Jobs = Growth: We Have Neither: Unemployment August, 2011

Real men (and women) want real jobs.  They want to provide shelter, clothing, and food for their families.  It is the 18th Century concept of the pursuit of happiness and some people who have loved and fought for freedom thought of it as a God given inalienable right of all free men.  What we have seen, since the beginning of the 1960's particularly, is the accrual of GDP growth primarily to the top 1% wealthiest in society at the expense of the remaining 99% of society.  We can talk about confidence --- and there appears to be less in the United States, Europe, and globally, but economic data on confidence is always past tense when received.  In the final analysis it comes down to real wages and personal income.  The myth that increases in the minimum wage increase unemployment has been repeatedly shown by economic studies to be false with moderate increases in the minimum wage having no appreciable effect on jobs.  Worker productivity has grown 80% since 1980 while real compensation has only grown 8% and real wages only 7% of which 23.5% of the income went to the top 1%.

The August, 2011 Unemployment report was unchanged (zero net job growth) with unemployment remaining unofficially at 9.1% and total official discouraged workers at 16.2% an increase of one tenth.  Using the older 1994 BLS calculation, Shadow Statistics estimates (this graph will change monthly) the total discouraged workers at approximately 22.8%.  The number of unemployed remained unchanged with no jobs added, because the participation rate went up to 64% and the employment-population rate went up to 58.2%.  The number of workers who could only find part-time work rose to 8.826 million from 8.396 million.  The average work week declined to 34.2 hours and the average hourly wage declined one tenth.  The participation rate is edging up for older age groups including those 55 years of age and older and it appears it will be getting older.  As for education, it appears that educational level is not significant in the ability to find new employment when unemployed and the diffusion index is at 52.2 (below 50 is contractionary) across all industries and is at its lowest level since last September.  For a full set of employment graphs at Calculated Risk go here.

Worse, the prior two months were revised down and the major indicators around those who have jobs are weak  The average duration of unemployment has dropped while the median has increased, which means that more people are dropping out of the labor force discouraged.  There is little remaining the Fed can do leaving the bulk of necessary action in the domain of the government's fiscal policy.  The continuing high unemployment is a direct result of the inadequate stimulus applied in 2009 and the destruction of education jobs will have a serious future effect on the ability of the United States to be competitive and to grow economically.

In an extensive analysis of the United States unemployment figures, the Australian economist Bill Mitchell finds a staggering loss of unemployment, increased under employment, a stagnant labor market, and declining economic growth heading towards recession as the result of the inadequate 2009 stimulus and political bickering which is abandoning U.S. workers to oblivion.

If you look at this link from the economist James Hamilton on the current economic condition with respect to the most recent economic reports, you will see that the United States has been making little meaningful progress in recovering from the global financial crisis and has only very slow growth to look forward to in the next six months.

In graphs from Calculated Risk, you can see several measures of recession and where we are in the terms of slow growth.  Using some different GDP per capita variations, Doug Short looks at recession indicators in a series of graphs and comes to the conclusion we have not yet fallen back into recession, but we are surely in the a second great contraction.  The Consumer Metrics Institute in their August 30 News, which has not yet been posted to their website, argues that the BEA deflators are not correctly portraying nominal GDP in real numbers.  By reverse engineering the BEA numbers, the Consumer Metrics Institute says, "When we recast the GDP growth rates using the BLS sourced deflaters we can build the following table showing the past 10 quarters of growth in "nominal" GDP, "real" GDP using the CPI or PPI tables (as appropriate for each individual GDP line item), the per-capita "real" GDP similarly calculated and the per-capita "real" disposable income (again most recent quarter on the left):

"Annualized GDP Growth Rates Past 10 Quarters

	2Q-2011	1Q-2011	4Q-2010	3Q-2010	2Q-2010	1Q-2010
"Nominal" GDP  Annualized Growth Rate	3.51%	3.09%	4.16%	3.86%	5.43%	5.52%
BLS Derived  "Deflaters"	4.69%	10.65%	2.90%	1.37%	0.36%	4.60%
BLS "Real"  GDP Annualized  Growth	-1.18%	-7.55%	1.26%	2.49%	5.07%	0.92%
BLS Per-Capita "Real" Annualized  GDP Growth	-1.90%	-8.29%	0.32%	1.54%	4.25%	0.11%
BLS Per-Capita "Real" Disposable  Income Growth	-0.60%	-3.62%	1.18%	1.46%	4.47%	2.83%

