Are Employment Indicators in the United States and Europe Really Improving?
2016. 1. 10. 21:08
Robust Hiring in December Caps Solid Year for U.S. Jobs (2016.01.08.)
For all of 2015, the nation added 2.65 million jobs, capping a two-year, back-to-back gain that was the best since the late 1990s, the government reported on Friday.
“I think this really is illustrative of the fact that economic momentum in the United States is still awfully strong,” said Carl Tannenbaum, chief economist at Northern Trust. “In spite of the craziness we’ve seen from Asian markets this week, the fundamentals here at home are still solid.”
The year ended with a particularly strong sprint. In December, employers hired an additional 292,000 people, the Labor Department said, and October and November were revised up by a total of 50,000, pushing the average for the last three months to 284,000.
Employment rose in December, bringing the unemployment rate close to what is considered full employment (translator’s note: generally below 5.5%). Is this really a sign that the U.S. economy is recovering?
“Median family income has fallen, not risen, so there’s a great disgruntled-but-employed majority out there,” Mr. Holtz-Eakin said. “People want a raise,” he said. “I don’t think raising the minimum wage is the right way to solve this problem, but I understand why it might look appealing.”
Mr. Holtz-Eakin blamed the anemic growth in productivity, which he said helps depress wages.
Moreover, many Americans have no choice but to settle for part-time work or are too discouraged to keep looking for employment after years of fruitless searching. A broader measure of unemployment that includes these people stayed at 9.9 percent in December. And a relatively low labor participation rate, which barely ticked up to 62.6 percent last month from 62.5, continues to bedevil the recovery.
Hardly. Holtz-Eakin, an economist at Boston College, points out that for those who managed to remain employed, wages have been cut substantially, while many others—after spending too long in involuntary unemployment—have simply given up looking for work altogether, or are scraping by in part-time jobs out of necessity. If those people are included in the broader unemployment sample, the December unemployment rate still comes in close to 9.9%.
“Where we saw the greatest growth was in financial services, retail, travel and transportation,” Mr. Erickson said, with weaker demand in manufacturing and communications. He said the company, with 62,000 employees worldwide, had poured money into employee training.
“The picture is clear: Employment in nonroutine occupations — both cognitive and manual — has been increasing steadily for several decades,” the report concluded. “Employment in routine occupations, however, has been mostly stagnant.”
Guarded optimism about the labor market contributed to the Federal Reserve’s decision a few weeks ago to raise interest rates from the near-zero levels, where they had rested since 2008.
Erickson, an executive at the customer-service firm Sitel, explained that the company had poured money into training its 62,000 employees worldwide this year, adding that the strongest employment growth had been seen in finance, logistics and distribution, travel, and related service sectors, while manufacturing remained weak. This guarded long-term optimism about the labor market was also part of the background to the Federal Reserve’s decision a few weeks ago to raise interest rates from the near-zero levels at which they had remained since 2008.
The absurdity of this should be obvious. One of the key indicators used last year to judge whether the Fed would raise rates was the manufacturing index. The same manufacturing data have repeatedly rattled global equity markets, and China’s stock market—which has recently begun cascading downward like Niagara Falls—has likewise been dragged lower by slowing growth tied to falling manufacturing indicators. Manufacturing, in other words, remains one of the most important macro-level gauges of economic health.
And the global manufacturing landscape can, broadly speaking, be divided into three major blocs: Europe, the United States, and China.
- Europe’s manufacturing sector has already been in deep structural collapse for quite some time.
- China’s manufacturing base has been deteriorating for the last four to five years, with foreign capital increasingly packing up and leaving on the grounds that business conditions there had become untenable; last year, the damage finally began to show up clearly in the numbers.
- And now, even in the United States—the one economy that still appears, at least on the surface, to be recovering—manufacturing employment indicators remain unimproved.
If the unemployment rate rises to nearly 10 percent once voluntary labor-force exit and involuntary part-time work are taken into account, then the mere fact that some segments of America’s non-manufacturing economy have shown limited improvement is nowhere near enough to conclude that the U.S. economy has actually begun to recover.
The posts below make it clear just how far the public statements issued by America’s political, bureaucratic, and business elites are from the reality of employment conditions around the world. Above all, the worsening state of youth employment is the most serious problem.
유럽 경제는 정말로 회복하고 있는가? 실업률 개선의 이면 (2016.01.08.)
각국 청년 대졸자의 취업률과 아베노믹스 (2016.01.09.)
As I have pointed out consistently for months now—and as this article itself also suggests—the apparent improvement in U.S. employment indicators is a statistical deception.
To understand why America’s political, bureaucratic, and business establishment has moved in concert to stage this kind of financial fraud, one must take an international-political view of the matter. Only by understanding the movements in the prices of oil, grain, gold, rare minerals, and other commodities, together with the shifting dynamics among the United States, China, Russia, Iran, Saudi Arabia, Iraq, Israel, and North Africa, can one see the picture clearly.
