Month: May 2016

Submitted by Nick Colas of Convergex

Supermodels And Other Productivity Measures

One of the livelier debates in economics at the moment relates to the intersection of productivity growth and the role of technology in modern society.  At its core, the problem is a simple one: for all the smartphones, Internet access, apps and other technological advancements of the last decade, productivity growth is close to zero (0.3% in Q4 2016).  One popular rebuttal from tech land is essentially “You economists are doing it wrong – missing critical items like free apps and other benefits of an interconnected world.”

Today we look this problem through a novel lens, measuring the inflation adjusted price of productivity-enhancing consumer items from the 1920s. The idea is that these products – cars, washing machines, electric refrigerators, sewing machines and typewriters – helped play a role in forming the golden age of U.S. productivity growth (1939-2000).  Our conclusion: if current day technology is so helpful to productivity, why is it so cheap?

* * *

Audrey Munson was the world’s first supermodel, but unlike her modern day counterparts, hers was a life of genuine trouble and suffering.  She worked in the first years of the 20th century, modeling primarily for sculptors who were creating works for both public display and private homes.  She had three things going for her which made her an extremely popular model with the artists of the day:

• She closely resembled the classical Greco-Roman ideal of beauty, with a symmetrical face and what was deemed at the time an appropriately proportional body type.
• She was very entrepreneurial, going from door to door looking for work with New York’s very best artists.
• She would work in the nude but purely in a professional capacity, which engendered tremendous respect among her peers.

Sadly, as modernism shifted artistic tastes away from classical forms she eventually fell on hard times.  By her 40s, mental illness set in and she was committed to a psychiatric hospital.  She died at the age of 104, in 1996, having spent the majority of her life in the St Lawrence State Hospital for the Insane in upstate New York.

There is a recent book out about Audrey’s life – aptly called “The Curse of Beauty” – which I can recommend if you want to learn more.  If you want to see a few images of the sculptures she inspired, here is a small sample:

• On the Upper West Side of Manhattan, a memorial to Isidor and Ida Strauss who perished on the Titanic, and some color on the book from Vanity Fair: http://ift.tt/1VV29dE
• Adolph Weinman’s “The Setting Sun” created for the Panama-Pacific International Exposition: http://ift.tt/1YfqaeJ
• Daniel Chester French’s “Mourning Victory”, which has pride of place in the Metropolitan Museum’s American Wing: http://ift.tt/1WREHON/
• Some pictures of Audrey in real life: http://ift.tt/1WREHOO…

We know what Audrey made as a model: $0.50/hour, or $12.03 adjusted for inflation today.  Compare that to Linda Evangelista, who once famously proclaimed “I don’t get out of bed for less than $10,000/day”, and you have a bit of an economic conundrum.  Why are models worth so much more today?  After all, they aren’t any more “productive”…

The answer, or at least “an” answer, is that photography is a more scalable medium than sculpture and less open to the artist’s interpretation of the model.  Audrey was famous in her time, to be sure, but Kate Moss and Adriana Lima have the benefit of thousands of photographic images to build and maintain their brands on a global basis.  And while a good photographer can help, in the end “The camera never lies”. 

All of this reminds me of the current debate in economic circles: why is U.S. productivity growth so slow (all of 0.3% in Q4 2014, and well below post-War trends of 2% since the Great Recession) when we have so much new technology around?  This puzzle even has a name – Solow’s paradox – after Nobel Prize winner Robert Solow’s offhand comment “You can see the computer age everywhere but in the productivity statistics”.  Explanations from Silicon Valley, who aren’t fans of this line of reasoning, range from “You’re measuring productivity incorrectly” to “wait for it, it’s coming” to “it’s concentrated in the services sector”.

You can read a good review of the debate here, in a 2014 article in The Economist: http://ift.tt/1uFatCf

One way to consider the question is to look at what productivity-enhancing technology cost in the 1920s and compare it to popular consumer products today.  The idea is simple: technology that truly boosts productivity should be expensive since buyers will happily pay a price premium for that benefit.

Take one nearly antediluvian example: the sewing machine.  In the 1850s one of these devices cost $100 – about $2,700 in today’s dollars.  Why so much? First, they increased household productivity dramatically since most clothes were homemade. Second, the better designs enjoyed strong patent protection. Fun fact, and not surprising given these numbers: sewing machines were the first product sold in the U.S. on an installment plan.  After all, who could afford $100 all at once?