4Q-2009	3Q-2009	2Q-2009	1Q-2009
4.88%	1.94%	-1.14%	-5.23%
2.11%	-0.43%	8.15%	3.61%
2.77%	2.36%	-9.29%	-8.84%
1.82%	1.42%	-10.06%	-9.59%
1.29%	-3.99%	-4.38%	-10.97%"

                          

Consumer Metrics Institute provides several graphs in the August 30 News asserts the double dip has already occurred with this chart below, which is one of several in the August 30 News, and you can find a larger version of it at the Consumer Metrics link above:




The Consumer Metrics Institute bottom line is the revised data shows Q1 2011 was far worse than recognized but the data shows moderation in the contraction rate but the full effect of the contraction has yet to be felt and deflating commodity prices can have a sudden positive impact on the economy.

The failure of government to create jobs now, not just down the road, has become morally inexcusable.  



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Guest Blogger: Warren Mosler With Economic Speech for President Obama

Warren Mosler is an economist, former hedge fund manager, and institutional investment advisor with his own broker/dealer and investment management firms.  This article was first posted on his blog The Center of the Universe.  I have my own concerns and thoughts on what President Obama should do to create jobs and economic growth with less systemically dangerous financial activity which I intend to write this weekend.  Different opinions and analysis are always useful in developing one's own analytical conclusions.

                                        PRESIDENT OBAMA --- USE THIS SPEECH

This is the speech I would make if I were President Obama:

My fellow Americans, 

let me get right to the point.

I have three bold new proposals to get back all the jobs we lost, and then some.

In fact, we need at least 20 million new jobs to restore our lost prosperity and put America back on top.

First let me state that the reason private sector jobs are lost is always the same.

Jobs are lost when business sales go down.  

Economists give that fancy words- they call it a lack of aggregate demand.

But it's very simple.  

A restaurant doesn't lay anyone off when it's full of paying customers, 

no matter how much the owner might hate the government, 

the paper work, and the health regulations.

  

A department store doesn't lay off workers when it's full of paying customers,

And an engineering firm doesn't lay anyone off when it has a backlog of orders.

Restaurants and other businesses lay people off when their customers stop buying, for any reason. 

So the reason we lost 8 million jobs almost all at once back in 2008 wasn't because all of a sudden 

all those people decided they'd rather collect unemployment than work.

The reason all those jobs were lost was because sales collapsed.  

Car sales, for example, collapsed from a rate of almost 17 million cars a year to just over 9 million cars a year.

That's a serious collapse that cost millions of jobs.

Let me repeat, and it's very simple, when sales go down, jobs are lost, 

and when sales go up, jobs go up, as business hires to service all their new customers.

So my three proposals are specifically designed to get sales up to make sure business has a good paying job for anyone 

willing and able to work.

That's good for businesses and all the people who work for them.

And these proposals are bipartisan.  

They are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between.

So listen up!

My first proposal if for a full payroll tax suspension.

That means no FICA taxes will be taken from both employees and employers.

These taxes are punishing, regressive taxes that no progressive short ever support.

And, of course, the Tea Party is against any tax.  

So I expect full bipartisan support on this proposal.

Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living.

This is big money, not just a few pennies as in previous measures.

These are the people doing the real work.  

Allowing them to take home more of their pay supports their good efforts.

Right now take home pay is barely enough to pay for food, rent, and gasoline, with not much left over.

When government stops taking FICA taxes out of their pockets, 

they'll be able to get back to more normal levels of spending.

And many will be able to better make their mortgage payments and their car payments,

which, by the way, is what the banks really want- people who can make their payments.

That's the bottom up way to fix the banks, and not the top down bailouts we've done in the past.

And the payroll tax holiday is also for business, 

which reduces costs for business, 

which, through competition,

helps keep prices down for all of us, which means our dollars buy more than otherwise.

So a full payroll tax holiday means more take home pay for people working for a living,

and lower costs for business to help keep prices and inflation down,

so sales can go up and we can finally create those 20 million private sector jobs we desperately need.

My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments 

with no strings attached.  

This will help the states to fill the financial hole created by the recession, 

and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday

restores their lost revenues.

Again, I expect bipartisan support.  

The progressives will support this as it helps the states sustain essential services, 

and the Tea Party believes money is better spent at the state level than the federal level.  