The Financial Crisis in China’s Manufacturing Sector (Shipbuilding)
2016. 1. 17. 22:08
Indebted Chinese Companies Increase Pressures on Government
A crisis in Chinese manufacturing. As I already wrote in a series of recent posts on the U.S. rate hike and the statistical manipulation surrounding the U.S. government and the Fed, the Chinese market—which had been propping up a collapsing world economy through last year by carrying one major axis of the manufacturing sector—is now beginning to shake from the foundations of the industry itself.
China’s bloated debt ratio had already been pointed out last September. (See the 2015.09.15. post.)
Looking for ways to spend (2015.09.12.)
“中 부채 실제로는 GDP의 250%"<이코노미스트> (2015.09.14.)
As of last May, the Chinese central government’s debt stood at 64% of GDP. Meanwhile, local government debt has reached 24 trillion yuan, or about two-fifths of GDP (40%). The Economist explains that if one adds the debt of state-owned enterprises implicitly guaranteed by the government, China’s total debt exceeds 250% of GDP.
There are many companies like Doosan that expanded their businesses through fire-sale style state-led or state-tolerated policies, leaving them financially wrecked with disastrous debt ratios. As supply prices fall, sales volume would have to surge dramatically just to keep these firms alive, but given the broader economic malaise, that is hardly easy. The combined debt burden of corporations and households alone is large enough to account for 12% of the Chinese economy as a whole.
The bigger the company, the more financially lethal the risks it is carrying, which is why major firms are now even being ordered by courts to split themselves into several separate entities. Korea recently had its own meltdown over Daewoo Shipbuilding, but China’s shipbuilding industry is taking a serious hit as well.
To make matters worse, high value-added young workers are all crowding into white-collar sectors, while wages in blue-collar sectors are rising by 10% a year thanks to the chaos caused by the older men who still hold the existing shop-floor hegemony. Were they benchmarking Hyundai Motor’s aristocratic unions or what?
Add Intel’s weak earnings on top of all this and the conclusion is obvious: the stock market is doomed in 2016
I should probably dump everything except the very few companies I am absolutely certain about. In a market like this, the one holding the most cash is king.
After China, a Crisis in Korean Manufacturing (Shipbuilding)”
2016. 1. 19. 0:46
As global recession cuts cargo volume, the BDI has fallen to its lowest level ever; even perfectly functional ships less than 20 years old are being scrapped
Even scrap prices fell 30% last year, so even when shipping companies dismantle vessels in a desperate fire sale, the cash they can actually recover keeps shrinking
Last year, Hanjin Shipping handed over two bulk carriers, including the Hanjin Bombay, to a foreign shipbreaking specialist. The Hanjin Bombay had mainly transported timber and iron ore on the Korea-Europe route. It had been in service for less than 20 years, but with losses continuing to accumulate, Hanjin Shipping made the tearful decision to scrap it. The ship could still operate, but operating it would only generate more losses, so they effectively dumped it on the market just to recover scrap value.
In 2014, Hanjin Shipping dismantled a total of ten container ships in the same way. All of the vessels it scrapped had been built between 1995 and 1997 and could have remained in service for another ten years or more.
Shipping companies move one after another to scrap vessels
Dismantling aging ships is the final option shipping companies resort to during a slump. Hanjin Shipping is far from the only company driven into this position. Most shipping companies around the world are in the same situation.
Among Korean firms, Hyundai Merchant Marine scrapped two bulk carriers last year, including the Hyundai Universal and the Hyundai Prosperity. These ships had mainly transported iron ore and other cargo on routes between Korea and Australia. An industry official said, “Both ships scrapped by Hyundai Merchant Marine were built in 1990 and could have remained in service for at least another five years. My understanding is that Hyundai judged them to be economically unviable and decided to dismantle them.”
In the immediately preceding post, I wrote about news that China’s shipbuilding industry is getting wrecked, and now here comes news about the domestic shipping industry.
There seem to be people who bought Hanjin Shipping and Hyundai Merchant Marine because oil prices hit fresh lows, but they should cut their losses now while they still can…
Manufacturing—the business of making things—is already dangerous enough, so there is no reason to think the business of transporting those goods would somehow be fine.
Conclusion: this year both shipping stocks and shipbuilding stocks are dangerous
Prolonged Low Oil Prices Are Now Imminent: What Will the Oil Price Collapse Mean for the Korean Economy?
2016. 1. 19. 6:10
The Price Pressures
At less than $30 a barrel, crude is down more than 70 percent in the last 18 months. Over the years, the price tends to fluctuate in response to geopolitical and economic turmoil. Worries about China’s health is weighing on oil.
The Supply-Demand Imbalance
United States production has surged in recent years as the shale boom took off. That has helped create a glut of oil as major producers like Saudi Arabia continue to pump at high levels.
Oil Prices Edge Lower as Iran Prepares to Ramp Up Production (2016.01.18.)