Fast forward a bit to the 1920s, and consider the prices of other household appliances:

• A washing machine for $81.50. That is $970.39 today. Actual current price of a nice GE or Whirlpool top loading washer (courtesy of PC Richard’s website): $450.
• A vacuum cleaner for $28.95, or $344.70 today. Actual current price of a Shark Navigator on Amazon: $179.00
• An electric refrigerator for $285.00, or $3,393.38 today. A nice chrome one from Best Buy today: $899.99.
• If you are feeling nostalgic, here are the ads: http://ift.tt/1AErA7i

As for office productivity, the typewriter was all the rage at the turn of the 20th century, costing all of $39.80 around 1915.  That is $627.66 today.  Funny enough, a medium range Dell desktop with screen costs $699 today on Amazon.

Now, if we are getting so much productivity out of the current range of offerings from Silicon Valley, I have a question: why aren’t these products really expensive, as the technology of the 1920s clearly was?  In fairness, a cell phone is costly – good monthly deals from major carriers usually make you pay about $600 for the phone. Which, funny enough, is what the typewriter cost (inflation adjusted) exactly 100 years ago.

But what about all the free apps and services?  Even Uber has to pay bonuses to recruit drivers. Why is that, if the model is so good? Yes, getting to scale is important for the service, but shouldn’t drivers come running if their productivity is so much better in the new model? Something is off.  Either the competitive pressures of excess venture capital in the system is dampening pricing power, or perhaps the latest wave of tech just doesn’t hold a candle to the real productivity enhancements of sewing machine, typewriter, washer and fridge.

I know – none of this really answers the question of Solow’s paradox satisfactorily.  At the margin, it does seem that the technologists have it right: something is wrong in the measurement of productivity.  The world has changed dramatically in the last decade, from iPhones to Uber and Facebook.  Whenever I write on this topic I get one consistent retort: productivity is flat because we’re all on social media.  Maybe so…  But then why isn’t Facebook expensive to use? In fact, I hear it is basically free.

via http://ift.tt/1Yfq9Hx Tyler Durden

UPS, and roughly 270,000 retired truck drivers, construction workers, and other service workers can breathe a collective sigh of relief… for now. As we previously reported, the Central States Pension Fund had submitted a plan to Treasury that if approved would have cut member benefits, and triggered UPS to take an estimated $3.8 billion charge.

As the WSJ reports, Kenneth Feinberg (who was appointed by the Treasury to review all such applications) rejected the plan presented by the CSPF. Feinberg cited a few reasons for his decision, one being that it imposed cuts in a disproportionate manner, another was that the notifications sent to participants were too technical to be understood, but namely Feinberg didn't agree with the assumption that the fund would achieve 7.5% yearly investment returns going forward. Those returns "were too optimistic and unreasonable" Feinberg said.

"You get to breathe again, you get to exhale. Our life was on hold." said Bill Orms, a 69 year-old retired truck driver from Akron, Ohio who would have seen his $2,400 a month benefit cut in half had the proposal been accepted.

Absent an injection of funds or benefit cuts, the fund which pays out $2.8 billion in benefits a year will be insolvent within ten years according to Thomas Nyhan, the plan's executive director. Nyhan added that he was "disappointed" by the Treasury's decision. According to the WSJ, the fund currently has $16.8 billion in assets against $35 billion in liabilities, and has roughly one active worker contributing to the fund for every four retirees that draw from it.

So we're now back to where we started. The Central States Pension Fund will by its own estimates be insolvent within ten years, and the government safety net, the Pension Benefit Guaranty Corp cannot be counted on to pick up the benefits because it too is well on its way to insolvency.

If the Treasury won't allow any pension cuts, and the government created safety net won't be there to keep the benefits flowing, how will the cash continue to flow to members? With the precedent now set by the Treasury that no cuts will be allowed, the answer will likely come in the form of a massive bailout.

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By EconMatters

I was originally looking at Tesla from a trading standpoint, but in comparing GM, both company`s Financial internals look bleak longer term. GM is a debt accumulating machine, and Tesla is the starter version of this model. The Automobile manufacturing Industry is a capital intensive business, but both these companies are laggards to best practices in the Industry at large. There is major trouble ahead for both companies at this level of financial mismanagement. Tesla is trying to grow too fast, and GM is a bloated Government style bureaucracy that requires major pruning to say the least.