My third proposal does not involve a lot of money, 

but it's critical for the kind of recovery that fits our common vision of America   

My third proposal is for a federally funded $8/hr transition job 

for anyone willing and able to work, 

to help the transition from unemployment to private sector employment.

The problem is employers don't like to hire the unemployed, 

and especially the long term unemployed.

While at the same time, 

with the payroll tax holiday and the revenue distribution to the states,

business is going to need to hire all the people it can get.

The federally funded transition job allows the unemployed to get a transition job,

and show that they are willing and able to go to work every day,

which makes them good candidates for graduation to private sector employment.

Again, I expect this proposal to also get solid bipartisan support.

Progressives have always known the value of full employment, 

while the Tea Party believes people should be able to work for a living, rather than collect unemployment.

Let me add here that nothing in these proposals expands the role or scope of the federal government.

The payroll tax holiday is a cut of a regressive, punishing tax, 

that takes the government's hand out of the pockets of both workers and business.

The revenue distribution to the states has no strings attached.  

The federal government does nothing more than write a check.

And the transition job is designed to move the unemployed, who are in fact already in the public sector,

to private sector jobs.

There is no question that these three proposals will bring drive the increase in sales we need to 

usher in a new era of prosperity and full employment.

The remaining concern is the federal budget deficit.  

Fortunately, with the bad news of the downgrade of US Treasury securities by Standard and Poors to AA+ from AAA,

a very important lesson was learned.

Interest rates actually came down.  And substantially.

And with that the financial and economic heavy weights from the 4 corners of the globe 

made a very important point.

The markets are telling us something we should have known all along.

The US is not Greece for a very important reason that has been overlooked.

That reason is, the US federal government is the issuer of its own currency, the US dollar.

While Greece is not the issuer of the euro.

In fact, Greece, and all the other euro nations, have put themselves in the position of the US states.

Like the US states, Greece and other euro nations are not the issuer of the currency that they spend.

So they can run out of money and go broke, and are dependent on being able to tax and borrow to be able to spend.

But the issuer of its own currency, like the US, Japan, and the UK, 

can always pay their bills.

There is no such thing as the US running out of dollars.

The US is not dependent on taxes or borrowing to be able to make all of its dollar payments.

The US federal government can not go broke like Greece.

That was the important lesson of the S and P downgrade, 

and everyone has seen it up close and personal and they all now agree.

And now they all know why, with the deficit at record high levels, interest rates remain at record low levels.

Does that mean we should spend without limit and not tax at all?

Absolutely not!

Too much spending and not enough taxing will surely drive up prices and inflation.

But it does mean that right now, 

with unemployment sky high and an economy on the verge of another recession,

we can immediately enact my 3 proposals to bring us back to 

a strong economy with good jobs for people who want them. 

And some day, if somehow there are too many jobs and it's causing an inflation problem,

we can then take the measures needed to cool things down.

But meanwhile, as they say, to get out of hole we need to stop digging,

and instead implement my 3 proposals.

So in conclusion, let me repeat these three, simple, direct, bipartisan proposals

for a speedy recovery: 

A full payroll tax holiday for employees and employers

A one time revenue distribution to the states

And an $8/hr transition job for anyone willing and able to work to facilitate 

the transition from unemployment to private sector employment as the economy recovers.

Thank you.

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Market & Economy: Hussman and Schiller

 John Hussman always publishes a weekly market and economy commentary on Monday.  In this commentary he is commenting on Fed policy, the current economy and state of U.S. financial institutions, market valuation in which he estimates the ten year S&P 500 total return is down to 5.1%, and changed his market climate to hard negative and he notes there seems to be less willingness to lend to corporations.  It is not a very pretty picture.  Read it here.
 
Robert Schiller, in an interview, discussed the economic malaise effecting investing and the general economy, cites current market volatility as unhealthy and possibly indicative of a potential equity downturn but definitely fragile.  He still finds equities expensive, that housing will remain under pressure, and tells why he likes TIPS. Watch it here.

These are two viewpoints.  Like all information, it should be read critically, which means that you do not have to agree with everything or every detail to gain value and knowledge.  Information is most valuable when it can be compared and evaluated through comparison and content for relevance.

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Is Buffett Feasting on Bank of America?

A reader has asked me to comment and explain Warren Buffett's purchase of Bank of America preferred shares in the amount of $5 billion.

