Month: August 2018

On the surface, today’s jobs report was solid: despite the headline miss, July payrolls were in line with expectations when one strips out Toys “R” Us job losses and the volatile summer vacation-linked occupations. Wages also came in line, rising at 2.7% Y/Y (a number which however was the most negative since 2012 when adjusted for inflation).

However, looking deeper between the lines reveals a potentially troubling problem.

Consistent with historical experience however, the breakdown in job creation by wage has evolved throughout the expansion. At first, more of the new jobs are for people with skills. As the cycle matures, job creation rotates in favor of lower-wage positions. Lower-wage workers are more easily replaced and have less bargaining power, so benefits from the economic expansion do not trickle down until the labor market is especially tight.

What this means in practical terms – as DB’s Torsten Slok explains – is that over the last three years, i.e. during the later stage of the current expansion, cumulative low-wage employment has risen by 104%, outperforming the high-wage segment which increased by only 64% over the same period. In the three years preceding that, high-wage jobs were created at a much higher rate, increasing 251% compared to only 28% for low-wage jobs.

And, as shown in the chart below, this means that high wage jobs have actually been declining throughout 2018 as employers have shifted their hiring to low-wage occupations, and replacing existing highly-paid workers with less productive, but cheaper, surrogates.

This has significant consequences for wage growth: the greater the portion of low wage jobs as a percentage of total, the more subdued overall hourly earnings growth will be. Which is precisely the phenomenon we have observed in recent years, and is what has stumped the Fed for which wage inflation has repeatedly been defined as a “mystery.”

There is another major problem: in their pursuit of semi-skilled workers, and low wage employment in general, potential employers have aggressively lowered their selection criteria. As a result, according to the BLS, over the past 3 months the vast majority of the total workers hired, some 1.1 million, are high school graduates or those without a high school diploma.

What about workers with some college degree or higher? Here the US economy has actually lost 233K workers!

Pink Floyd was right: American workers indeed no longer need any education.

Alas, there are extensive negative consequences of hiring workers who have – at best – graduated from high school. First and foremost, a chronic lack of productivity, which incidentally is also the key reason why this has been the slowest economic expansion in US history. And as the latest data reveals, the recent surge in hiring of less than college grads, confirms two things: wage growth will remain anemic at best, and productivity – that key component of GDP – will continue to shrink.

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Harley Davidson has begun shutting down its Kansas City north motorcycle plant as the firm shifts production to Thailand to avoid stiff EU tariffs in response to steel and aluminum tariffs imposed by the Trump administration. 

Around 180 workers will clock out for the last time at the Kansas factory which has operated for over two decades, while additional staff will remain until next year to continue making motorcycles until the facility is completely closed. Meanwhile, the motorcycle builder will also shift the manufacture of three models currently made in Kansas City to their state-of-the art factory in Pennsylvania. 

In total, 800 Kansas City employees will lose their jobs, while their York, PA factory will gain 450 workers. 

In response to Harley’s move, President Trump in June called it “the beginning of the end” for the company, and blamed the motorcycle company for “waving the white flag” by using the trade war as an excuse to move production. 

Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag. I fought hard for them and ultimately they will not pay tariffs selling into the E.U., which has hurt us badly on trade, down $151 Billion. Taxes just a Harley excuse – be patient! #MAGA

— Donald J. Trump (@realDonaldTrump) June 25, 2018 

A Harley-Davidson should never be built in another country-never! Their employees and customers are already very angry at them. If they move, watch, it will be the beginning of the end – they surrendered, they quit! The Aura will be gone and they will be taxed like never before!

— Donald J. Trump (@realDonaldTrump) June 26, 2018

Trump then warned the company that it would pay a big tax to sell back into the US: “when I had Harley-Davidson officials over to the White House, I chided them about tariffs in other countries, like India, being too high. Companies are now coming back to America. Harley must know that they won’t be able to sell back into U.S. without paying a big tax!”

….When I had Harley-Davidson officials over to the White House, I chided them about tariffs in other countries, like India, being too high. Companies are now coming back to America. Harley must know that they won’t be able to sell back into U.S. without paying a big tax!