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Via Eric Peters Autos blog,

If Elon Musk’s various projects are so Iron Man fabulous, why do they all need so much government “help”? Shouldn’t Tesla – and Solar City and SpaceX – be able to stand on their merits… if they actually have merit?

Tesla fanbois – and Musk himself – will tell you all about the virtues of his electric cars. They are sleek and speedy. This is true. But they are also expensive (the least expensive model, the pending Model X, will reportedly start around $35k, about the same price as a luxury sedan like the Lexus ES350) and come standard with a number of significant functional deficits such as a best-case range about half that of most conventional cars and recharge times at least 4-5 times as long as it takes to refuel a conventional car.

That’s if you can find a Tesla “supercharger” station.

If not, then the recharge time becomes hours rather than half an hour.

But the real problem with Tesla cars is that no one actually buys them.

Well, not directly.

Their manufacture is heavily subsidized – and their sale is heavily subsidized

Either way, the taxpayer (rather than the “buyer”) is the one who gets the bill.

On the manufacturing end, Tesla got $1.3 billion in special crony-capitalist  “incentives” from the state of Nevada to build its battery factory there. This includes an exemption from having to pay any property taxes (unlike you and I) for the next 20 years. Another inducement was $195 million in transferable tax credits – which Tesla could sell for cash.

California provides similar inducements – including $15 million from the state of California to “create jobs” in the state.

Tesla does not make money by selling cars, either.

It makes money by selling “carbon credits” to real car companies that make functionally and economically viable vehicles that can and do sell on the merits – but which are not “zero emissions” vehicles, as the electric Tesla is claimed to be (but isn’t, actually, unless you don’t count the emissions produced by the utility plants that provide the electricity they run on, or the emissions produced mining the materials necessary to make the hundreds of pounds of batteries needed by each car).

Laws in nine states (including California) require each automaker selling cars in the state to sell a certain number of “zero emissions” vehicles, else be fined. Since only electric cars qualify under the law as “zero emissions” vehicles – and the majority of cars made by the real car companies are not electric cars – they end up having to “purchase” (air quotes for the same reason that you are a “customer” of the IRS’s)  these “carbon credits” from Tesla, subsidizing Tesla’s operations and adding to the expense of manufacturing their own functionally and economically viable cars.

The amount Tesla has “earned” this way is in the neighborhood of $517 million.     

Tesla is a newfangled take on the welfare queen. Or more accurately, the EBT card – which is designed to look like a credit card. To have the appearance of a legitimate transaction … as opposed to a welfare payment.

Underneath the glitz and showmanship, that’s what all of Musk’s “businesses” are about. They all depend entirely on government – that is, on taxpayer “help” – in order to survive.

Without that “help,” none of Musk’s Tesla’s could survive.

It is estimated that Tesla’s various ventures – including his new SolarCity solar panel operation and SpaceX – have cost taxpayers at least $4.9 billion, with Tesla accounting for about half of that dole.

And he still loses money.

Musk fanbois will counter by pointing out that other businesses – including the car business – also get “help” from the government (that is, from taxpayers) which is perfectly true. But that’s not much of a defense – much less a refutation of the charge that Musk is a crony capitalist.

Which is all he is.

The real difference between Musk’s operations and those of say General Motors is that General Motors’s products are fundamentally viable while Tesla’s are not. GM is happy to accept government “help” when offered but it is not necessary for taxpayers to bankroll the production of Corvettes – nor provide thousands of dollars in cash incentives to each prospective buyer in order to “stimulate” sales.

The straight dope is that Tesla could not build a single car without the government’s help. Take away that “help” and the actual cost would be so prohibitive that virtually no one except perhaps fellow billionaires like Musk with money to burn on toys would buy a Tesla.

As it is – even with massive subsidies at the manufacturing level and then again at the retail level – each Tesla still “sells” at a loss of several thousand dollars per car … adding up to almost $400 million so far this year (the company just announced this; see here).

The typical Tesla “buyer,” meanwhile, has an annual income in excess of $250,000.

Why are taxpayers – the majority of them not earning $250k annually – being taxed to support the “purchase” of electric exotic cars by extremely affluent people?

Why should taxpayers be made to subsidize any of Musk’s “businesses”?

He’s a billionaire.

And – we’re constantly told – a really smart guy.

