Tuesday, May 24, 2016

Today's Links

1--Manufacturing Recession Goes Global as Demand Withers

Then Japan hit the world with its collapsing trade figures.

Exports plunged 10.1% in April from a year ago, on weakness in China and other emerging markets, as Japan’s Ministry of Finance reported on Monday. Imports plummeted 23% on lower commodity prices and weak demand at home, despite (or because of) the Bank of Japan’s reckless scorched-earth monetary double whammy of QQE and negative interest rates.

So it fits in nicely that the Nikkei Japan Manufacturing PMI, also released on Monday, dropped to 47.6 (below 50 = contraction), with the output index plunging to 46.9, the sharpest decline in 25 months.

The new orders index, a harbinger for future business, dropped to 44.1, the sharpest decline in 41 months. Turns out, one of the primary reasons for the drop wasn’t the April earthquake, but “a marked contraction in foreign demand, which saw the sharpest fall in over three years.”

2--Growing signs of a resurgence of class conflict in the US

An estimated 8,788 collective bargaining agreements, covering 2.2 million workers, are due to expire or be modified in 2016. The chief obstacles to a fight against the companies are the AFL-CIO and Change to Win unions, which are allied with the Obama administration and the Democrats. The unions function as an arm of corporate management and the state. They support the policy of lowering wages and cutting health care and pension costs to make US corporations more “globally competitive.”

The unions have long abandoned the principle of “no contract, no work,” keeping workers on the job for months or even years without a contract. On Friday night, the National Association of Letter Carriers (NALC) announced that it would continue negotiations with the US Post Office past the contract expiration date for 204,000 city letter carriers. Another 370,000 USPS workers were forced to accept arbitration by the American Postal Workers Union (APWU) and other unions....

In the US elections, the radicalization of workers and young people is expressed in the widespread support for Bernie Sanders, who has centered his campaign on social inequality and opposition to the “billionaire class.” Sanders role, however, has been to try to channel growing anti-capitalist sentiment back behind the Democratic Party, which, under the Obama administration, has overseen a historic transfer of wealth from the working class to the corporate and financial elite.

3--Temp-Worker Freeze Bodes Ill for Economy

One of the labor market’s early-warning signs may be flashing trouble.
Hiring by staffing agencies has ground to a halt so far in 2016, a worrisome sign because the category fell off before a broader job-market slowdown ahead of the past two recessions. Many economists look at the sector as a leading indicator because cautious firms tend to first hire temps when an expansion begins and dismiss those nonpermanent workers when they sense the economy is faltering.
The question now is whether the recent flattening in temp employment points to another economic downturn or is just respite for an industry that has capitalized on a shift toward flexibility for workers and firms..

More than one in 50 U.S. workers were employed as temps at the end of 2015, eclipsing a record set in early 2000. At that prior peak, the unemployment rate was near a cyclical low and payrolls were growing steadily, albeit at a slightly slower rate than the prior two years. By spring 2001, the economy was in recession.
“It’s the first sector that really begins to lose jobs,” said Donald Grimes, a labor economist at the University of Michigan. “If you start seeing those numbers go negative, you’ve got a real problem.”

The temp sector has shed 27,400 jobs since December, a reversal from the preceding five years, when the temporary-help category grew five times as fast as overall employment. That suggests the sector, which did add jobs in April, bears careful watching, especially because the slowdown comes alongside other red flags.

The long decline in initial jobless claims, another leading labor-market indicator, appears to have ended this spring. Average payroll growth this year slowed to the weakest pace since early 2014. The unemployment rate has plateaued. And industrial production suffered the largest decline to start the year, outside of a recession, on record...

Executives in the staffing industry say they now serve different types of clients. Temp staffers are less often in the clerical and light-industry sectors—which have been in decline for decades—and more frequently work in technology, health care and finance. Those staffers might roll out a mobile app or develop​a strategy to meet new regulations.

The typical staffing-agency worker is increasingly a specialist rather than an entry-level employee, said Kelly Services Inc. Chief Operating Officer George Corona. Most temp and freelance workers prefer the work to a permanent placement, he said, while others want to try out employers before making a commitment.
“The younger generation of workers hasn’t seen the loyalty from employers” and don’t expect to provide it in return, he said. “They’re looking for different things in terms of work-life balance

Temp workers also are paid less, on average, than their permanent peers. The average hourly wage for temporary help workers was $16.83 in March, compared with $25.45 for all private-sector workers.
“Structural changes in the labor market mean that higher volatility is likely to persist, in part through a weakening of the social compact between workers and firms,” Treasury Chief Economist Karen Dynan said in a recent speech.