Oil edged even further below $30 a barrel on Monday as the potential impact of additional oil from a post-sanctions Iran weighed on an already oversupplied market …
But a report from the Organization of the Petroleum Exporting Countries on Monday indicated that the group expects low global prices — which have fallen by 70 percent since 2014 — to force its rival producers, like the United States, to curb production enough to eventually reduce the glut of supplies that has driven prices down …
OPEC predicted in its monthly oil report that 2016 would be “the year when the rebalancing process starts …
OPEC forecast that the United States would see the world’s largest output decline this year as capital spending continues to fall, reducing the number of rigs drilling wells. Overall production, including biofuels, in the United States will fall by an average of 380,000 barrels a day this year, to an average of about 13.5 million barrels a day, according to OPEC, whose 13 members include the Arab oil states, and Iran, Nigeria and Venezuela …
Many forecasting organizations agree with OPEC that production growth outside the organization will fall as companies defer or cancel projects. On Monday, for instance, Royal Dutch Shell said it was pulling out of an estimated $11 billion effort to extract difficult-to-recover natural gas in Abu Dhabi in the United Arab Emirates because “the project does not fit with the company’s strategy, particularly in the economic climate prevailing in the energy industry …
Oil prices could remain under pressure for some time, analysts say. Many agree that growth of production outside OPEC is slowing. But inventories, which are already high, are likely to continue to build, although more slowly, through at least the first half of this year. Hedge funds and other financial buyers are betting heavily on prices falling further …
One big uncertainty is how demand for oil will fare. Slowing growth in China has been a factor in falling demand. And the recent turmoil in the financial markets that began in China but that has spread globally has raised questions about whether underlying economic weakness around the world could become worse — with even growth in the United States beginning to slow …
That is why analysts are forecasting an increase of around 400,000 barrels a day in the coming months from Iran.
As sanctions on Iran are lifted and Iranian supply is added to an already oversupplied crude market, the price of Brent crude—the benchmark for international oil prices—has fallen to $29.6 per barrel, its lowest level in the past 18 months.
OPEC expects that as oil-producing countries cut back investment in drilling, supply and demand will gradually rebalance through a daily reduction of 380,000 barrels until average daily output falls to 13.5 million barrels, and that oil prices will begin to rebound from this year onward.
In fact, Royal Dutch Shell announced on Monday that it would abandon a natural gas extraction project in Abu Dhabi estimated to cost $11 billion.
Shell is already on the verge of a shareholder revolt after spending $48 billion to acquire BG Group, with people essentially asking why they paid such an absurd price under current conditions. Depending on its fourth-quarter 2015 earnings release scheduled for Wednesday, the stock price is likely to swing violently.
The bigger problem is that the financial sector, including hedge funds, is betting that oil prices will fall even further. China is the variable if there is one, but China’s manufacturing index is already effectively dead, so there is no basis for expecting a recovery in oil demand there. More recently, even its financial markets have fallen into disarray, raising the possibility that China could drag down the still-fragile U.S. recovery with it in a kind of mutual destruction scenario.
And then comes the finishing blow: expanded Iranian crude supply is beginning to be priced in, and starting next month production is expected to rise by an additional 400,000 barrels per day.
So what will this oil shock do to the Korean economy, and how long will it last?
“The construction and engineering industries are facing a worst-case scenario because of low oil prices. According to the Ministry of Land, Infrastructure and Transport, overseas orders won by Korean construction and engineering firms last year totaled $46.144 billion, down 30% from the previous year’s $66.009 billion. It was the worst figure since 2007. A major reason was that oil-producing countries in the Middle East, North Africa, and South America delayed project orders.
Construction companies struggling because they are not being paid properly are also increasing in number. Samsung Engineering filed for international arbitration last year against a Saudi client that failed to pay roughly 140 billion won for plant construction work. Hanwha Engineering & Construction also saw its unbilled construction amount rise to 924.4 billion won as of the end of the third quarter last year, as projects in the Middle East ran into difficulties.
Falling oil prices are also devastating for the shipbuilding and steel industries. The lower oil prices go, the fewer offshore plant orders are placed. As low prices persist, most offshore projects that had been scheduled for last year have been postponed indefinitely. Representative cases include Chevron’s $1.5 billion Thailand Ubon Project and the $4 billion Nigeria Bonga floating production storage and offloading project.
The shock from Middle Eastern fiscal distress is spreading to the financial sector as well. Middle Eastern sovereign wealth funds recently suspended negotiations with the Korean government over the purchase of a stake in Woori Bank. The reason given was that falling oil prices had reduced their investment capacity. The government is now scrambling to sound out European investment funds as alternative buyers.”
Arab sovereign wealth funds have already begun pulling capital back, and the second Middle Eastern construction boom that had been building since 2010 has now run into a hard stop.
Recent international oil prices have fallen to levels similar to those seen during the prolonged low-oil era that lasted from the mid-1980s to the early 2000s. In 1985, international oil prices stood at $60.6 per barrel in real terms, but they were cut in half to $31.2 the following year due to a large-scale production increase by Saudi Arabia. After that, real oil prices mostly remained in the high-$20s to low-$30s range until they began climbing sharply in 2005 on the back of surging BRICS consumption. If one uses that earlier period as a reference, this low-price environment could last for more than a decade.
