Sunday, May 26, 2013

Today's links

1--- The Fed's Real Worry - A Pick Up In Deflation, Street Talk, zero hedge

"A wave of 'disinflation' is currently engulfing the globe as the Eurozone economy slips back into recession, China is slowing down and the U.S. is grinding into much slower rates of growth. Even Japan, despite their best efforts through a massive QE program, cannot seem to break the back of the deflationary pressures on their economy. This is a problem that has yet to be recognized by the financial markets.

The recent inflation reports (both the Producer and Consumer Price Indexes) show deflationary forces at work. Wages continue to wane, economic production is stalling and price pressures are falling. More importantly, there are downward pressures on the most economically sensitive commodities such as oil, copper and lumber all indicating weaker levels of economic output. The battle against deflationary economic pressures has been what the Federal Reserve has been forced to fight since the financial crisis. The problem has been that, much like 'Humpty-Dumpty', the broken financial transmission system, as represented by the velocity of money, can't be put back together again."

The last paragraph above is particularly important.  The biggest fear of the Federal Reserve has been the deflationary pressures that have continued to depress the domestic economy.  Despite the trillions of dollars of interventions by the Federal Reserve the only real accomplishment has been keeping the economy from slipping back into an outright recession.  However, when looking at many of the economic and confidence indicators, there are many that are still at levels normally associated with previous recessionary lows.  Despite many claims to the contrary the global economy is far from healed which explains the need for ongoing global central bank interventions.  However, even these interventions seem to be having a diminished rate of return in spurring real economic activity despite the inflation of asset prices.


It is important to remember that in economics inflation is:
"...a rise in the general level of prices of goods and services in an economy over a period of time.  When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy."

It is very difficult to have a "general rise in price levels" amidst a lack of consumer demand driven by suppressed wages, high levels of unemployment and little demand for credit by businesses. The lack of demand exerts downward pressures on the pricing of goods and services keeping businesses on the defensive.  This virtual spiral is why deflationary environments are so dangerous and very difficult to break.

I have constructed a composite "High Inflation Index" in an attempt to measure these three legs of inflationary pressures.  The purpose, of course, is to visualize the data to determine if inflation is prevalent in the current economic cycle or not.   The index is equally weighted of the M2 Velocity of Money, the Year Over Year (YOY) percent change in wages and the YOY percent change in the Consumer Price Index (CPI).  The first chart shows the historical levels of each of the three components.


Notice that there is a very tight relationship between the rise and fall of compensation of employees and the velocity of M2 money supply.  With M2 velocity plunging to historically low levels this does not bode well for sustained increases in either employment or compensation as the demand for money simply does not exist currently...
 
Recently, inflationary pressures rose as economic growth surged from the lows of the financial crisis as the economic system was flooded by trillions of dollars of stimulus, bailouts and financial supports.  However, that surge, in both the economic growth and the inflationary pressures, peaked in early 2011 and have been on the decline since.  This is why the Federal Reserve remains extremely worried about the diminishing rate of return on their monetary experiments as it relates to the economy.  Inflating asset prices higher have increased consumer confidence but has had little translation into the creation of underlying economic growth.
With the index clearly warning of rising deflationary pressures in the economy, which has recently been seen in many of the manufacturing reports that have shown downward pricing pressures both on prices paid and received, there is no "exit" currently for the Federal Reserve to reduce its monetary supports. 
 
 
 
Aggregate Buybacks: Dollar-value share repurchases amounted to $93.8 billion over the fourth quarter and $384.3 billion for 2012. The fourth quarter total is in-line with that of Q3, but represented year-over-year growth of 9.6%.