Short-term projects and less-loyal workers can be a recipe for volatility. The average tenure for a temp employee was 10.7 weeks last year, down from 11.3 in 2014, marking the shortest engagement time since 2003, according to the American Staffing Association. The industry group said the shorter tenure could be an indication temps are more quickly converting to full-time work. About one-third of temps are offered permanent work.
Volatility in the sector can make the leading indicator hard to read.
“When temp employment is moving sideways, as it is now, it could mean things are frothy and firms are jumping straight to permanent hires,” said Erik Weisman, economist at MFS Investment Management. “Or it could signal we’re on the precipice of a downturn and firms don’t want to hire, and even start firing temp workers.”

4--Investors Check Out of Europe  

Fractious politics, economic malaise, negative rates discourage fund managers   ...

Investors have sold exchange-traded funds tracking European shares for nearly 15 weeks—the longest stretch since 2008—according to UBS Group AG. Meanwhile, annual net outflows from eurozone bonds were running at over half a trillion euros as of the end of March, according to a Pictet Wealth Management analysis of data from the European Central Bank. That is happening as investors are turning away from Europe’s growing pool of negative-yielding debt.

The money is finding a home in places from U.S. Treasurys to emerging economies, helping to push up prices in those markets.

Just last year, Europe was a top pick by global fund managers as it recovered from the sovereign-debt crisis of 2010 to 2012. The current retreat shows that this rehabilitation has faded, and fast...

In recent weeks, investors have been selling equities around the world over concerns about the global economy. But the selling in Europe has been particularly pronounced.

Funds have sold around $22.6 billion worth of ETFs that track European equity since March, which is equivalent to roughly 9.4% of the total held of these investments, according to Mr. Gheedia. ...

Meanwhile, global fund managers’ allocation to eurozone equities dropped to 17-month lows in May, according to a survey by Bank of America Merrill Lynch. When prospects seemed sunnier last year, a net 55% of fund managers favored the region.

This is already taking a toll on European markets. The Stoxx Europe 600 is down nearly 8% this year, compared with a roughly flat S&P 500.

Banks are Europe’s worst-performing sector, having fallen nearly 19%.

Investors are concerned that negative interest rates are eating into the sector’s margins, while lenders in Southern Europe continue to grapple with bad loans.

That could have a knock-on effect on a continent where companies rely on bank lending for around three-quarters of their funding needs. Banks also make up an outsize chunk of local equity markets.

Investors’ concerns over banks are already being borne out after a poor set of results in the most recent earnings seasons.

The downbeat news about profits wasn’t just from banks. Overall, that earnings season has deepened investors’ doubts about profitability in Europe....

The ECB’s stimulus measures, including cutting interest rates below zero to boost sagging inflation, have dragged down the yield on eurozone government bonds. Yields fall as prices rise.

Roughly €3.5 trillion ($3.9 trillion), or 54%, of these securities trade at a negative yield currently, according to Bank of America Merrill Lynch.

That is pushing investors to look elsewhere for returns, including in emerging markets and U.S. Treasury bonds, analysts say. With the 10-year German bond yielding 0.181%, the 1.85% yield on the 10-year Treasury bond looks a lot more appetizing.

“We’ve seen a lot of flows into anything with a positive yield,” said Steve Thompson, senior client-portfolio manager at Invesco Fixed Income.

5--CLO Debt Market Peps Up      

Uptick coincides with other signs of a healthier loan market  ...

The esoteric securities market underpinning demand for the riskiest corporate loans is perking up, raising hopes that it could become easier for banks to sell a range of loans, including those that they failed to syndicate last year.

More corporate loans are being bundled this spring into collateralized loan obligations, which buy loans from junk-rated companies and repackage them into securities that pay varying levels of interest based on which get paid off first if the underlying loans go bad....

CLOs, one of the only asset-backed investment vehicles that performed well during the financial crisis, have taken on increased importance in recent years, providing a major source of demand for low-rated corporate loans. More than $200 billion worth of the securities were sold across 2014 and 2015 before the market started tailing off....

Loans have “come a long way since mid-February,” when new issues were still scarce, and it has helped that CLOs “are starting to find some sea legs,” said Frank Ossino, a loan-fund manager at Newfleet Asset Management....

Last year, CLOs bought 61% of all new institutional loans from junk-rated companies, up from 53% in 2013, according to LCD.

The loan and CLO markets are still far from healed. Both the Vectra and the Premiere Global loans were sold at steep discounts of 90 cents on the dollar, having been originally offered last year at 98 cents on the dollar and 99 cents on the dollar respectively, according to LCD.

Just $17.6 billion of CLOs have been created this year, down 62% from a year earlier and the lowest volume at this point since 2012. The market set an issuance record of $124.1 billion in 2014, when other riskier assets such as stocks were surging to records

6--Hit the Taliban Harder (WSJ calls for escalation in America's longest war)

The Mansour strike will be wasted without more U.S. help from the air...