Surely he could fund (or find) the private capital necessary to fund his various projects. The fact that he could not find private – that is, willing – investors but instead has to rely on the coercive power of the government to fund his projects speaks volumes about the fundamental worth of his projects.

He “succeeds” only because of his ability to game the system, not by offering products that people are willing to pay for (using their own money, that is).

The heroic real-life Tony Stark image notwithstanding, Musk is an operator – not a creator of value.

He has more in common with the vulture capitalist oligarchs of the former Soviet Union than with the namesake of his electric car company.

via http://ift.tt/273JXna Tyler Durden

Preserving Wealth…

 

 

 

Chart Source: Nick Laird at ShareLynx.com

via http://ift.tt/1QVcsrE Tyler Durden

Submitted by John Rubino via DollarCollapse.com,

For the past 50 or so years, the quickest way for a sharp young sociopath to get rich has been to join an investment bank or hedge fund. The former were riding a “regulatory capture” gravy train that became ever-more-lucrative as new government agencies morphed into subsidiaries of Wall Street. Hedge funds, meanwhile, were surfing the wave of easy money that inevitably results from putting banks in charge of interest rates and government spending.

Said another way, when financial assets are being artificially inflated by excessive liquidity, it’s easy to make money by shuffling this ever-appreciating inventory back and forth, and to look very smart while doing so.

But those days are ending with a bang. Consider:

Mega-bank profits are collapsing

Virtually every major bank in every major country reported Q1 earnings ranging from disappointing to catastrophic. To take just one representative example, Deutsche Bank’s profit fell by 58%, and it is now shedding 35,000 workers in 10 countries while eliminating half its investment banking customers.

It’s like that everywhere. Even Goldman Sachs, whose former (and future) execs hold decision-making roles in virtually every Treasury and central bank, is hurting:

Goldman Said to Extend Fixed-Income Job Cuts to 10% of Staff

 

(Bloomberg) – Goldman Sachs Group Inc. is cutting more jobs in its securities units, extending reductions in fixed-income operations this year to roughly 10 percent of workers there, according to people with knowledge of the situation.

 

The dismissals in New York and London this week build on cuts that already had targeted about 8 percent of fixed-income personnel through last month, people with knowledge of the matter said, asking not to be identified because the plans aren’t public. The push also affects the equities division, one person said.

 

Goldman Sachs Chief Executive Officer Lloyd Blankfein is undertaking the firm’s biggest cost-cutting push in years as the investment bank tries to weather a slump in trading and dealmaking, people familiar with the plan said last month.

 

Goldman Sachs’s trading revenue tumbled 37 percent to $3.44 billion in this year’s first quarter from a year earlier, as market volatility and falling asset values drove clients to the sidelines. Revenue from trading bonds, currencies and commodities plunged 47 percent. The company’s stock is down 11 percent this year.

The Hedge Fund Model Turned Out To Be Pointless

Hedge funds were the rock stars of the investment world, raking in fees that dwarfed what traditional mutual funds charge, while turning high profile managers like Bill Ackman and David Einhorn into household names. But that too has passed. Far from being iconoclastic geniuses, hedge fund managers in the aggregate turned out to be a typical dumb-money herd, piling into stocks like Apple (down 30% from its recent high), Allergan (down 41%) and Valeant (down 87%), for (apparently) no other reason than that their prices were rising. Here’s how the huge and much-revered Sequoia Fund did with and without its Valeant position.

Einhorn’s Greenlight fund lost 20% in 2015, dramatically underperforming plain vanilla index funds which charge a fraction of hedge fund management fees. Ackman’s Pershing Square has lost $5.5 billion in just 15 months, primarily because of a huge bet on Valeant. And this, remember, is while stocks and bonds were generally rising.

But wait, there’s more. Irish specialty pharmaceutical firm and hedge fund favorite Endo just announced disappointing earnings and weak guidance, causing its stock to gap down by 40% in a matter of minutes and virtually guaranteeing huge Q2 disappointments for thousands of hedge fund investors.

Clients, not surprisingly, are bolting en masse. Most recently, insurance giants MetLife and AIG announced plans to redeem big parts of their hedge fund positions. And hedge fund obituaries are now a financial media staple:

Hedge Fund Managers Lose Their Swagger

 

(Bloomberg) – Doug Dillard followed the path that once almost guaranteed entrance into the 1 Percent: Good college (Georgetown), investment bank (Morgan Stanley), MBA (Harvard). Then a hedge fund. A decade out of business school, he was heading Standard Pacific Capital, a multibillion-dollar San Francisco firm that traded global stocks. It did well by its clients, making money in 2008 as markets plummeted.

