Man Who Sold the World (9/2)

Man Who Sold the World

Happy Labor Day!

Here’s the latest installment of MarketShadows: The Man Who Sold the World: Sept. 2, 2012.

(Named after the song, “The Man Who Sold the World.” Pic credit: Jesse’s Cafe Americain)

Overview:

  1. Nothing announced at Jackson Hole.
  2. Jobs gained since 2008 were disproportionally low-wage jobs, as middle class jobs have been steadily declining (outsourced).
  3. Gains in the stock market since 2009 have been largely due to the Fed’s zero interest rate policy (ZIRP) and quantitative easing (QE).
  4. A majority of GDP growth has been due to the consumer, and the stock market. Obama has cut government jobs.
  5. The stock market reflects the moves in the Dollar; the Dollar is at a critical point.
  6. Exelon Corporation (EXC) is our stock pick this week. It’s going into the virtual portfolio as a buy-write–we’re selling a call and selling a put against 100 shares.
  7. Pause in Treasury supply next week, enough liquidity for market party to continue–assuming no surprises.

Excerpts

The U.S. stock market notched a third month of gains in August! Friday’s premarket pump kept the longest monthly rally alive for everyone to enjoy the holiday weekend.

Ben Bernanke made no earthshaking announcements on Friday, at his annual appearance at the Kansas City Fed’s economic symposium in Jackson Hole, Wyoming.  As the Economist reported:

“The world was wondering whether [Ben] would send a definitive sign that action was coming. He did not, merely repeating the key sentence from the August statement, that the Fed ‘will provide additional policy accommodation as needed to promote a stronger economic recovery.’ This should not have been surprising; Fed chairmen don’t like to front-run the Federal Open Market Committee [FOMC].

“Mr Bernanke had a different goal than signaling to Wall Street. Pressure on the Fed has become intense in the last year, from hawks and conservatives (not necessarily, but increasingly, the same) who think the Fed has done all it can do and going further risks inflation, monetization of the debt, and a loss of credibility for the central bank; and from doves and liberals who accuse Mr Bernanke of having shirked his responsibility and his own prior advice to the Bank of Japan by not more aggressively using the tools and alternative frameworks available to boost employment.”… (The road to QE3)

 

Wondering whether Bernanke’s hands will be tied going into September, and speculating on a relatively decent non-farm payrolls number for August, Bruce Krasting wrote, 

“I would think so, but I don’t think like Bernanke.

“If the economy produces, on average, only 150k new jobs per month, then the unemployment rate will remain high (8+%), for a long-time. Ben doesn’t want that as his legacy. The talk on Wall Street (and the manipulated financial press) is that a new round of QE is coming in a fortnight. It will be $500B in size (spread over 6 months). It will be directed at MBS securities…

“There are extremely asymmetrical results associated with more QE. Yes, there might be a few more months of ‘party time.’ But when the party ends (it will), the cost will be ten times the short-term gain.

“Ben Bernanke can afford to throw another party in September. The reason is that he will not be around when the inevitable cleanup of his mess starts. He’ll be back in Princeton when the SHTF.”… (SSA on NFP, Unconventional Policy and the Hangover)

 

Of course, the upcoming presidential election raises the stakes and politicizes the Fed’s actions.

Jobs gained in the ‘recovery’ have largely been jobs paying lower wages. In last week’s
MarketShadows, we discussed a study by Senier Research showing that median household income fell 4.8% to $50,964 since the recession ended in June 2009. Data from the Naional Employment Law Project shows why. During the recession, employment losses occurred throughout the economy, but were concentrated in mid-wage occupations. In contrast, during the recovery, employment gains were concentrated in lower wage jobs. Lower wage jobs grew 2.7 imes faster than mid-wage and higher-wage jobs. Specifically:

“Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth.

“Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.

“Higher-wage occupations were 19 percent of recession job losses, and 20 percent of recovery growth.

“The lower-wage occupations that grew the most during the recovery include retail salespersons, food preparation workers, laborers and freight workers, waiters and waitresses, personal and home care aides, and office clerks and customer representa- tives.”

 

 

Median household income by age revealed that most of the income losses occurred among people in the early stages or final stages of their careers. Moreover, older workers’ ability to retire has taken a substantial hit, resulting in the elderly taking positions from younger workers. The Fed’s Zero Interest Rate Policy (ZIRP) – loss of income from safe investments – has intensified the pain. This factor has forced investors into riskier assets–Bernanke’s third and unofficial goal: propping up the stock market.

Not surprisingly, the National Employment Law Project also concluded that, “The unbalanced recession and recovery have meant that the long-term rise in inequality in the U.S. continues. The good jobs deficit is now deeper than it was at the start of the 21st century.”

Since the financial meltdown in 2008, the Fed has been expanding its balance sheet. Bernanke believes, without evidence, that his balance sheet policies are effective: “After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields… These effects are economically meaningful.”

Economically meaningful to some. The stock market has responded to the balance sheet expansion lock-in-step. But does quantitaive easing increase employment? Not significantly. Has it helped the middle class? No. (Bruce discusses this in SSA on NFP, Unconventional Policy and the Hangover)

QE gives money to the banks, which were theoretically supposed to lend out excess reserves. However, individuals have enough debt and have been de-leveraging. Small businesses have not been hiring, but have been complaining that is it difficult to secure loans. While large companies have money on their balance sheets, many have been laying off workers.

In effect, QE primarily benefited the banks and the stock market (higher net worth individuals). The banks have taken systemic risks in the market. Indeed, evidence demonstrates that quanitaive easing helped the banks and the largest companies, but not the little guy or the American economy as a whole.

 

 

Over   the   past   few   years,   the   government   has   been   a   drag   on   the   US   GDP   growth.   ‘Austerity’  measures  implemented  by  Obama   and   Congress   have   been   pulling   growth   the   wrong   way.   It   seems   counterintuitive,   because  the  deficit  is  growing!  What  is  the  gov-­‐ ernment   spending   our   money   on?   Defense,   Health   and   Human   Services,   and   interest   on   the  debt  itself.

[...]

Looking ahead, Lee Adler of the Wall Street Examiner reported:

Connecting the dots, I think that the huge amount of new supply [Treasuries] had a lot more to do with the stock market buckling on Thursday than the economic news did. But the pundits and the media never make the connection between massive Treasury supply and market disruptions. Instead, they concoct all kinds of spurious excuses for it….

There still appears to be more than enough liquidity flowing into US markets to continue to support bull moves, so that when one market takes a hit, the other tends to see some of the excess cash flows. In the past couple of weeks, the unexpected increase in Treasury supply absorbed most of the available liquidity.

The calendar is very light next week with no new paper scheduled and a possible paydown as large as $11 billion, assuming that the 4 week bill is no larger than $41 billion. $10 billion in cash management bills [CMB] are set to expire on September 6. If they are redeemed on schedule that will put some cash into the market. But withholding tax collections have again been running weak, so there’s a chance that the government may need to roll those bills or increase the size of the 4 week bill. We’ll know better on Monday… (Withholding Improves but Treasury Out of Cash Again, Pounds Market With Supply)

 

Next week should also see some fireworks with the ECB and August unemployment numbers.

Until then, have a wonderful week.

- Market Shadows writers/Ilene

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