With warning lights flashing in both Chinese and American manufacturing at the same time, demand for crude can only remain weak for the time being. Korean economic research institutes such as SK Securities and the LG Economic Research Institute are also projecting that the low-oil environment will be prolonged.
Conclusion: let’s go long on low-oil beneficiaries.
Saying the U.S. Economy Has Improved Is a Scam
2016. 1. 23. 22:27
George Soros, the American billionaire hedge fund investor, has projected that China’s economy will undergo a hard landing and that the result will ultimately be global deflation.
On the 21st (local time), Soros said in an interview with Bloomberg Television, “A hard landing is unavoidable,” adding, “It is less that I expect it than that I am already observing it.”
From a financial point of view, this is exactly what I have been arguing all along: the claim that the U.S. economy is getting better is a fraud.
It may improve going forward. That belongs to the realm of possibility. But it has not improved yet.
And with manufacturing collapsing across the world right now, I do not think a short-term recovery is realistic. If the economy had already recovered to that extent, would the Fed have dragged its feet so long over raising rates last year?
The Fed raised its policy rate not long ago, but long-term interest rates are actually falling, and demand for long-term Treasury bonds is increasing.
A decline in long-term rates points to deflation. If deflationary pressure rises, then the value of money should, in theory, rise in response. In other words, as prices fall, currency value should rise accordingly so that purchasing power increases, which in turn stimulates consumer spending, the single biggest component of GDP.
But in the United States right now, deflation has appeared without a corresponding rise in the value of the dollar. Instead, gold prices are rising. What are people supposed to do with that, buy Big Macs with gold?
There are also those who argue that the Fed’s rate hike is drawing dollars back into the United States from emerging markets, but I do not really buy that. It is not that the dollar itself has meaningfully appreciated; it is that emerging-market currencies have collapsed so badly that the dollar has merely fallen less by comparison. In the end, that is not an appreciation of the dollar driven by genuine growth fundamentals inside the United States.
For now, all we can do is keep watching through year-end to see when the Fed actually makes its next rate hike.
My guess is that this year will look a lot like last year: they will keep floating the bait and dragging things out, only to barely manage one move near the very end.
January FOMC Holds Rates Steady: On Oil, Shale Gas, Future Exchange-Rate Moves, and the Direction of the Korean Stock Market
2016. 1. 28. 17:20
One-third of U.S. shale energy firms could go bankrupt amid falling oil prices (2016.01.12.)
BHP Billiton writes down $7.2 billion in U.S. shale assets (2016.01.15.)
Korean economy faces another difficult year, beset by troubles at home and abroad (2016.01.26.)
China’s stock market breaks below 2700… already down 24% this year (2016.01.28.)
The Fed made its January announcement at dawn. A broken economy is not going to revive itself, so rates were of course left unchanged.
As I had been telling people since last summer and writing on this blog since the fall, the United States is not in a position to raise rates right now. From manufacturing indices onward, the data are a mess, and even the employment numbers only barely scrape together something like a 5% unemployment rate by using the kind of accounting logic that would make even Korea blush—excluding contingent workers, the voluntarily unemployed, students, and everyone else inconvenient to the headline. In reality it is closer to 9%, and youth unemployment is even worse. The severity of youth unemployment is, in fact, a global trend. I have touched on that in earlier posts, so those interested can go back and read them.
The temporary appearance of improvement in the employment data was largely the result of the short-lived shale gas boom, but that is now fading out of the industrial sector, while the oil price chicken game is only accelerating. On top of that, the massively expanded medical insurance and welfare costs known as Obamacare have more than absorbed all the money that was poured out through QE in the early Obama years. Manufacturing is a wreck, employment data are wrecked, and oil is dead.
That is why I had flatly said last fall, “There will be absolutely no rate hike this year." And yet in December the Fed suddenly went ahead and raised rates, saying that “labor market conditions had improved considerably this year” and that it had achieved “reasonable confidence." I was left dumbfounded, because no matter how hard I looked, I could not find any real economic basis for a rate hike in the actual condition of the U.S. economy.
Right after the December rate hike announcement, some of the paid online market gurus started making a huge fuss, saying that “next year the market will bloom.” One futures trader in Yeouido even declared outright that “the Hang Seng is going to 5,000.” Needless to say, I did not believe a word of it.
Back in the first half of 2014, when the exchange rate was trending lower and hovering around 1,040 won, an acquaintance of mine at BNP Paribas told me, “We’re looking at 960-980 won by year-end.” I did not buy that either, and bought dollars that summer at 1,020 won. By year-end, the exchange rate closed in the 1,100s.