— Donald J. Trump (@realDonaldTrump) June 26, 2018

In the same series of Tweets, Trump also said that the US is “getting other countries to reduce and eliminate tariffs and trade barriers that have been unfairly used for years against our farmers, workers and companies. We are opening up closed markets and expanding our footprint. They must play fair or they will pay tariffs!”

….We are getting other countries to reduce and eliminate tariffs and trade barriers that have been unfairly used for years against our farmers, workers and companies. We are opening up closed markets and expanding our footprint. They must play fair or they will pay tariffs!

— Donald J. Trump (@realDonaldTrump) June 26, 2018

The workers are with Trump

Even after Harley Davidson became the first American company “to wave the white flag” and announce, in an 8-K filing, that it planned to move some production offshore, the workers at the Harley Davidson plant in Menomonee Falls, Wisconsin stood by their president even though the Financial Times reports that “they could end up as collateral damage.”

Mark, another Harley worker sitting astride his motorbike during the afternoon shift change at this plant that employs about 1,000 workers, said: “I think Harley is just using it as an excuse” to move more production overseas, after a recent decision to close the company’s Kansas City plant. “They will just blame it on Trump.” –FT

What’s more, several workers agreed with President Trump’s assessment that the company’s decision to move production is “just a Harley excuse.”

Mark, another Harley worker sitting astride his motorbike during the afternoon shift change at this plant that employs about 1,000 workers, said: “I think Harley is just using it as an excuse” to move more production overseas, after a recent decision to close the company’s Kansas City plant. “They will just blame it on Trump.”

Asked by the FT whether they blame Trump for Harley’s offshoring decision, most workers said they only blamed the EU, and that, regardless of the fallout, it wouldn’t change their vote. “The president was just trying to save the US aluminum and steel industry,” one said approvingly.

Harley-Davidson said on Monday that it maintained a “strong commitment to US-based manufacturing,” but that its facilities in India, Brazil and Thailand would increase production to avoid paying the EU tariffs that would have cost it as much as $100m.

When asked whether the latest news could make him vote against Mr Trump if he runs for a second term in 2020, one worker, who gave his name only as Tod, replied: “No, I don’t think so. It’s going to take a little bit more than that. He’s doing good things. We’ll just have to see who runs on the other side, that might change my vote.”

Workers at the Harley plant also expressed optimism that they would be able to find another job if they were laid off, largely because the US economy is booming. “He’s making changes, trying to get the country back where it needs to be,” one worker told the FT. And how he does it may matter less than the idea that he’s trying to “Make America Great Again.“

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Via Global Macro Monitor,

10^12

Apple’s market cap hit 10^12 dollars yesterday (and just dipped below it this morning)…

Impressive but no pom-poms here at Global Macro Monitor.  We would be more impressed if Apple’s main businesses were doing better and the company was more focused on electrical engineering rather than financial engineering.

Don’t get us long, I mean wrong,  we were The Dallas Cowboy Cheerleaders for Apple’s stock pre-2015.   Check the record.

Just the data, ma’am

The table below illustrates that almost all of Apple’s revenue growth was driven by inflation, that is the price increase for iPhones.  

Unit sales growth for the company’s three major products  – iPhone, iPad, and Mac – were either flatish year over year or negative.  This has been the case now for several years.

If Apple were not able to significantly raise iPhone prices (mainly through the upgrade to the X) and only grow revenues by the device’s unit sales growth of 0.67 percent,  Apple’s total revenues would have been about one third of what was posted, or 6.7 percent versus 17.3 percent.

One thousand dollar smart phones are not a sustainable proposition, in our opinion, folks.  China, or somebody, somewhere, will, or already is producing a quality equivalent smart phone for $250.

Are iPhones Peacock Feathers? 

Yes, yes, and yes, still not a Porsche.   We get it.

Our sense, however, millennials, and the youngers, are not as into conspicuous consumption as the self-absorbed boomers are.

An iPhone is not peacock feathers, folks, at least we don’t think so.

Does owning  an Apple iPhone really signal superior genes to the opposite sex?

Make sure to click on the peacock feathers link to understand what the hell we are talking about!

An Omen Of Coming Inflation?