 

But Dillard’s returns—like most other hedge fund managers’—failed to keep pace in the post-Great Recession bull market. Investors exited. In February, when assets slid below $500 million, Dillard pulled the plug. “It has recently become clear to both of us that sometimes there is a logical conclusion to even a good thing,” he and his partner, Raj Venkatesan, wrote to clients.

 

They aren’t the only ones thinking their good thing might be gone. On April 26, Third Point manager Dan Loeb, one of the hedge fund elite, wrote to investors that the industry is “in the first innings of a washout.” At the annual Berkshire Hathaway shareholder meeting at the end of April, Warren Buffett told investors to keep money away from hedge funds because of their high fees and lousy returns.

 

“People are worried about their jobs,” says Edward Magi, who sells real estate for William Pitt Sotheby’s in Southport, Conn., an area popular with hedge funders. He’s seen two multimillion-dollar deals fall apart this year because the buyers lost work. Hedge funds have gone through tough patches before, but this one is disquieting, as the broader investing world isn’t in crisis mode. The S&P 500-stock index, after a rocky start to 2016, advanced about 1.3 percent in the first quarter. Hedge funds lost an average of 0.6 percent.

 

Even some high-profile managers are struggling. The funds of Alan Howard and Richard Perry—once consistent winners—were down in the first quarter, after two years of losses. The S&P 500 returned a cumulative 16.7 percent in that period. In the past two quarters, investors have pulled more money from hedge funds than they put in—almost $17 billion—the worst outflow since 2009. More are demanding that struggling funds lower the fees of 2 percent of assets and 20 percent of profits they’ve typically charged.

Why is this happening?

First, QE and negative interest rates turned out to have unintended consequences, one of which is a drying up of bond trading. If governments buy up all the high-grade bonds then obviously there aren’t many left to trade. And if the yield on new bonds is negative, holders of existing positive-coupon bonds have no incentive to sell them. Hence, eerily silent trading desks around the world.

Second, the financialization of the global economy has created a vast sea of hot money that flows mindlessly from one location and asset class to another on a scale that exceeds traders’ ability to predict and/or manipulate. Put another way, in a world where it’s impossible to know what’s going to boom or crash next, it’s irrationally dangerous to place big bets on anything. See Bloomberg’s ‘Paralyzing Volatility’ Means Trouble for Wall Street Giants:

From stocks to currencies and bonds, the upswing in turbulence to start the year is chasing all but the bravest traders from financial markets. Despite the recent rebound in U.S. equities, volume in the S&P 500 Index is down 23 percent. Speculative bets on the direction of currencies have also dropped to the lowest in two years, while average daily trading among dealers in U.S. Treasuries is close to a seven-year low.

 

Worries about the outlook for the U.S., Europe and China, as well as mixed policy signals from central bankers around the world, have all contributed to what UBS Group AG Chief Executive Officer Sergio Ermotti called a “paralyzing volatility” that’s scaring away clients and caused industry-wide trading revenue to tumble to the lowest since 2009.

 

Investor concern over the state of the global economy is adding to “the structural pressure that’s been hurting banks for the last few years,” said Paul Gulberg, a banking analyst at Portales Partners LLC.

 

Whipsawed Traders

 

Normally, a rise in volatility tends to lead to higher trading activity as traders jump in to bet on the market’s ultimate direction, according to Gulberg. That hasn’t been the case this time. Violent swings across assets have whipsawed just about everyone as concern deepens over the state of the global economy and the effectiveness of negative interest rates and quantitative easing.

 

At the start of the year, it took just six harrowing weeks for the S&P 500 to lose 11 percent and then a mere five weeks to recoup all the losses. What’s more, it came within months of its August swoon, the first time since 1998 that bull-market investors have suffered two such swings in close succession.

 

Even after stocks rallied in February, trading has fallen off. U.S. equity volume has averaged 7.2 billion shares a day since the bottom, compared with 9.3 billion shares a day in the first six weeks of the year, data compiled by Bloomberg show. Daily moves in the S&P 500 have also averaged 0.84 percent since August, versus 0.55 percent in the prior two years.