Buyback Conviction: Dollar-value buybacks amounted to 79.1% of free cash flow on a trailing twelve month basis, which is the largest value since Q3 2008. The Consumer Discretionary and Consumer  Staples sectors both spent more than 100% of their free cash flow (116.7% and 114.2%, respectively). The Energy and Utilities sectors spent $35.8 billion and $1.4 billion, respectively, on buybacks, despite generating negative free cash flow (-$25.7 billion and -$23.5 billion). The Consumer Discretionary sector also led all sectors in repurchasing the most shares relative to its size. Over the trailing twelve months, the sector repurchased shares that amounted to 4.5% of the sector’s average shares outstanding over the year
 
 
Just when you think Congress can't get any dumber, it crafts a $1tn farm bill that harms the poor and promotes unhealthy food
 
Elements of the farm bill, as it stands, will cut food stamps to the poor and the previously incarcerated, thus increasing poverty and possibly crime; add to the growing obesity crisis by encouraging chemical sugar substitutes; push genetically modified food at the expense of public health with the so-called "Monsanto Protection Act"; and support factory farming at the expense of sustainable food production with abusive crop subsidies.
That's quite a lot of damage to wreak with a single law, but this Congress certainly seems up to the challenge.
The farm bill will set US food policy for 2014 to 2023, encompassing everything from agriculture to food stamps. The food stamps show the worst decision-making. Conservatives are apparently annoyed that more Americans are using food stamps. That much is true. Food stamp usage has grown by at least 70% since the financial crisis in 2008, with a record 47.8 million people relying on food stamps in order to afford their weekly grocery bills. This is costing the government $74.6bn.
...
the rise in food stamp use is neither anomalous nor abusive. It makes perfect sense. Poverty goes up in recessions and in weak recoveries like this one. About 12 million people are out of work. Only about 58% of the population is employed, which is around the lows of the early 1980s recession, and which also has not changed appreciably for around three years.
Long-term unemployment is a persistent problem, with 40% of all unemployed people out of work for six months or longer – at which point many employers arbitrarily deem them unemployable. Poverty has been rising steadily since 2008 – just like the use of food stamps.
Partially responsible for this mess, by the way, is the notably counterproductive fiscal policy decisions made in Congress to support damaging austerity, as even the chairman of the Federal Reserve said last week.

5---Cash Piles Up as U.S. CEOs Play Safe With Slow-Growth Economy, Bloomberg

Any lament that U.S. executives are sitting on cash at their companies instead of investing in plants and equipment may be about to get louder.

The buildup of cash and marketable securities accelerated in the first quarter on a year-over-year basis to a record $1.73 trillion after slowing in early 2012. At the same time, capital spending in the most recent quarter rose by the least since March 2010, when the U.S. was still emerging from a financial crisis.

The trends, based on data from about 2,300 U.S. companies compiled by Bloomberg, suggest executives’ lack of need or confidence to invest deepened with threats of federal spending cuts and the economic slowdowns at home, in Europe and China. Without a pickup in spending, the U.S. economy loses a driver of job creation and risks staying locked in below-average growth, giving even more cause to hold tight.

“What concerns me is that companies have all of this excess cash and they are not deploying it into their long-term operations,” said Nick Raich, chief executive officer of the Earnings Scout, an independent economic research firm based in Cleveland. “Public outcry will erupt if companies do not spend and create jobs.”

6---Twin blasts at Beirut Hezbollah stronghold injure at least 5, RT

7---Nikkei nosedive not just a correction, Reuters

SO THE VERSION of events being touted by Japan bulls is that last week’s one-day 7.3% plunge in the Nikkei represented simply a pullback for a market that had put in its most supercharged performance over six months since 1953. This presents a major buying opportunity for those who believe “Abenomics” and the newly pugilistic Bank of Japan will drag Japan out of its two lost decades – or so the story goes.

But was Thursday’s stock market collapse about equities or really all about bonds? I suspect the latter, as the equity meltdown unfolded after a capitulation in Japanese government bonds that saw yields spike to their highest in a year. Bank of Japan governor Kuroda spoke on Friday about calming bond markets, but ever since he announced the mammoth quantitative easing programme in April the JGB market has turned into a quivering mass of uncertainty bordering on terror.

It might just be that now the easy money has been made by punting on Japanese equities, a slower grind higher is on the cards after last week’s “correction”.

But I’m not convinced it was simply a correction. Rather, it might have been something closer to a realisation that for all the brouhaha of Abenomics, the “three arrows” and the shed-loads of money printing, the Japanese financial authorities are losing the plot.

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