Bank of America has a need to raise about $100 billion and has approximately $50 billion in overvaluation of its second loans as well as other mortgage and mortgage related legal exposure.  Like Yves Smith at naked capitalism, I have no love for Bank of America, because it is too big, systemically dangerous, and needs to shed the risks of combined commercial banking and investment banking activities.  I have asserted, that since the global financial crisis, U. S. banks have been allowed legally to present public accounting statements which, if presented by any other U. S. business entity, would be considered fraudulent.  It has recently been selling business segment, such as its Canadian credit card business, and other assets to raise money.

I have indicated when discussing European banks, and it holds true for all banks globally and in the U.S., that the recent market downturn has reduced bank stock prices and bank equity, which puts pressure on them to raise money to maintain Tier I and Basel III liquidity ratios.  Bank of America's stock has declined steadily from 1/14/2011 at $15.25 to $6.42 on 8/23 and then rose to $7.76 on 8/26 with the Buffett deal.


If you compare the Goldman Sachs deal Buffet made with this Bank of America deal, you will find it is not as good as the Goldman Sachs deal.  Both were for $5 billion in preferred shares, but the Goldman dividend was 10% while Bank of America is paying 6% (8% accumulation if it suspends dividend payments); Bank of America is callable at a 5% premium while the Goldman Sachs shares were redeemable at a 10% premium; with Goldman Buffet received $5 billion in common share warrants with a strike of $115 and exercisable over five years while Bank of America gave Buffett 700,000,000 warrants for common shares with a exercise price of $7142857 ($5 billion) for a seven year period.  Some sources have characterized this as a $3 billion gift to Buffett from Bank of America, but the correctly calculated amount of the gift is $1.435 billion with the total value of the assets received at $6.45 billion.  Buffett extracted a substantial "fee" from Bank of America. Warren Buffett got a 22.5% discount on total value.

Bank of America preference share class x (Tier 1 equity) had a 7% coupon and was trading at $21 with a $25 par value on the day of this deal for an 8.3% yield.  Buffett's Bank of America preferred shares are Tier 2 debt/loss reserves and should have had a market yield of 9%; he is getting 6%.  At the time of the deal Bank of America shares were $6.88 and his exercise on the warrants were higher at $7.14 rounded.  Linus Wilson, a finance professor, has calculated the market value of the warrants to be $3.17 billion and would be dilutive, of course, of common shares outstanding if exercised.

Since Bank of America needs to raise $100 billion or more, if this deal brings the Buffett imprimatur to Bank of America, it could able to lower financing costs.  If their financing costs would be70 basis points lower, it would save $1.4 billion.

With Goldman Sachs, Buffett took the deal on the fixed side and with Bank of America he is taking it on the equity side.  Does this make Bank of America an attractive stock?  There are hedge funds and mutual funds betting that Bank of America will never be allowed to fail and they are presently losing money.  If eurozone banks develop serious liquidity problems and eurozone austerity dries up the European economy with global ramifications as the U.S. economy continues to slow down with continuing high unemployment, because U.S. political leaders refuse to provide fiscal policy to stimulate aggregate demand, then the global, and that includes the United States, economy is going to contract and stay contracted for a significant period of time.  If that serious economic decline begins to manifest itself, one of the early signs will be bank liquidity stress.

This is not a market for individual investors to be in individual stocks.  Even mutual funds with high financial exposure should be evaluated for the risk of their investments and role within a given portfolio.  This is a time for a well diversified mutual fund portfolio individually consistent with age, assets, risk tolerance, income needs, and affordable quality of life.  All of the big banks are facing headwinds.

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Uncertainty and European Bank Risks

The stress of the global financial crisis continue to haunt European banks as the economy continues to slow and bond vigilantes target sovereign debt of countries (such as the countries of the eurozone) who do not have their own fiat money.  The emergency lending facilities of the ECB have become more important for many European banks. On last Monday, banks deposited 128.7 billion euro with the ECB and borrowed 555 million euro overnight from the ECB Marginal Lending Facility, which was up from 90 million the prior day.  As Greek default becomes more inevitable and other eurozone countries struggle with sovereign debt financing, the interbank lending market has shown increasing stress as the skepticism about bank liquidity throughout Europe grows.  On Tuesday, European banks borrowed 2.82 billion euro overnight from the ECB, despite the stigma attached to the Marginal Lending Facility.

