, the driver of the truck and owner of Okemah Express LLC, said the Tesla driver was “playing Harry Potter on the TV screen” at the time of the crash and driving so quickly that “he went so fast through my trailer I didn’t see him.”

“It was still playing when he died and snapped a telephone pole a quarter mile down the road,” Baressi told The Associated Press in an interview from his home in Palm Harbor, Florida. He acknowledged he couldn’t see the movie, only heard it.

Frank Baressi, 62, was the driver of the truck that was hit by a Tesla that
Joshua D. Brown was operating in self-driving mode.

As AP adds, the Florida Highway Patrol said on Friday that it found an aftermarket digital video disc (DVD) player in the wreckage of the car.  “There was a portable DVD player in the vehicle,” said Sergeant Kim Montes of the Florida Highway Patrol in a telephone interview with Reuters.

Brown’s published obituary described him as a member of the Navy SEALs for 11 years and founder of Nexu Innovations Inc., working on wireless Internet networks and camera systems. In Washington, the Pentagon confirmed Brown’s work with the SEALs and said he left the service in 2008.

According to preliminary reports indicate the crash occurred when Baressi’s rig turned left in front of Brown’s Tesla at an intersection of a divided highway where there was no traffic light, the National Highway Traffic Safety Administration said. Brown died at the scene of the crash, which occurred May 7 in Williston, Florida, according to a Florida Highway Patrol report. The city is southwest of Gainesville.

By the time firefighters arrived, the wreckage of the Tesla — with its roof sheared off completely — had come to rest in a nearby yard hundreds of feet from the crash site, assistant chief Danny Wallace of the Williston Fire Department told The Associated Press. The driver was pronounced dead, “Signal 7” in the local firefighters’ jargon, and they respectfully covered the wreckage and waited for crash investigators to arrive.

The Tesla death comes as NHTSA is taking steps to ease the way onto the nation’s roads for self-driving cars, an anticipated sea-change in driving where Tesla has been on the leading edge. Self-driving cars have been expected to be a boon to safety because they’ll eliminate human errors. Human error is responsible for about 94 percent of crashes. 

This is not the first time automatic braking systems have malfunctioned, and several have been recalled to fix problems. In November, for instance, Toyota had to recall 31,000 full-sized Lexus and Toyota cars because the automatic braking system radar mistook steel joints or plates in the road for an object ahead and put on the brakes. Also last fall, Ford recalled 37,000 F-150 pickups because they braked with nothing in the way. The company said the radar could become confused when passing a large, reflective truck.

The technology relies on multiple cameras, radar, laser and computers to sense objects and determine if they are in the car’s way, said Mike Harley, an analyst at Kelley Blue Book. Systems like Tesla’s, which rely heavily on cameras, “aren’t sophisticated enough to overcome blindness from bright or low contrast light,” he said. Harley called the death unfortunate, but said that more deaths can be expected as the autonomous technology is refined.

Others were more direct: Karl Brauer, a senior analyst with Kelley Blue Book, said the accident is a huge blow to Tesla’s reputation. “They have been touting their safety and they have been touting their advanced technology,” he said. “This situation flies in the face of both.”

Brauer said Tesla will have to repair the damage in two ways. First, the company needs to make sure its customers understand that autopilot is meant to assist drivers, not to fully take over for them. Second, the company should update the cars’ software so autopilot will turn off if it senses the driver’s hands aren’t on the wheel for a certain period of time. Mercedes-Benz’s driver assist system is among those that require drivers’ hands to be on the wheel.

And then there is the biggest wildcard which Tesla could have never anticipated. As AP adds, records showed 8 speeding tickets in 6 years for the now dead driver.

In other words, while autopilots are a great feature, the biggest problem is that they can never anticipate, nor correct for, either the driver’s own carelessness (or stupidity) or far worse, that of others which no autopilot can possibly account for. As a result, we expect many more “autopilot” related deaths, especially as more decide to take the opportunity to catch up on missed movies.

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In an interview today on CNBC, Art Cashin hits the nail on the head as he typically does when asked about the central banks, the bond market and US Treasury yields hitting new record lows.

“It’s attracting money, it’s a very powerful magnet and it’s going to keep doing that.”

 

“With all apologies to Janet Yellen it’s getting to a point where it doesn’t matter what the Fed thinks, rates are going to stay low.”

On whether anything Stanley Fischer said today changes the view on that, Cashin delivers epic truthiness that nobody with a PhD sitting in the Eccles building ever wants to hear again.