 

A similar picture is taking shape in other markets. After putting on a record amount of futures contracts in December, traders have since scaled back wagers on the direction of the dollar against eight major currencies as implied volatility jumped. The last time conviction was so weak in terms of positioning was in 2014.

 

In Treasuries, long considered the deepest and safest market on the planet, average daily volume among primary dealers fell to $444 billion in April, just above its low in December 2009. That occurred after some measures indicated that swings 10-year Treasury yields soared to record levels, according to TD Securities.

 

“The state of the world — it’s fragile at best,” Bob Savage, the CEO of CCTrack Solutions, a New York-based hedge fund.

Where do we go from here? Probably into a crisis in which the world stops trusting markets, and financial assets are devalued accordingly.

via http://ift.tt/21IZ7KJ Tyler Durden

One week ago, Deutsche Bank’s Dominic Konstam unveiled, whether he likes it or not, what the next all too likely step will be as central bankers scramble to preserve order in a world in which monetary policy has all but lost effectiveness: “It is becoming increasingly clear to us that the level of yields at which credit expansion in Europe and Japan will pick up in earnest is probably negative, and substantially so. Therefore, the ECB and BoJ should move more strongly toward penalizing savings via negative retail deposit rates or perhaps wealth taxes.”

Many were not happy, although in reality the only reason why the DB strategist proposed this disturbing idea is because this is precisely what the central banks will end up doing.

Today, he follows up with an explanation just why the central bankers will engage in such lunatic measures: quite simply, he thinks that economic contraction is now practically assured – and may have already begun – for a simple reason: contrary to popular belief, this particular “expansion” will die of old age after all, and won’t even need the Fed’s intervention to unleash the next recession (if not depression).

There is an old saying amongst market watchers that economic expansions do not die of old age. Rather, during the course of the business cycle dynamics emerge that threaten to become unacceptable from a policy perspective. In the context of economic expansion, that dynamic has been inflation. The conventional pattern has been that as expansions mature, demand for labor outstrips the available supply, creating upward pressure on wages. In the presence of pricing power, higher wages are passed along to end consumers through higher prices. Profits decline to the extent that wage acceleration outstrips price increases. The point is that the historical template has the Fed, as an exogenous agent, raising rates to slow wage growth and inflation and to restore profits. In this sense the cycle is actively terminated, rather than “dying of old age”.

 

A number of stylized facts about the business cycle are apparent historically. Recessions always occur as part of an effort to restore profit growth. Profits are almost always dependent on productivity growth. Productivity recoveries almost always involve reduced labor demand. Productivity recoveries usually follow a period of stronger wage growth – and in that way productivity and wages are correlated. It is the strength in wages, however, that pressures profits unless passed through into higher prices. It is therefore always the case that recessions involve a period of central bank monetary tightening aimed at curbing any pass through of higher wages into prices and thus forcing a slowdown in labor demand to boost productivity via a recession and to then curb the rise in wages. Recessions are effectively created by policymakers to counter otherwise accelerating inflation.

However, this time it’s different. As Konstam writes, “the current cycle is distinct in that pricing power is generally lower than in the past… This is likely because of the now well worn theme of global competition: production can be moved to lower wage centers, allowing constant or larger profits in an environment of steady or even lower prices. Lower pricing power reduces the ability of the corporate sector to pass along even mild wage increases to consumers and makes profits that much more vulnerable.“

Then there is the issue of plummeting productivity, something discussed here extensively in the past:

A second unique aspect of the current cycle is that productivity growth across major economies has been stubbornly low throughout the cycle. We have particular sympathy for the idea that demographic changes are at least in part responsible. The aging of the baby boomer generation has been reflected in an aging workforce, and productivity growth in older workers is lower than in younger workers for life cycle reasons: these workers are further removed from education or vocational training in the use of technology and at any rate have already acquired a set of job related skills.

 

 

 

Because in equilibrium workers are paid their productivity, stagnant productivity growth implies static wage growth. It is incorrect, however, to presume that faster wages imply concurrent faster productivity growth. Higher productivity might have followed higher wages in the past, but only by virtue of reduced labor input that was meant to contain wage growth relative to consumer prices and restore profits.

 

 

If imbalances arise in the supply of and demand for labor, wages might temporarily accelerate more rapidly than underlying trend productivity growth. This creates a profits problem. The Fed restores productivity by slowing aggregate demand, allowing labor input to decline more rapidly than output. Higher productivity restores profits: wage increases are “paid for” by increasing output per unit labor input. As with lower pricing power, stubbornly low productivity growth makes (falling) profits weaker on the margin.