As the result of increasingly perceived risk by investors, European banks will pay more for the $100 billion of cash they need to raise by the end of the year.  Banks are hoarding cash, depositing it with the ECB, rather than lend it to other banks as political leaders squabble and preach deficit reduction which will only slow the economy faster.  Credit Agricol, with significant Greek exposure, posted profits which beat forecasts and felt compelled to complain about unjustified market irrationality and volatility.  A Bundesbank board member stressed in public comments that recent dollar money market tensions were far from the 2008 crisis levels and European banks are not facing a funding crisis as the result of U.S. money market funds becoming more selective to whom they lend.  The Bundesbank board member emphasized the liquidity available through repos and the ECB's readiness to mitigate problems with the swap agreement with the Fed. On Thursday, the Greek central bank (Bank of Greece) announced it had activated an Emergency Liquidity Assistance program to insure liquidity funding and all small, medium, and large Greek banks, except the National Bank of Greece, have indicated they will participate.  A Fitch survey of U.S. money funds showed a 9% decreased exposure to Europe last month and significant caution with respect to Italy and Spain.  Bankers have estimated that Italy lost $40 billion worth of money market funding in July.  While these figures are miniscule compared to the 8000 billion euro funding of the 91 eurozone banks, it does show the true state and reliance of eurozone banks on short term funding with some 58% of that funding needing to rolled over in two years and 47% in less than one year, but the official line is that there is nothing really wrong with the eurozone banks.

Today, Christine Lagarde of the International Monetary Fund, in a speech at Jackson Hole, said that European banks may need urgent forced capital injections to stem the eurozone's sovereign and financial crisis as they must be strong enough, in her words, to withstand the risks of sovereigns and weak growth.  She indicated that while private funding should be the priority, public funding, perhaps through the EFSF, should be ready.  She emphasized the IMF's change from immediate fiscal tightening to fiscal programs which allow spending to continue now while economies stay weak and reduce deficits over the long term.  This speech occurred at the same time as the second and third largest Greek banks announced an all share merger to be followed with a 500 million euro capital injection.

This IMF changed emphasis which acknowledges the need for public spending to feed growth during periods of declining aggregate demand is a refreshing change from the 1997 austerity mistake the IMF imposed on Japan which stifled growth.  Eurozone banks will remain key indicators in a global economy which is slowing down and economic contraction which eurozone austerity has accelerated.

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Radio Appearance Discussing Global Economy

On Saturday, August 20th, I was a guest on Saturday Session with Bishop on WMAY and streaming live to discuss the global economy.  The conversation focused more on China and the United States and briefly touched on Europe, which is a larger and more looming problem, due to time constraints.  I am providing a MP3 link to the interview appearance.  It is all about growth globally and jobs in the United States and several eurozone countries.

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Does High Frequency Trading Stoke Volatility?

There is a lot of speculation in the financial media and among individual citizen traders about whether high frequency trading is responsible for market volatility because it ignores fundamental analysis for data trends.  Obviously, high frequency trading could increase trading volume and accelerate market trend through volume.  While the sheer volume and speed can effect prices and there has been speculation that a high frequency trader could, and maybe has from time to time, driven an equity or futures price up on sells and buys to itself, the real question is the fairness of access.  All high frequency traders have direct access to the market through broker-dealers making trades in nanoseconds, causing the question to be raised whether they have the proper structure to insure proper margins and other technical regulatory safeguards.  Since a single high frequency trader could send a million or more messages a day to a market with few trades, the cost to the stock exchanges for adequate data networks is very expensive.  Individual traders do not have direct access to the market and must meet all regulatory conditions as do broker-dealers who have direct access to the market.  The bottom line question is, consequently, one of fairness.  Do individual traders get speedy market execution and a fair market price? 

The Review of Futures Market has a special issue (Volume 19)of which the first article reviews the research literature and methodologies on high frequency trading and the last article is on the effect of high frequency trading in the futures market.  The first study finds high frequency trading is a natural evolution of the trading process, add "quality" to the market through added liquidity, lower trading prices, and reducing bid-ask spreads at the cost of shifting profits, however small on individual trades, through trading volume, only pose a modest manipulative threat because they typically do not hold positions overnight, and only present a problem when they withdraw liquidity from the market causing system breakdown or cascading.  The study suggests the need to design electronic trading systems and to slow or interrupt trading and/or change the trading mechanism.  The last study finds that high frequency trading increases liquidity in the futures market.