Furthermore, Apple’s inflation driven earnings may be an omen of a larger inflation coming to the overall economy.

Of course, the  iPhone X was a much better quality phone and will almost certainly be hedonically adjusted by the BLS so it won’t show up in the CPI.

Ridiculous.   Real wages and purchasing power decline as consumers purchase higher priced items, regardless if the camera phone has a better resolution.

But, hey, if Apple can charge $1,000 for a phone why not ________  for any item.   Fill in the blank for your company and seller or supplier of choice.

Great Products, But What Have You Done For Us Lately?

We love Apple products, have loved the stock in the past, and have a double digit number of Apple devices in our household.

We will like the stock much more when they are driven more by electrical engineering(product innovation) rather than financial engineering (stock buybacks).

The New Supply-Side Economics of Asset Markets 

Finally, the limiting supply (shifting supply curve left) induced surge in Apple price shares due to buybacks is endemic of today’s asset markets, in general.  Most notable in risk-free bonds — restricting supply through QE, which distorts the risk-free interest rate,  of which all assets are priced; though this is slowly changing;   housing  with all cash investors and private equity — now the largest holder of single family homes, and gouging renters;  and equities through the massive buyback programs.

Moreover,  there is feedback loop buying bias induced by the move to passive investing.

The “Steel Bubble”

These are a few of the major factors why these overvalued asset markets are so much harder to pop than the asset bubbles of Christmas past.    See our posts on the “steel bubble.”

Apple, The Stock

Toppy.  Selling the hype and waiting for the “new, new thang.”   If they build it, I will come.

Overall market action bullish.   No sellers, until they sell.  Today’s action is a signal that no-liquidity August has arrived.   Go to the beach!

Stay tuned.

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We knew this week was going to momentous with multiple event risk tape-bombs every day, but aside from Apple’s “four comma moment” it appears The PBOC just trumped The Fed, The BoJ, The BoE, and earnings, as former fund manager and FX trader Richard Breslow notes…“just like that the PBOC changed your day.”

Via Bloomberg,

I feel utterly in-tune with the markets. It’s Friday, it’s August and I was watching the clock even before the sun rose. It was meant to be a really fun and dispositive week full of momentous news. Well, it would be a gross mis-characterization to say it was full of giggles, but we did learn some important things. Or maybe it’s better to say reminded of matters that analysts keep trying to deride but traders can’t ignore.

Ranges have been tight, volumes abysmal and most assets have “pared,” or in some cases, erased, their early extremes. Liquidity will be priced at a premium, so take things with a grain of salt.

Risk reduction before the weekend is prudent and remains standard operating procedure. Especially when news such as the PBOC raising reserve requirements on FX forwards well after the close of their official trading day could be sprung out of the blue when no one was paying attention.

Who would have thought that at 9 a.m. London time, when the on-shore yuan found a bank suddenly willing to aggressively buy the currency, that it was something everyone needed to think about? At the time it felt like that was the time-marker signaling the de facto end of the trading day rather than a recast of how things might go.

Emerging markets do remain under pressure. The number of people telling me that the carry is compelling at these cheaper valuations has dwindled as the week progressed. Turkey saw to that. Still, the small bounce in their equity markets today on the back of yesterday’s U.S. push will no doubt influence a new round of optimistic commentary. And these markets do bear watching closely. But I don’t think there need be an urgent rush to suddenly grab whatever you can get your hands on.

Stocks may behave like lemmings but currencies don’t lie. And the MSCI Emerging Markets Currency Index is at a very crucial technical juncture. It sits at a level that has held multiple times going back to last year. It is also at an important retracement level of the whole move up from January 2016 to the highs of March this year. If this holds again, we will be due a bounce. If not, it won’t be an insignificant statement. There are tons of conflicting fundamental factors at play, so let the lines do the heavy lifting.

We began the week having to endure people telling us to sell dollars and, in particular, buy euros. It was the vote with your heart not your mind recommendation, that ignored the reality of rates and growth. Still, the dollar index is also getting up toward levels that have previously held. Take a look at BTP yields before assuming it’s necessarily an easy trade and the recent range inviolate. But it might be.