Konstam then flips the entire “old age” question on its head and asks the relevant question namely whether the Fed is still needed to create a recession given the characteristics of the current economic cycle.

We would argue that it is not. Last week’s employment report illustrates that there is still very little or no wage pressure. This points to the persistent presence of slack in labor markets, perhaps because NAIRU is lower than even the latest estimates. Moreover, to the extent that the Fed is seeking to increase wage share, they should be biased to remain “behind the curve” pursuant to optimal control. Note that the absence of wage and price pressure and a static Fed are more or less consistent with the current level of yields and the shape of the curve, while optimal control would bias the curve steeper in a bearish fashion.

So if Fed action (read tightening) is not needed to induce a recession, what could be the catalyst? According to DB, two things.

The first is a demand shock. This could in principle occur as a result of Fed tightening as during the 2007/2008 housing shock which occurred well after the Fed effort to curb wage growth was under way. In these instances the demand shock forces rapid reductions in labor demand due to the profit drain from higher wages. The central bank usually reverses course quickly with monetary easing, and fiscal stimulus is deployed to counteract the negative demand shock. In terms of market movement, the reaction of policy makers to a demand shock would bias the curve to steepen bullishly.

 

In the current environment, savings rates are rising and likely to continue to do so. We have recently argued that demographics are pushing the labor force participation rate lower, which exerts upward pressure on the savings rate. It is not clear the consumer has experienced a shock sufficient to create a recession. However, to a larger extent a slow rise in savings is to be expected given the demographic picture – a large proportion of baby boomers are approaching retirement, when savings rates are typically highest – and because twenty-somethings need to save for homeownership for longer than previously given more stringent credit standards. A shock rise in savings would require a collapse in risk assets including house prices. Such a shock could emanate from a disorderly deleveraging in China, perhaps accompanied by a lumpy devaluation. We would argue that – thanks to the unfolding relent – scenarios such as these are less likely now.

Maybe, although as we showed recently, as of March, the US savings rate following numerous revisions, was already at the highest in over three  years and rising.

 

Which brings us to Konstam’s worst case scenario, one which is quickly starting to smell like the credit analyst’s “base-case” namely the “third avenue for recession” which Deutsche Bank believes is the worst of the three. “This is an endogenous slowdown in labor demand that results because corporations are not just tired of negative profit growth, but also because they are drawing a line in the sand from the perspective of defending margins. No one knows where that line is. But payroll reports like last week’s suggest it could be around here. We have had the worst profit recession since 1971 but profit share is still in the low 20 percent range, having peaked around 24 pct. The worst level has been in the mid to low teens.”

And the punchline:

An endogenous recession – not due to a negative demand shock or Fed policy tightening – is the worst because not only does it speak to policy impotence, but it also highlights the inherent contradiction in capitalism that has worried economists for over a century. That contradiction is that profits, savings or “surplus” must be continually plowed back into the economy to support growth, yet doing so runs the risk of undermining the next profit cycle through over supply. If profits are not plowed back, corporations run the risk of deficit demand. In simple terms, a line in the sand for profit share means that corporations end up firing workers who just happen to be consumers as well.

But why plow back profits into the economy when one can just buy back stock instead and make owners of capital wealthy beyond their wildest dreams when you have every central bank, and in the case of the ECB explicitly, backstopping bond purchases so that the use of proceeds can just to to fund buybacks.

Or, god forbid that the “inherent contradiction” not in capitalism but in the neo-Keynesian model is revealed, exposing all those tenured economists and central bankers as clueless cranks, and finally vaulting Austrian economics to the pinnacle of economic thought.

The irony, of course, is that once the global economy falls into the deepest economic depression the world has seen – perhaps ever – everyone will be shocked and confused hot it is that we go there when “markets” kept rising, and rising, and rising…

Sarcasm aside, let’s summarize: according to Deutsche Bank the worst kind of a recession, an “endogenous one” in which labor demand plunges as “corporations are not just tired of negative profit growth, but also because they are drawing a line in the sand from the perspective of defending margins” may be imminent… or is already here because based on “payroll reports like last week’s suggest it could be around here.“

Surely, that alone should be enough to send the S&P to new all time highs.