Individual investors would be wise to not spending time researching and fretting about the effect of high frequency trading on equity prices and concentrate on the technical and fundamental information of the equity and the market.  You never fight the market and individual investors need a very profound analytical and economic reason to be in individual stocks during a market correction.  Consequently, individual investors would be wise to pay attention to not just price movement of the equity and the market, but the volumes.  This market is not only in correction but it has been testing March lows for the last two weeks with temporary reflexive rallies of short duration.  A week ago last Monday, Monday the 15th, was the fourth market day in successively lower trading volume (down 16.6% that day) even though it went up 213.88 on the DOW.  The next day was down in price but up only 6.1% in volume.  The next day was up marginally on 14.6% down volume.  Thursday of that week it went down 419.63 on up volume of 63.5%.  Monday of this week (22nd) the DOW was up only 37.00 on down volume of 20.4%.  On Tuesday it was up 322.11 on only 1.7% up volume.  On Wednesday, the DOW was up 143.95 but on down volume of 8.5%.  All of these days of trading have been volatile.  The likelihood that today would be a down price day with up volume would have been a reasonable bet and, in fact, that is what is occurring at this time.  By watching price, volume, and economic news, which means knowing what economic reports are coming out on what days not just event news, the individual investor should have some reasonable trend indication which will serve them well as they stay out of individual stocks during any correction and research stocks to buy when the market trends up for more than a short reflexive rally. 

Pay attention to technical and fundamental information on both the equities you are researching and the market itself.  You can control your buy and sell decisions and learn from them.  You cannot make yourself a better trader by researching the effects of high frequency trading.

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Gold is Correcting

When Gold hit a record $1917 an ounce this week, which was up 16% from earlier this month, trend profit taking set in creating a market correction and gold has been dropping.  The Shanghai Gold Exchange on Tuesday raised gold margins by 26% and the CME in the United States on Thursday raised gold margins 22%, both of which undoubtedly created margin calls and more selling.  Professional traders have learned and practice profit harvesting in which they reduce positions to capture and lock in gains over 20%, depending on the market and position, and definitely when they have substantial gains, such as 100%.  Even private investors who have gold at $400 or $800 basis should have been reducing their positions to no less than their original investment to lock in profits.  Gold is a crisis hedge and has been going up accordingly.  With the continuing crisis in the eurozone and the determination of eurozone leaders to pursue austerity which will only increase and magnify the problems slowing growth in Europe and globally, gold will stop its downward moves on economic news perceived negatively and start back up.  What one wants to avoid is the historically documented reversals of gold from highs to prior lows such as $400 and $800.

Some have characterized this correction in gold prices to panic selling, because it was overbought, and to fears the FED will not satisfy the market with comments on Friday from the Jackson Hole economic discussion meeting, which is reaching for causation since the FED has little it could announce from such an academic exercise.  With the margins being raised, we are seeing the same market correction silver saw in May.  It was time then to sell silver and it is time now to sell gold and harvest profits.
Dennis Gartman of the Gartman Letter was one of the professional trading advisors who began cutting their gold holdings on Tuesday when gold got "frothy" at $1910. On the same day, Nouriel Roubini was sending messages that gold was in a hyperbolic bubble, which implies a possible correction, although he also acknowledged, as I stated above, that uncertainty is rising and gold should consequently continue upward after a correction.  It does not appear that any gold correction will burst the bubble given the uncertainty in Europe and slowing global growth which will make the economies of Europe worse faster, but it will briefly reduce the size of the bubble as the professional and smart traders lock up their profits.



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European Bank Liquidity

Starting last week we started seeing questions surfacing regarding the liquidity needs of European banks as a result of the volatile swings in the stock markets (if bank stock equity goes down they face the need to raise more capital) and potential opening market attacks on French banks (which I find hard to believe resulted from misinterpretation of a fictional series in a French newspaper). On August 10th, ECB overnight lending facility use jumped $5.75 billion dollars (4.058 billion euro), although it could have been from timing issues as banks awaited the arrival of ECB six month funds.  It was noted last week that the LIBOR-OIS (bank credit risk) spread with EURUSD basis swaps was widening but differently than it did in 2008.  The LIBOR-OIS was due to a rise in the LIBOR which would indicate the gap is being driven by liquidity measures, but the EURUSD basis swap was increasing on the short end implying near term caution rather than systemic risk.  Short term wholesale funding problems are magnified when access to long term funding in senior unsecured debt markets become more independently difficult for banks.  Nomura  noted the net stable funding ratio shows CASA, SocGen, Bankia, UniCredit, Commerzbank, and Intesa with the lowest ratios, but no European banks have reserve problems and, as of last week, no European bank had gone to the ECB for USD liquidity.  In relation to the short term liquidity functions last week, it also appeared that the peripheral eurozone countries were having a collateral crunch as well as a credit crunch.