In a new development that should be carefully watched, the European FRA/OIS spread has been widening out as a suspected hedge against potential banking stresses in Italy. It’s a cheap and potentially lucrative form of buying insurance against trouble. And a lot less expensive than doing it in the currency option market.

I said yesterday, that I was fixated on the yuan. And I still am. The PBOC’s action today won’t have solved all of the world’s problems, but it will certainly affect short-term price action. And then we’ll see where things stand next week.

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It took little time for Trump’s chief China trade war advisor Larry Kudlow to respond to China’s publication of its “retaliation list” itemizing the $60 billion in US goods that will be subject to US tariffs. Saying that the $60 billion trade response by China might be weak, Kudlow warned that the US has more ammunition than China in a trade fight, envisioning that the US imports more products from China than vice versa. 

Predictably, Kudlow focused on China’s currency devaluation response as the trade war recently shifted to currency war as Beijing hopes to offset the impact of tariffs using a weaker currency.

Speaking on Bloomberg TV, Kudlow correctly noted that the yuan has fallen in part because China has “stopped defending the yuan. They think it’s going to help offset the U.S. efforts to get rid of their unfair trading.” This changed on Friday evening  (Chinese time) when the PBOC announced it would increase the reserve requirement on FX forward, precipitating a short squeeze and sending the Yuan sharply higher and the dollar sliding.

Some speculated that the PBOC move was a form of soft capital control, as the Yuan had fallen so much it had precipitated capital flight, easily the weakest link in China’s economy. Kudlow touched on this, saying that “some of the currency fall though I think is just money leaving China because it’s a lousy investment, and if that continues that will really damage the Chinese economy.”

“If money leaves China – and the currency could be a leading indicator – they’re going to be in a heap of trouble. And so I’m going to make the case that they are in a weak economic position. That’s not a good place for them to be vis-a-vis the trade negotiations,” he told BBG TV’s Jonathan Ferro.

It also explains why Wilbur Ross yesterday said that Trump plans to pour more pain on China’s economy: after all if the Trump administration believes China is near a breaking point, it makes sense to keep cranking up the pressure.

Kudlow then made another accurate assessment of China’s economic situation saying that “it looks to me like the China economy is declining in growth. It’s weakening almost across the board. And it looks like the People’s Bank of China is trying to pump it up by adding high-powered money and new credit.”

And the punchline: “We’ve said many times: no tariffs, no tariff barriers, no subsidies. We want to see trade reforms. China is not delivering. Their economy’s weak, their currency is weak, people are leaving the country.”

As a reminder, this is precisely the prescription suggested by One River CIO Eric Peters, who last weekend laid out what is the best way to win trade war with China:

“The best way to bring Beijing to its knees is by running a tight monetary policy in the US,” continued the same investor. “China has the world’s most overleveraged, fragile financial system.” In 2008, China’s total debt-to-GDP was 140%. It is now roughly 300%, while GDP is slowing. “The economy is held together by capital controls. If those fail, the whole system fails.” The capital flight in 2015/16 cost the government $1trln in reserves, and that was with ultra-dove Yellen in charge. Imagine what would have happened with Volcker at the helm. “The Chinese are dying to get their money out.”

“Engineering a decade of rolling Chinese financial crises would be the most effective foreign policy the US could run,” continued the same investor. Forget about the South China Sea, don’t bother with more aircraft carriers, just let Beijing try to cope with their financial system. “And we’re 80% of the way there – we instigated a trade war, implemented a massive fiscal stimulus, which created the room to raise interest rates,” he said. “The combined policy mix makes capital want to leave at the same time it makes the dollar more attractive and effectively shuts down new investment inflows to China.”

Kudlow’s conclusion: China “better not underestimate President Trump’s determination to follow through” on trade threats, and we are confident that it is only a matter of time before Trump tweets his angry response to China’s latest retaliation to Trump’s own Chinese tariffs, pushing the tit-for-tat escalation further beyond a point of no return.

 

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Authored by Martin Armstrong via ArmstrongEconomics.com,

You really cannot make up a story like this, because it sounds just so unbelievable.