Since last summer, the Fed has even been pulling back the relatively small amount of dollars that had been released through QE—dollars that had not really circulated much in the real market to begin with—by repeatedly signaling future hikes and bluffing about more hikes to come. I kept saying, “If it pops briefly right after the rate hike, sell everything and buy puts or inverse products.” Ironically, I myself did not have enough margin to do it. I expect the exchange rate to rise further over the course of this year, and I think the KOSPI is going to get smashed.
A month ago, when the Fed raised rates, I said, “The way China’s exchange rate is moving looks seriously unstable. Even if uncertainty is supposedly out of the way, if the KOSPI cannot settle above 2100, I’m dumping everything and running. But no matter how I look at it, I do not think it can break through." And, sure enough, the KOSPI failed to get above 2100, while foreign investors started dumping in bulk from the very beginning of the year.
So how far will the Korean stock market fall this year? Given that it has already dropped below 1920, maybe it has already hit its bottom?
Though I still have no conviction that the global economy is recovering, so for the time being I will stick to short-term trading only…
U.S. January Employment Report: 151,000 Jobs Added, Unemployment at 4.9%, Supposedly Signaling a Turn Toward Real-Economy Strength. Oh Rly? Heh
2016. 2. 5. 23:08
U.S. Economy Added 151,000 Jobs in January; Unemployment at 4.9% (2016.02.05.)
The Labor Department said Friday that payrolls rose by 151,000 in January, a falloff from the year-end sprint that helped make 2015 the second-best year for job creation since the late 1990s.
But investors have lately been edgy, concerned about weakness in China, plunging oil prices and a series of reports suggesting the American economy may have hit an air pocket in recent weeks.
The latest figures on the job market — plus a slight fall in the unemployment rate to 4.9 percent, from 5 percent in December — suggest some modest strength persists. January was the first time since February 2008 that the unemployment rate fell below 5 percent, just before the collapse of Bear Stearns set the stage for the financial crisis.
To be sure, markets are famously mercurial, foreseeing recessions that never come to pass and assuming the good times will go on right up until the music stops.
But for all the talk of recession on Wall Street, or at least anemic growth in 2016, the Main Street economy appears to be on a fairly solid footing.
All of these crosscurrents — steady hiring but anxious markets, falling unemployment but flat wages — underscore the delicate task now facing the Federal Reserve.
The central bank raised short-term interest rates in December, confident that the economy could withstand the impact of a quarter-point tightening in monetary policy after almost a decade of near-zero rates.
Sectors tied to the domestic economy, like retail, education and health care, restaurants and professional services, are performing well. Businesses linked closely to export markets or the energy industry, on the other hand, are suffering.
For the winners, especially in parts of the country where unemployment is very low, Wall Street’s nervousness seems misplaced.
“It’s a very tight labor market, and we continue to hire,” said Dave Rozenboom, president of First Premier Bank in Sioux Falls, S.D. “The economy is as strong as it has ever been here.”
Sioux Falls’s situation may be unusually strong, but the upward trajectory in employment over all in the United States suggests to some analysts that smaller-business owners know something that the Wall Street pessimists don’t.
I’m writing this on my phone, so to sum up the article in one line, it basically says: “Contrary to Wall Street’s pessimistic forecasts, employment growth and rising minimum wages suggest that the real economy is improving, and in light of the Fed’s recent remarks, even a March rate hike—which had seemed likely to be pushed back until summer—may now go ahead as scheduled."
The U.S. economy is improving? My view has not changed.
If oil, which is showing a temporary rebound here, can just hold a mildly firm trend for another week, then stock prices should move up without too much trouble. I’m already starting to unwind positions anyway, so that works out well.
Global Stock Markets Tumble… Nikkei Plunges More Than 4% Intraday
Global stock markets tumble… Nikkei plunges more than 4% intraday (2016.02.09.)
Japan’s Tokyo stock market opened lower on the 9th and was down more than 4% during the morning session. The decline reflected the fact that U.S. and European markets had closed lower the previous day, while international oil prices fell again, intensifying the preference for safe-haven assets. In particular, the strengthening yen appears to have reinforced selling pressure in equities.
The Nikkei 225, which opened at 16,666.79, closed the morning session at 16,168.21, down 4.92% from the previous day.
As demand for safe assets intensified, gold prices and bond prices rose sharply. On the previous day at COMEX in New York, gold futures for March delivery traded near $1,197 per ounce, up nearly 3.5%. The yield on the 10-year U.S. Treasury fell to 1.76%, its lowest level in a year. (Bond prices up, bond yields down.)
Low oil prices need to be brought under control, but for that to happen, factories around the world would first have to resume normal operations.
And heavy manufacturing factory is not a bakery. You can’t just switch back on overnight by saying, “Alright, let’s start producing again tomorrow.”
International Oil Surges 12.3%, U.S. Stocks Rebound: The Lifeboat Has Arrived!
2016. 2. 13. 19:10
International oil jumps on production-cut hopes … WTI up 12.3% in a single day (2016.02.13.)
The effect of the previous day’s Wall Street Journal report on a possible production-cut agreement grew even stronger.