“Not at all, I think the only thing I heard from him was a mild frustration that they couldn’t get things going. The market is more powerful than the Fed, that’s the problem.”

 

Or put another way (h/t @RudyHavenstein) – “Let the market clear!!”

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Authored by Yoon Young-Kwan, originally posted at Project Syndicate,

Populism, nationalism, and xenophobia all contributed to the victory of the “Leave” campaign in the United Kingdom’s recent referendum on membership in the European Union. But these forces float on the surface of a larger sea change: a fundamental shift worldwide in the relationship between the state and the market.

Since the birth of modern capitalism, these two frameworks of human activity have generally been at odds. While the market tends to expand geographically as its participants pursue economic benefits, the state seeks to keep orderly everybody and everything within the territory it controls. A merchant may recognize market opportunities in a foreign country, but he will run into the state – most immediately, that country’s immigration authorities – if he pursues them.

How to reconcile the tension between the market and the state is the central concern of political economy today, just as it was for Adam Smith in the eighteenth century, Friedrich List and Karl Marx in the nineteenth century, and John Maynard Keynes and Friedrich von Hayek in their long debate on the topic through the middle decades of the twentieth century.

Let’s consider two hypothetical extremes in the state-market relationship.

The first is a seamless global market in which individuals can maximize their material benefits without any state intervention. The problem with this scenario is that you may live in a country that is vulnerable to all the negative consequences of no-holds-barred globalization, such as currency devaluation, labor exploitation, the flouting of intellectual property laws, and so forth.

The other extreme is a world comprising entirely isolated autarchic states, where individuals are protected from external economic forces and the state has full autonomy over domestic affairs. In this scenario, you will have to forgo all the well-known economic benefits of the global division of labor.

Between these two extremes lies most of the world as it is, characterized by regional integration projects like the EU or the North American Free Trade Agreement.

We can identify important swings during the history of capitalism over the last two centuries, either toward the market or the state. For example, the repeal of the Corn Laws in the UK in 1846 favored a free market in international trade and accelerated globalization until the outbreak of World War I.

After WWI, the pendulum swung back toward the state. Financial capital in the West was weakened politically, and a mobilized working class took the opportunity to demand jobs and social-welfare programs that ran counter to the logic and rules of a globalized market. In the run-up to World War II, beggar-thy-neighbor policies and rampant protectionism ensued – with Britain leaving the gold standard in 1931 in response to a run on the pound. The Economist declared that Monday, September 21, “the definite end of an epoch in the world’s financial and economic development.” After the passage of Brexit, the same journal warned, “Britain is sailing into a storm with no one at the wheel.”

The 1944 Bretton Woods conference marked another swing back toward the market, but this time allowed for some degree of national autonomy. Until the late 1960s, a harmonious balance of international openness and national autonomy allowed for widespread prosperity.

Turbulence returned in the 1970s, however, as the slow growth and high prices of “stagflation” and a global energy crisis pushed the pendulum back toward fully liberalized markets – a shift from the Keynesian to the Hayekian world, helped along by Margaret Thatcher in the UK and Ronald Reagan in the United States.

This brings us to the present. The economic crisis of 2008, and the global economy’s failure to recover from it fully, put an end to the project begun by Thatcher and Reagan. As in the post-WWI period, workers came to see themselves as left behind by globalization, with political leaders favoring financiers and big business at their expense. In the case of Brexit, the “Leave” camp voted for more national autonomy, even though it will have a clear material cost.

An American version of Brexit may not be far behind if the next US president scraps the Trans-Pacific Partnership trade deal with 11 Pacific Rim countries, signed in February of this year. At a time when global trade negotiations are almost dead, the TPP should seem like a reasonable approach to boosting multilateral trade. And yet both presumptive US presidential candidates say they oppose it, promising what would be tantamount to an “Amexit” from the global trading system.

We are at an interregnum. Social and political discontent will continue to bubble up around the world until we return the state-market relationship to a healthy equilibrium. The problem is that no one knows how best to do this.

Some propose re-harmonizing international markets with national autonomy, as occurred under Bretton Woods. But the post-war international economic order was built for the pre-globalization age, and we cannot put the genie back in the bottle, even if it were possible to do so. Brexit marks the beginning of the end of the latest era of globalization. What comes next is anyone’s guess, but we can be certain that it won’t be the final destination.