U.S. ground forces don’t have to re-engage to make more military progress. As David Petraeus and Michael O’Hanlon wrote on these pages Saturday, what’s needed is more vigorous bombing in support of Afghan security forces...

The U.S. should help Afghans press the offensive before the Taliban reconstitute their leadership.

Mr. Obama’s eagerness to declare the war over by the time he leaves office has ceded the military advantage to the Taliban, and security has deteriorated significantly since 2014 in much of the country. Afghan leaders have been pleading for more support, and for a commitment of 10,000 or more U.S. troops into 2017 and beyond. Mr. Obama wants 5,500 or fewer, but the Pentagon may soon recommend more. Listen to your generals, Mr. President, and take the air battle to the Taliban wherever they are.

7--Balance Due: Credit-Card Debt Nears $1 Trillion as Banks Push Plastic

Outstanding balances near precrisis levels as banks promote cards and borrowers regain confidence ...

Capital One, the nation’s fourth-largest credit-card issuer, said credit-card sales jumped 14% in the first quarter from a year earlier. The company’s strategy to boost card usage by raising spending limits and giving out more cards is also paying off: Capital One customers spent 20% more on their cards during the first three months of the year than they did a year ago.

At Citigroup Inc., average credit-card balances in the first quarter posted the first year-over-year increase since 2008. Such balances also grew at Discover Financial Services Inc. and J.P. Morgan Chase & Co., the nation’s largest lender.

Even American Express Co., which historically has focused on customers who pay their bills off every month, is now concentrating on lending money to consumers who keep a balance....

Outstanding balances reached nearly $952 billion in the first quarter, up 6% from a year earlier, and the highest level since August 2009, according to the Federal Reserve.

“You could see $1 trillion this year,” said David Blitzer, managing director and chairman of the S&P Dow Jones index committee, which tracks consumer-loan performance.

Overall consumer-spending trends remain uneven. Retail sales were stronger than expected in April, although there are signs that consumers are cutting back on nonessential purchases.

Because many creditworthy consumers are still cautious about spending, lenders are turning more aggressively to subprime borrowers. Lenders issued some 10.6 million general-purpose credit cards to subprime borrowers last year, up 25% from 2014 and the highest level since 2007, according to Equifax.

Citigroup and Discover, which typically focus on prime customers, have rolled out cards aimed at less creditworthy borrowers that carry a lower risk for issuers if those customers can’t pay their bills. Known as “secured” cards, they require subprime borrowers to make a deposit that equals their card’s spending limits....

Many issuers are now lending to borrowers with a broader range of credit scores, said Wayne Best, chief economist at Visa Inc. That includes “some of the areas that have not been as fully explored or serviced before, such as near-prime and subprime.”

Overall, lenders gave out more than 104 million general-purpose and store credit cards in 2015, up 6.5% from a year earlier and up 47% from the bottom in 2010, according to Equifax.

The boom isn’t without risks. A return to economic turbulence could trigger more defaults, which now stand near historic lows. Industry wide, default rates on general-purpose credit cards increased each of the first four months this year. In March, default rates registered the largest month-over-month increase since March 2010, according to Mr. Blitzer.

Delinquency rates on credit cards and car loans are rising in several states hit by the energy slump as a growing number of unemployed workers battle to keep up with their bills.

So far, though, business is good. Credit-card returns on assets, a measure of profitability, are expected to hit 4.25% to 4.50% this year for big lenders, compared with 4% in 2015, according to R.K. Hammer Inc., a credit-card consulting firm. Overall bank returns are roughly 1%, according to industry estimates.

“Credit cards are the best business in banking,” said Robert Hammer, who runs the consulting firm

Card profits could rise further as the Federal Reserve raises benchmark interest rates, as most credit cards have variable rates that move in tandem with the Fed.

The binge marks a reversal for lenders, many of whom retreated from the credit-card market during the recession as defaults increased. Some lowered credit lines for existing customers in an attempt to limit additional losses, and others pulled back on soliciting new customers.

Now, as the national unemployment rate remains low and more borrowers have the income to pay their debts, competition among lenders for new card customers is heating up again.

The new plastic comes with richer perks. Just a few years ago, new customers who received Chase’s popular co-brand card with United Airlines received 30,000 miles and other perks. The lender now is offering 50,000 miles on its British Airways card, with a chance to pump that up to 75,000 miles.

In another popular perk, creditworthy borrowers can now receive cash-back bonuses of as much as 5% in certain categories, compared with longtime standards of 1%.

Keith Little, a telecom analyst in Maumelle, Ark., says he and his wife recently signed up for a Citi card that returns 2% of all purchases in cash. The couple, who stopped using credit cards in 2005 after paying off $10,000 in balances, now favors the cash-back card for most of their purchases, which total about $2,500 a month. The couple hopes that the windfall will defray some of the costs on their next trip.