The newspaper quoted UAE Oil Minister Suhail bin Mohammed al-Mazrouei as saying, “All OPEC member states are prepared to cut output.”
The remark was interpreted as meaning that even Saudi Arabia, which had opposed production cuts until now, was willing to agree to reducing output.
The phrase is “hopes for production cuts,” which means no long-term fundamental driver of recovery has actually been found. What happened is simply that a daily newspaper passed along the wishful thinking of the UAE oil minister, who is probably one of the people on this planet suffering most from low oil prices right now, and oil still jumped 12.3% in a single day on that basis.
[New York stocks rebound on soaring oil and financials… Dow up 2.0%] (2016.02.13.)
Investors also paid attention to remarks by William Dudley, president of the Federal Reserve Bank of New York, who spoke that day. In briefing materials for a speech on household debt, Dudley assessed that the U.S. economy was in a position to cope well with whatever shocks might emerge going forward.
Dudley said, “Major parts of the U.S. economy, such as the household sector, are showing healthy conditions,” and added that “the financial system is clearly stronger, with more liquidity and greater bank capital strength than in the years before the financial crisis.”
When the president of the New York Fed starts talking about “more liquidity and greater bank capital strength,” that is basically another way of saying there will be no rate hike for the time being.
Whatever the case, people trapped in stocks have at least been given an exit route for now.
If negative real rates start getting applied and the yen alone falls from here, then my portfolio gets the full trinity—surging oil, rising U.S. stocks, and a weaker yen—but we will see how it plays out.
Japanese Stocks Explode Higher, Chinese Stocks Hold Up, Hong Kong Rebounds, Korean Stocks Rebound, European Stocks Begin Rebounding, U.S. Markets Closed
2016. 2. 15. 20:02
Nikkei closes up 7%… no collapse in Chinese equities (2016.02.15.)
With the yen dropping sharply (-1.08%), the trinity I mentioned yesterday—surging oil, rising U.S. stocks, and a weaker yen—is now in place. Add to that the Nikkei exploding higher and the Shanghai index holding up, and it is about as good as it gets.
European markets, still in their opening phase as I write this, are already rebounding in response to the same mood. Since U.S. markets, which open in the early morning Korea time, are closed for the holiday, today’s trend should hold through tomorrow as long as oil does not take a major hit.
Thanks to that, the KOSPI—after being left on life support Thursday and Friday, gasping and convulsing—now looks like it may be staging one last reflexive rally… If the growing view that a March rate hike is impossible ends up pushing the dollar-won rate down as well, then everything falls perfectly into place.
“Buffett, Soros, Icahn… Financial Heavyweights Betting Again on a Commodities Rally”
2016. 2. 18. 20:27
Buffett, Soros, Icahn… Financial heavyweights betting again on a commodities rally (2016.02.17.)
According to Bloomberg on the 16th, Berkshire Hathaway, led by Buffett, disclosed in a quarterly report filed with the U.S. Securities and Exchange Commission that it had newly acquired shares in Kinder Morgan, a U.S. oil and natural gas pipeline company, during the fourth quarter of last year (October-December). The total number of shares purchased came to 26.53 million, worth $395.88 million in value.
Soros Fund Management, led by Soros, also newly acquired shares in the U.S. oil-services company Baker Hughes during the same period and bought additional shares in Kinder Morgan. According to the quarterly report Soros Fund filed with the SEC, the fund purchased roughly 685,000 shares of Baker Hughes for $31.6 million and added another 50,000 shares of Kinder Morgan.
Icahn Enterprises, Carl Icahn’s investment fund, was also found to have increased its holdings in Transocean, an offshore drilling company. The quarterly filing also showed that Icahn Enterprises maintained its existing stakes, unchanged from the end of September, in Chesapeake Energy, Cheniere Energy, and Freeport-McMoRan.
The CRB Index, a benchmark for the global commodities market, has recently fallen back to levels last seen before the commodities rally began in 2002. It is true that the slowdown in China and other emerging economies has become more pronounced, but in absolute terms domestic demand in emerging markets has recovered substantially since 2002. China’s GDP, for example, rose more than tenfold from $1.4 trillion in 2002 to $10.7 trillion last year.
Dow Jones reported that major private-equity firms had so far been reluctant to invest in energy-related companies as weak international oil prices persisted. Deloitte, meanwhile, warned in a recent report that roughly one-third of oil and natural-gas producers worldwide could end up declaring bankruptcy.
Since last fall I’ve basically been reading all NYT pieces on oil, commodities, stocks and bonds, the Fed, and economic conditions, and now hedge funds are already placing their bets… So is this finally the bottom?
If I work at a hedge fund, do I get to spend all day watching the market while getting paid? That would be fun.
Eurozone Growth Still Falls Short Despite Quantitative Easing
2016. 5. 6. 7:37
Eurocoin Signals Significant Euro Area Growth Slowdown In April (2016.05.05.)