I am in Germany on business and did not see the place overrun with refugees as on my last trip. So I made some inquiries. To my complete astonishment, the German government is actually giving refugees three weeks paid vacations INCLUDING airfare BACK to the very countries that claim they are fleeing because it is unsafe.

So in other words, despite claiming their lives would be at risk if they were forced to return home, the government is paying them for a vacation to the very place they claim to be fleeing. You just cannot make up such a completely insane government policy. I know someone who works with the refugees and they confirm they are on vacation back home. Therefore, asylum seekers are nonetheless returning to their homeland for a “short time”.

I searched to see if I could find any article on the subject. I found how most are trying to cover the practice up. reported that a German Federal Employment Office spokesman said: “There are such cases.” 

Some stories are trying to deny the issue which was first reported by the leading German newspaper Die Welt am Sonntag, Refugees go on vacation, where they are allegedly persecuted which reinforces the growing problem caused by the fact refugees are allowed to leave the country for 21 days a year but are not obliged to say where they are going. Migrants are protected and are entitled to “privacy”.

My sources in Switzerland have confirmed the same problem – dozens of asylum seekers who had apparently turned up penniless after fleeing what they said was a war zone were found to have flown home on holiday.

Die Welt reported just how screwed up the government is. There is no communication between government agencies. If an advisor in the Employment Agency gets wind that someone wants to go to Syria, for example, Die Welt reported they are not supposed to pass this information along due to data protection issues.

There is no actual proof that a person is really persecuted in the home country. Syria was at least a war zone. People have been pouring in from all over North Africa which is not in a state of war.

If someone is taking a vacation for 21 days at government expense back to the place they fled, common sense dictates they are not refugees. Government incompetent is just off the charts.

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We may have found the reason for Bitcoin’s persistent weakness over the past week.

After hitting a price above $8,000 thanks to recent Blackrock ETF speculation, the cryptocurrency has dropped 10% in the past week, dropping as low as $7,300 today, leaving traders stumped what was causing this latest selloff in the absence of market-moving news.

It turns out the reason may have been a good, old-fashioned margin call forced liquidation, because as Bloomberg reports a massive wrong-way bet left an unidentified bitcoin futures trader unable to cover losses, resulting in a margin call that has “bailed-in” counterparties forced to chip in and cover the shortfall, while threatening to crush confidence in yet another major cryptocurrency venues.

According to a statement posted by Hong Kong’s OKEx crypto exchange on Friday, a long position in Bitcoin futures that crossed on Monday, July 30, had a notional value of about $416 million. After Bitcoin prices dropped sharply in subsequent days, OKEx moved to liquidate the position on Tuesday, “but the exchange was unable to cover the trader’s shortfall as Bitcoin’s price slumped.”

The exchange, which identified the problem trader only by an anonymous ID number 2051247, said the position was initiated at 2 a.m. Hong Kong time on July 31.

“Our risk management team immediately contacted the client, requesting the client several times to partially close the positions to reduce the overall market risks,” OKEx said. “However, the client refused to cooperate, which lead to our decision of freezing the client’s account to prevent further positions increasing. Shortly after this preemptive action, unfortunately, the BTC price tumbled, causing the liquidation of the account.”

The exchange was forced to inject 2,500 Bitcoins, roughly $18 million at current prices, into an insurance fund to help minimize the impact on clients. And since OKEx has a “socialized clawback” policy for such instances, it also forced other futures traders with unrealized gains this week to give up about 18 percent of their profits.

As Bloomberg notes, “while clawbacks are not unprecedented at OKEx, the size of this week’s debacle has attracted lots of attention in crypto circles.”

The episode underscores the risks of trading on lightly regulated virtual currency venues, which often allow high levels of leverage and lack the protections investors have come to expect from traditional stock and bond markets. Crypto platforms have been dogged by everything from outages to hacks to market manipulation over the past few years, a period when spectacular swings in Bitcoin and its ilk attracted hordes of new traders from all over the world.

“Everyone is talking about it,” said Jake Smith, a Tokyo-based adviser to Bitcoin.com, in reference to the OKEx trade.

And while everyone also wants to now how much capital was actually at risk, the biggest question is just how much margin there was in the trade. The problem here is that the exchange – ranked No. 2 by traded value – allows clients to leverage their positions by as much as 20 times.