Yves Smith at naked capitalism noted this week that mid-tier banks are finding it harder to get funding in interbank markets, that five year CDS of eurobanks are trading wider than they did in 2008m U.S> money market funds have cut back on exposure to European banks, eurobanks are have a harder time borrowing euro from the ECB to swap for US dollars, and the eurozone is not prepared for any large scale recapitalization of banks program.

On Wednesday of this week, one European bank borrowed $500 million, which was an unusually large amount for one bank, from the ECB in US dollar liquidity for the first time since February.  This would indicate it was probably a larger European bank under temporary stress.

Today, the Wall Street Journal wrote that the New York FED is meeting with the U.S. offices of large European banks to gauge their vulnerability to to escalating financial conditions and potential funding difficulties as U.S. branches of foreign banks became net borrowers of dollars from their overseas affiliates for the first time in a decade.  The New York FED President, Dudley, was quick to publicly state this was just a standard FED review.

On this Wednesday, excess liquidity in money markets actually rose 167 billion euro as Euribor lending rates went down.

This has led to a renewed discussion, involving nerves, noise and funding fears, of what level of funding stress European banks may or may not be facing.  While there are indications of stress in the wider markets, the spread on the three month Euribor rate and the overnight  index swap OIS rates has widen but nowhere near the post-Lehman 2008 peak.  What is interesting is the spike is from a drop in the OIS rate not the Euribor, which implies banks think the swap rates will drop and liquidity improve.  This would indicate the situation is not one of extreme stress, but an evolving situation which requires watching.

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Inflationistas Beware

When the PPI (wholesale prices index) report came out yesterday for the United States, it caught everyone off guard, because core PPI went up 4 tenths to 2.5% when it was expected to go up two tenths and headline PPI went up 2 tenths  to 7.2% when it was expected to be unchanged.  The increase in the core PPI was a jolt and prompted many of us to dig into the report and wait to see the CPI report today with every expectation it would exceed expectations of up 2 tenths for both CPI and core CPI.  Today, the CPI report showed headline CPI went up 5 tenths to 3.6% and core CPI went up the expected 2 tenths to 1.8%.

When looking at the PPI numbers, it should be remembered that PPI has been more volatile than CPI, although it has been trending  with CPI more closely recently.  The headline whole sale prices were up on tobacco, trucks, and pharmaceuticals.  Looking at crude prices were down for the third straight month declining 1.2 with commodities down, but core crude prices were up on copper and corn.  We have previously written about copper in relation to China as loan collateral and the slowing global growth should bring it down as well as corn being up temporarily on weather conditions and Japan.  Crude foods were down 8 tenths.  Finished goods were up 6 tenths on fresh fruit (which are in season), melons (in season), eggs, dairy, coffee, and beef and veal with crude down 9 tenths but processed up 7 tenths.  Intermediate prices for foods were up only one tenth on processed eggs and natural, imitation, and processed cheese.  The FED is more likely to look at intermediate prices for future trend.

Headline CPI was up on food at home, dairy, fruit, energy, gas, and apparel.  Core CPI was up on shelter and medical care.

It is apparent in the CPI prices that there is impact from past higher commodity and transportation prices which have since started to decline and this decline in commodity and transportation prices is not yet reflected in the current CPI.  When looking at CPI, it should be remembered that headline CPI is more subject to transitory volatility which does not stick.  Consequently, core CPI is a more effective tracking of inflation/deflation trends.  While this does not help the pain of a pocket book in a grocery store today, it is significant in having a more accurate macroeconomic perspective.  Core CPI went up the expected amount and, at 1.8% annualized, it is still below the FED 2% target for growth.

Growth remains the problem not inflation long term.

Still, it is historically relevant to realize that if the CPI figures were as calculated in the 1980s, it would be approximately 11%; if they were as calculated in the 1990s, it would be approximately 7%.

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