… leading growth indicator for the euro area is now at its lowest reading in 12 months. Given the previous Q1 preliminary growth estimate at 0.6% (q/q growth) from Eurostat, the current level of Eurocoin suggests quarterly growth slowdown to around 0.4%.
Even with eurozone QE, first-quarter growth had been expected to come in at 0.6%, but it only reached 0.4%.
My own view is that Japan showed the same pattern: unless the real economy itself begins to grow in substantive terms, fiscal and monetary policy alike are unlikely to have much traction going forward.
Bank of Korea Governor Lee Ju-yeol Scales Back the Likelihood of a June Rate Cut
2016. 5. 25. 17:19
Remarks by Bank of Korea Governor Lee Ju-yeol put the brakes on rate-cut expectations in Seoul’s bond market. The reason was his diagnosis that the reliability of GDP as an indicator is declining over time.
The growth forecast for this year released by the KDI the previous day was 2.6%, 0.2 percentage points below the Bank of Korea’s own figure.
It may look like a small gap, but the market reacted strongly. The yield on the 3-year Korean government bond fell 2.3 basis points in a single day, the steepest drop since April 20. In particular, market participants seemed to agree with the KDI’s recommendation for a rate cut. The fact that one of the Monetary Policy Board members came from the KDI also appears to have fueled those expectations.
Governor Lee’s remarks that day reined in the rate-cut expectations that had been spreading. In the market, people were also talking about comments made after the economic trends meeting that cyclical unemployment and structural unemployment caused by restructuring arise from different sources and therefore require different policy responses.
Lee Mi-seon, an analyst at Hana Financial Investment, said, “Governor Lee does not seem to want this to lead to a rate cut,” adding that “it could be interpreted as meaning monetary policy may not be of much help with structural problems.”
It seems that expectations for a rate cut picked up after the KDI released a growth forecast that came in 0.2 percentage points below the Bank of Korea’s own projection.
Korea’s fiscal position is strong, and its foreign-exchange reserves are substantial. A weaker KRW no longer feeds through into export growth as directly as it once did. So if the Bank of Korea were to cut rates at a time when further dollar strength is already in view, would the costs not outweigh the benefits? I gather that the authorities already had a rough time earlier this year defending the exchange rate around the KRW 1,200 level in the NDF market.
They say they want to expand support for youth entrepreneurship. But judging from the entrepreneurs and startup CEOs I’m close to, the idea of having career bureaucrats—people who spent their lives buried in civil-service exam books—sit in judgment over startups is ridiculous. At that point, it would make more sense either to raise the basic old-age pension and simply put cash directly into the hands of people in their twenties and thirties, as Mayor Lee Jae-myung has argued, or to step up infrastructure investment in less developed provincial regions. I remember giving up on a trip to Jinju once because the transportation links were such a mess.
Performance by Asset Class (2016 YTD)
2016. 6. 3. 18:18
Trades in 2016: the good, the bad and what comes next (2016.05.31.)
The S&P 500 and MSCI Emerging Markets have at least managed to post gains so far, while European bank stocks and Japan’s TOPIX have performed poorly.
The best-performing asset has been oil. Brent is up 40% YTD.
Gold comes next at +14% YTD, followed by the yen.
If oil has risen, and gold has risen while the yen is also strengthening, that suggests the dollar is still structurally weak.
Those hedge-fund old hands must have made a fortune. (See the 2016.02.18. post.)
How Overseas IBs View the U.S. Rate-Hike Issue
2016. 9. 2. 02:41
“Even foreign investment banks remain skeptical about a rate hike” - NH (2016.09.01.)
Summary of an NH Investment & Securities WM Research report by analyst Koo Ja-won
- Citigroup: Political events loom in October and November. Expects a rate hike in December.
- Goldman Sachs: 80% probability of at least one rate hike within the year.
- BNP Paribas: A December hike is more likely than a September move.
- RBC (Royal Bank of Canada): A rate hike would be more appropriate next year than this year.
I keep saying the Fed is not going to raise rates again anytime soon. The outlook for China is still not firm enough, and China is the one that still has to pull commodity demand higher.
That said, oil prices have risen substantially from last year’s levels, and the decline in U.S. unemployment is becoming more and more evident.
China’s economy did begin turning around earlier this year. What matters now is whether that recovery can be consolidated enough to make an exit from deflation look real.
I do think the Fed could manage one rate hike around year-end.
Will OPEC’s Output-Cut Deal Really Lead to Higher Oil Prices?
2016. 9. 30. 01:09
OPEC deal shows Saudi oil strategy has backfired, says John Kilduff (2016.09.30.)
Iran’s oil output has reached 3.6 million barrels per day after the lifting of international sanctions earlier this year, but Tehran says it is targeting production of 4 million barrels a day.
Nigeria and Libya are both seeking to increase production as they make progress resolving domestic conflicts that have sidelined crude supply.
On Tuesday, Mustafa Sanalla, the head of Libya’s state-run National Oil Corp., said the country’s crude production had more than doubled to 485,000 barrels a day after the reopening of oil ports this month, Dow Jones reported.