For those who rhetorcially tend to ask “what can possibly go wrong” after every bitcoin slump, well now you know.

What happens next?

OKEx, which requires traders to pass a quiz on its rules before they can begin investing in futures, outlined planned changes to its margin system and liquidation procedures that it said would “vastly minimize the size of forced liquidation positions” and make clawbacks less frequent.

According to Bloomberg, clawbacks are unique to crypto markets and expose the exchanges who use them to reputational risks when clients are forced to absorb losses, said Tiantian Kullander, a former Morgan Stanley trader who co-founded crypto trading firm Amber AI Group.

“It’s a weird mechanism,” Kullander said.

Finally, judging by the bounce in bitcoin, the market appears relieved that it has identified the culprit of the selling, and with no more liquidation overhang left, is once again pushing prices across the crypto space higher.

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Following yesterday’s disappointment in manufacturing data, Markit’s latest survey confirms the Services industry slowed in July as higher prices are hurting margins and business expectations hit a 6-month lows. Worse still, ISM’s Services survey tumbled with a big miss to its worst since Aug 2017.

Business confidence eased to a six-month low and was subdued in the context of the series history, with some service providers raising concerns surrounding tariffs and their effects on client demand.

Additionally, Market notes that Employment growth eased to a five-month low, with the rise in staffing numbers tempered by difficulties finding suitable candidates for vacancies.

ISM’s Survey breakdown confirms Markit’s view for once with new orders crashing by 6.2pts to 57 – its biggest drop since Aug 2016… and worse still, the stagflationary threat remains as prices paid kept rising despite weaker sales.

As Bloomberg notes, the slump in the gauge of service providers — which accounts for about 90 percent of the economy — is a reminder that U.S. growth will be hard-pressed to sustain the second-quarter pace that was the fastest since 2014.

Commenting on the PMI data, Tim Moore, Associate Director at IHS Markit said:

“US service providers experienced strong growth conditions at the start of the third quarter, with business activity rising at only a slightly softer pace than in June. Strong domestic demand helped to support another improvement in new order levels and a solid expansion of payroll numbers in July.

“However, business expectations across the service economy edged down to a six-month low. Survey respondents cited concerns about rising costs and trade frictions, alongside difficulties sustaining the tempo of new business growth seen in the second quarter of 2018.

”Rising operating expenses continued to place pressure on margins in the service economy, partly reflecting higher wages and fuel bills in July. There were signs that higher input costs have started to shift through to consumers, as service providers recorded the fastest increase in their average prices charged since September 2014.”

At 55.7 in July, the final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index dipped slightly from 56.2 in June. Despite the rate of expansion easing to a three-month low, it remained strong in the context of the series history…

Maybe the impact of the housing market is starting to hit the surveys…

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One of the recurring complaints about the job market – at least from the perspective of employers – has been the scarcity of workers, with the number of job openings now greater than the number of unemployed Americans (although a big question here that has so far been unanswered is why don’t employers simply raised wages to find more appropriate candidates than hiring convicts and drug addicts).

Meanwhile, the picture from the perspective of workers is quite different, and while today’s jobs report was overall solid when one excludes the Toys “R” Us liquidation and the layoffs associated with school vacations, there was one number that stood out: the surging number of multiple job holders.

According to the latest payrolls report, in July, the number of Americans holding multiple jobs soared by 453,000, the second highest on record, and only lower than the 487,000 multiple jobholder increase in October 2014. As a result, the total number of multiple jobholders in the US spiked to 8.072 million, surpassing the recession high of 8.071 million hit in August 2008, and the highest all the way back to 1999.

There was offsetting good news, as the number of full-time workers jumping by 453K in July, while part-time workers declined by 36,000.

And yet, by far the worst news in today’s report was that despite the 2.7% nominal increase in average hourly earnings, when netting out the 2.9% increase in inflation, real wages declined by 0.2%, which was the biggest monthly drop in average hourly earning going back to 2012. This may explain why US car sales just posted their worst decline in years and why increasingly more sectors have been complaining about sluggish spending by the US consumer.

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