* * *

And for those wondering: yes, according to DB things will get worse simply because they have to get worse to offer some hope for an actual mean reversion-based recovery. Sadly, as DB is all too correct, the only way that central banks have ahead of them now involves more negative rates, more wealth transfers, and of course, the infamous “wealth tax” DB touched upon last week.

Things will need to get worse before policy can become radically better. That may involve piling more debt from government onto existing debt, coupled with “helicopter money” elements to reduce some of the burden for existing debtors. It could involve a direct transfer away from profits and savers to workers and spenders via negative rates and wealth taxes that banks collect either way. There is light at the end of the tunnel. But we have yet got to the right tunnel and probably won’t until the US falls into a recession.

Actually, make that a depression, because when central banks have really nothing left to lose, that’s when the terminal step in fiat debasement can finally begin.

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Via Dana Lyons' Tumblr,

A key global equity index is testing its significant breakout level from last month.

Just a quick post today featuring one of our new favorite indexes, the Global Dow Index. Again, the Global Dow is an equal-weighted average of 150 of the world’s largest stocks. It isn’t our favorite because it is necesarilly the most attractive looking investment at this time. Rather, we have found it very instructive as to the trend of global equities and, as a bonus, very receptive to traditional technical and charting methods.

For example, on April 15, we noted that the Global Dow was breaking out above multiple levels of key resistance. We had previously stated that its reaction at that level may loom large in determining whether the global stock rally is halted or extended. Thus, the breakout was a big victory for the bulls and, indeed, the index would pop another 5% or so immediately.

Presently, however, the index has come back down to test that breakout level. Nobody who has observed the equity markets the past 2 years should be remotely surprised about this as stocks have essentially been spinning their wheels over that time.

Big Picture:

 

Close Up:

 

As for the present test, the story is the same. A hold here around 2300 keeps the ball in the bulls hands. A breakdown below there gives it to the bears. Stay tuned to the developments in this key index.

*  *  *

More from Dana Lyons, JLFMI and My401kPro.

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Something happened this week that has never happened before. While outflows from equity ETFs soared, the $3.6 billion redemptions from high yield bond ETF HYG this last few days is the largest ever – almost twice as big as the previous largest outflows (seen in May last year).

The last week saw the biggest outflows from the high-yield bond ETF (HYG) ever…

 

As Bloomberg reports, the withdrawals from equity and credit funds highlighted the lack of faith in the rally that helped stocks briefly erase their annual losses last month. Equity traders have remained on the sidelines, with volume down in recent weeks as investors sought safer assets such as gold.

The S&P 500 just suffered its biggest two-week retreat since February as signs of slowing growth in the world’s largest economy mounted. Worldwide stock ETFs lost $12.6 billion in the four days through May 5, wiping out more than six weeks of inflows, as the MSCI All-Country World Index capped its worst week in three months.

 

“The market is becoming more cautious and using ETFs to allocate tactically. We’ll probably continue to see more flows into gold and less into equities.”

 

The $5.3 billion pulled from State Street’s SPDR S&P 500 ETF Trust represented more than 40 percent of the total withdrawals recorded in the first days of the month, according to data compiled by Bloomberg tracking funds of more than $100 million. Underscoring the flight from risk assets, BlackRock Inc.’s iShares iBoxx $ High Yield Corporate Bond ETF also saw outflows as traders yanked $2.3 billion from it.

Instead, they poured more than $1 billion in the SPDR Gold Shares and almost $540 million in the iShares TIPS ETF, which tracks inflation-protected Treasury notes.

The last week saw the biggest inflows to the gold ETF (GLD) since Nov 2011…

"There are a lot of things going on in the market right now, and investors are reacting to that,” said Deborah Fuhr, a former ETF research head at BlackRock who helped found London-based research firm ETFGI. “Investors are moving toward safer havens. Clearly gold is for many the safe haven, long-term store of wealth and inflation hedge.”

 

“There’s clearly a flight to safety, though some of it is probably profit taking,” said Christopher Johnson, the vice-president of ETF sales and strategy for the Americas at Macquarie Capital (USA) Inc. in New York.

 

“On the one side, some say things are much better than people think and the markets are coming back, while on the other people are very guarded and concerned. There are so many headline risks out there that it’s causing investors, particularly in the institutional space, to hesitate.”

As a reminder, it's all smoke and mirrors…

 

Friday’s U.S. jobs report did nothing to allay lingering worries over weak economic expansion and the efficacy of unprecedented central-bank policies.

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