“Anything [that] can, goes on the Citi card,” Mr. Little said.

9--Banks Dealt Blow in Libor Lawsuits

Appeals court restores private suits against Bank of America, J.P. Morgan Chase, Citigroup and others

The lawsuits accuse 16 major banks—including J.P. Morgan Chase & Co., Bank of America Corp. BAC 1.73 % and Citigroup Inc. C 1.85 % —of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ customers.

The plaintiffs, who owned various financial instruments that were affected by Libor, claim the returns on their investments were depressed by the banks’ alleged collusion. The lawsuits were filed by several groups of plaintiffs, including the local governments of cities such as Baltimore, San Diego and Houston....

Libor, a widely used benchmark that helps set interest rates for everything from mortgages to corporate loans, is calculated daily for different currencies based on estimated borrowing rates submitted by banks on panels. The lawsuits are targeting banks on the panel that sets U.S. dollar rates under Libor.

These lawsuits are separate from the sprawling criminal and civil probes around Libor rigging, which began in 2008 and have implicated traders around the world. Regulators have accused big banks of letting their traders and executives shift Libor rates up or down to benefit their trading positions.

About a dozen financial firms have settled charges of manipulating Libor and many have pleaded guilty to criminal charges. The largest penalty imposed was the $2.5 billion paid by Deutsche Bank DB 2.19 % AG last year.

In total, U.K. and U.S. authorities have imposed sanctions of more than $6 billion in the Libor cases. A series of global investigations still are under way, but The Wall Street Journal reported in February that regulators in the U.S. and U.K. are preparing to bring a final round of civil charges against several banks in the probe.

The defendants affected by the appellate ruling Monday are Bank of America; Bank of Tokyo-Mitsubishi UFJ Ltd.; Barclays BCS 4.38 % PLC; Citigroup; Credit Suisse CS 2.10 % Group AG; Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank); Deutsche Bank AG; HSBC Holdings HSBC 3.13 % PLC; J.P. Morgan Chase; The Norinchukin Bank; Portigon AG/Westdeutsche ImmobilienBank AG; Lloyds Banking Group LYG 3.76 % PLC; Royal Bank of Canada RY 1.06 % ; Société Générale SCGLY 3.67 % ; UBS AG and The Royal Bank of Scotland Group RBS 5.29 % PLC.

10--Helicopter Money: The Illusion of a Free Lunch

11--The coup in Brazil

Brazil today awoke to stunning news of secret, genuinely shocking conversations involving a key minister in Brazil’s newly installed government, which shine a bright light on the actual motives and participants driving the impeachment of the country’s democratically elected president, Dilma Rousseff. The transcripts were published by the country’s largest newspaper, Folha de São Paulo, and reveal secret conversations that took place in March, just weeks before the impeachment vote in the lower house was held. They show explicit plotting between the new planning minister (then-senator), Romero Jucá, and former oil executive Sergio Machado — both of whom are formal targets of the “Car Wash” corruption investigation — as they agree that removing Dilma is the only means for ending the corruption investigation. The conversations also include discussions of the important role played in Dilma’s removal by the most powerful national institutions, including — most importantly — Brazil’s military leaders.

The transcripts are filled with profoundly incriminating statements about the real goals of impeachment and who was behind it. The crux of this plot is what Jucá calls “a national pact” — involving all of Brazil’s most powerful institutions — to leave Michel Temer in place as president (notwithstanding his multiple corruption scandals) and to kill the corruption investigation once Dilma is removed. In the words of Folha, Jucá made clear that impeachment will “end the pressure from the media and other sectors to continue the Car Wash investigation.” Jucá is the leader of Temer’s PMDB party and one of the “interim president’s” three closest confidants.

12--Sanders names Cornel West, Keith Ellison to DNC platform committee

Zogby is likely the most controversial of Sanders' picks thanks to his activist work on behalf of pro-Palestinian causes. He's repeatedly criticized Israeli Prime Minister Benjamin Netanyahu, who himself hasn't always been the favorite of pro-Israel Democrats, and he's compared the "plight of the Palestinians" to the Holocaust in a 2010 column for The Huffington Post. 


While Sanders, the most successful Jewish presidential candidate in American history, supports Israel, his views on the Israeli-Palestinian conflict don't mesh with that of the party's establishment. 


He's argued that Israel took "disproportionate" actions against the Palestinians in the 2014 conflict and has called on Israel to pull back on settlement building and trade restrictions. 


Zogby is not the only name that potentially telegraphs potential platform fights by Sanders' supporters. 


Ellison, the first Muslim elected to Congresss and the head of the Congressional Progressive Caucus, is a co-author of legislation meant to raise the minimum wage to $15. Clinton and other members of the Democratic establishment, including President Obama, back a $12 minimum wage


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