Those gains, along with Russian plans to increase production, show the market will continue to be swamped with supply, Kilduff said.
Michael Cohen, head of energy commodities research at Barclays, said Wednesday he believes the situations in Nigeria and Libya are getting worse on balance. He told “Squawk on the Street” he doesn’t expect developments in those countries to provide anything more than “fits and starts” for the oil market in the next year.
Goldman Sachs: OPEC deal doesn’t change how much oil will cost through 2017 (2016.09.30.)
The OPEC deal to cut oil production may provide a short-term support for prices, but chances are it won’t change the supply outlook much, Goldman Sachs said.
Goldman said in a note to investors that it was sticking with its forecasts for WTI at $43 a barrel for the end of this year and $53 a barrel in 2017.The investment bank had cut its year-end forecast this week from $50 a barrel.
“If this proposed cut is strictly enforced and supports prices, we would expect it to prove self-defeating medium term with a large drilling response around the world,” Goldman’s analysts said.
“Strictly implemented in the first half of 2017 and all else constant, the production quotas announced today should be worth $7 a barrel to $10 a barrel to the oil price,” the analysts said.
But they added, “Compliance to quotas is historically poor, especially when oil demand is not weak.”
Goldman also noted that risks were “skewed to the upside” on production from countries not targeted by the quota deal, pointing out that output from Libya and Iraq was already 180,000 barrels a day above the bank’s expectations.
Oil prices have been rising recently on the back of OPEC’s production-cut agreement, and there has been no shortage of commentary taking further gains for granted. The major IBs, however, do not seem all that optimistic.
To begin with, Iran, which only recently emerged from sanctions, has little reason to be enthusiastic about cutting output. Meanwhile, African producers such as Nigeria and Libya, whose domestic troubles had been holding back oil production, now look likely to increase output as those internal problems ease to some extent. If the major Middle Eastern producers agree to cut output while global demand for oil has not materially recovered, then non-OPEC producers will naturally see that as an opening and move to raise production instead.
On top of that, China—the world’s largest oil consumer—has not been in a position since last year to consume oil on the kind of scale it did when factories were still being built at full speed. One of the main drivers cited during the 2008-09 oil collapse was the abrupt slowdown in Chinese growth. That was also when China’s annual GDP growth first fell out of the double-digit range.
There is also the academic point. According to Professor Ghalayini’s paper, The Interaction between Oil Price and Economic Growth, oil prices and economic growth in oil-importing countries are negatively correlated (“For the oil importer countries, oil price increase and economic growth are negatively correlated while all things being equal, the relation is positively correlated for oil exporter countries”). From China’s point of view, moreover, there is little reason to buy higher-priced OPEC crude when it has already shifted its main source of oil imports away from Saudi Arabia and toward North Africa.
For all of these reasons, even if OPEC has agreed to cut output, the total change in global supply is unlikely to be large enough to produce a major rise in oil prices. Goldman Sachs has revised its view and now sees WTI at $43 a barrel by the end of this year and $53 next year. That is well below its previous forecast of $50 by year-end.
I agree with Goldman’s view. If OPEC’s actual supply does not change very much, and given how little oil China produces itself, the decisive variable for any sustained rise in oil prices will ultimately be whether Chinese manufacturing makes a full recovery.
Until the relevant indicators confirm this thesis, it still seems too early to bet heavily on a sustained rise in oil prices.
Oil Falls 1.1% as OPEC September Output Hits Record High … Some OPEC Members Push for Higher Production
2016. 10. 12. 7:14
Some OPEC members push to raise production… next month’s output cut could be rendered meaningless
As for the view that OPEC’s output-cut agreement would drive oil prices higher, I had already said, “For geopolitical reasons, it still seemed too early to bet heavily on a sustained rise in oil prices."
For the same reason, I liquidated my entire Hanwha Chemical position even though I had built it at a very favorable average cost.
The Fed Decides to Raise U.S. Interest Rates
2016. 12. 15. 4:29
Fed Raises Key Interest Rate, Citing Strengthening Economy (2016.12.14.)
WASHINGTON — Citing the steady growth of the American economy, the Federal Reserve said Wednesday that it would increase its benchmark interest rate for just the second time since the 2008 financial crisis.
The widely expected decision moves the Fed’s benchmark rate to a range between 0.5 percent and 0.75 percent, still a very low level by historical standards.
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This was a rate hike that had largely been telegraphed. But when the Fed delivered its first hike last December, it was talking as if further tightening would follow almost immediately, using phrases like “considerable improvement in labor market conditions” and “reasonable confidence.” And yet it still took a full year for them to manage another mere 25 basis points.
From a global macro standpoint, it looked to me as though a reversal in fundamentals had begun to take shape, at least to some extent, so I had already gone to a full position as of this month (2016.12.01.). I think things should be fine through the end of next year. Of course, that will still depend on how the situation develops.