In conclusion, we found this comment extremely pertinent (via Steve Hurst)…

Its inevitable the empty wallet movement overcomes the treasure chest party at the ballot box as the number of empty wallets steadily increases driven by inequality mechanisms.

 

If you aint got nuttin you got nuttin to lose.

 

There is a welfare system in place but its effect is emasculating and longterm unemployment is correlated with psychological problems. The longterm and well established trend in growing youth unemployment is a timebomb at so many levels.

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Despite – or perhaps due to – Italy’s failed attempt to slide a state-funded €40 billion recapitalization attempt past Angela Merkel while blaming it on Brexit, and coupled with a bailout proposal to provide €150 billion in liquidity to insolvent banks, overnight we got yet another confirmation that the biggest risk factor for Europe is not Brexit but Italy, where yet another failed bank was bailed out. As the FT reports overnight, Atlante, Italy’s privately backed €5bn bank bailout fund which was created in April to stem the threat of contagion from struggling lenders and whose assets turned out to be woefully inadequate, took control of Veneto Banca after a €1bn capital increase demanded by EU bank regulators attracted zero interest.

This is good news for Veneto Banco and bad news for all other insolvent banks, because the fund, known as Atlas in English, was intended to hold up the sky for Italian banks. Instead it is now practically out of funds, having depleted more than half of its war chest after taking control of Popolare di Vicenza, another regional bank, last month.

That has left little in reserve to tackle about €200bn in non-performing loans run up during Italy’s three-year recession, of which €85bn have not yet been written down. Bad loans are weighing on bank lending and crimping an already weak recovery.

As the FT adds, Lorenzo Codogno, an economist and former treasury director-general, said: “Italian [and to a lesser extent European] banks have entered into a negative loop where they cannot ask for private capital as there is no investor appetite and without capital they cannot provision or write off NPLs.”

This means the only hope is public-funded bailouts, however that is banned by eurozone regulations.

As we reported on Monday, Renzi had hoped the turmoil touched off by the UK’s vote to leave the EU would persuade Ms Merkel to suspend state aid rules and allow Rome to lead a recapitalisation of Italy’s weakest banks . But Ms Merkel rejected the idea, saying: “We wrote the rules for the credit system. We cannot change them every two years.” The European Central Bank also opposed the idea. Benoit Couere, a board member, said suspending new rules designed to shield taxpayers from the burden of bank rescues would be the end of the single market.

Then, as we reported yesterday, in a minor concession, the European Commission signed off a separate plan on Thursday allowing Italy to help banks with short-term liquidity problems. The move is similar to arrangements already in place in several other EU countries since the 2008 financial crisis. The commission said only solvent banks were eligible for the “precautionary” scheme and that there was “no expectation” it would need to be used.

Judging by the prompt bailout of yet one more bank, the question is not if but when it will be used.

A further problem for Italy is that its debt capacity as a sovereign has now topped out, and any new debt incurred to bailout banks will promptly result in downgrades, and a threat to state solvency: “Any increase in government debt we see as a negative development,” said Ed Parker, head of Emea sovereign ratings at Fitch, which rates Italy at triple B+, two notches above junk. Colin Ellis, chief credit officer in Emea at Moody’s, said: “Italian debt stock is already high and it would be credit negative to add to that pile of debt. The big problem is the level of uncertainty in Italy and the wider eurozone right now.”

Meanwhile, a desperate Italy fully aware of what is coming, is considering increasing Atlante’s firepower by a further €5bn or more by drawing money from pension funds, the state or foreign investors, say bankers. Atlante is due to launch a second fund focused on buying NPLs next month. Authorities in Italy are racing to create a bigger cushion for the banks before publication of stress test results, expected at the end of July. Senior bankers fear Italian lenders will emerge poorly from the tests, triggering another slide in share prices.

Of course, if that is the only catalyst, there is no need to worry: there is no way that Mario Draghi will unleash the dominos that will topple the Italian banking system, when it was he himself who as Italy’s central banker allowed these banks to pile up the unprecedented amount of bad loans. As such expect all Italian banks to pass.

The real threat is if the local population wakes up to the risk of holding their savings in a financial system that is now teetering on the edge, something Renzi himself admitted when he said that he “hoped to use a liquidity backstop to contain investor panic, which could result in a run on deposits and affect banks’ liquidity.” Because even if it buys up every bond, loan and stock in the world, the ECB will not be able to fix the public’s loss of trust in fractional reserve banking.

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