- Alhambra: Nothing To See Here, It's Just Everything
Authored by Jeffrey Snider via Alhambra Investment Partners,
The politics of oil are complicated, to say the least. There’s any number of important players, from OPEC to North American shale to sanctions. Relating to that last one, the US government has sought to impose serious restrictions upon the Iranian regime. Choking off a major piece of that country’s revenue, and source for dollars, has been a stated US goal.
In May, the Trump administration formally withdrew from the Joint Comprehensive Plan of Action, known otherwise as President Obama’s “Iran deal.” It was widely expected that pulling out would lead to harsh sanctions against any country continuing to trade using Iranian crude oil.
At the beginning of November, the US government formally re-instated those sanctions. In a surprising compromise, it did issue a number of waivers to countries like South Korea, Greece, Japan, and even China (among several others). That meant a good bit of Iran supply would remain available on global markets as a substitute source.
It is becoming 2018’s version of the 2014 “supply glut”, a benign or nearly so excuse for oil’s otherwise shocking crash. From Bloomberg only last week:
Just in late September, some traders were predicting that global oil prices would hit $100 a barrel over the following months. Their forecasts were based on the prospect of a supply crunch due to U.S. sanctions on Iran that went into effect in November. However, America’s surprise decision to grant waivers from its restrictions to some nations sparked a collapse in crude.
On the surface, the story does seem to check out; the US government did, in fact, keep Iran open for a little while longer. That additional future supply would have to have been factored into the ongoing oil price, further pressure to the downside.
But did it “spark a collapse in crude?” Nope, a demonstrable fallacy.
Oil prices peaked on October 3 and by the end of that month the curve was already weeks in contango. You could argue that global oil traders were counting on waivers and already factoring Iran into the equation, but again they were a “surprise decision.”
The drop in WTI and the chaos in oil markets (benchmark spreads) was more than a month old by then, and it’s been a straight line (almost) from the start of the crash.
In other words, Iran came along long after the market had viciously turned. Why is it so hard for people to accept that the problem could be rethinking demand worldwide?
It is, for many, impossible to believe that central bankers have it all wrong therefore the constant appeal of these sorts of ridiculous excuses. Mario Draghi says Europe is booming, or was, and if it isn’t now it’s only because of “transitory” factors to be cleared up soon enough. Jerome Powell can’t use the word “strong” frequently and emphatically enough in his commentary.
What do these guys know? A disorderly oil crash is uniformly associated with the opposite economic (and market) case. There is nothing benign about such open and obvious disorder.
It’s not just the oil warning, though; there has been a predictable proliferation of denial, in my estimation just a bit more intense than the last outbreak only a few years ago. This is related to 2017’s inflation hysteria, the very flipside to it.
The idea of “globally synchronized growth” was deeply emotional. So many just wanted to believe that the upturn was actual recovery, and that the global economy had finally hit a growth patch after a decade without any. People still cling to the idea that central bankers are the “best and brightest” and therefore all that was missing was sufficient time.
The technocracy could never be denied its success. One full decade seemed to be the max allowable, therefore 2018 just had to be the one.
Except, trading last year produced one big warning after another, these accelerating and growing noticeably in the last half particularly the last two months. Rather than take account for them all, the excuses are always limited to trying to discount each warning individually. That’s a big clue about what’s behind them; emotion not rational analysis.
These are pure rationalizations based on pure denial. The oil crash must be a supply glut, but what about that ungodly repo rate spike? Well that’s just 2a7 year-end window dressing (yes, thanks L. Bower, some are actually trying to dismiss a nearly 300 bps spread in GC repo as no big deal, mere technicals).
So, why does that repo spike oddly connect to exactly what eurodollar futures are saying?
Or inflation expectations?
Swap and credit spreads?
UST futures (above) and the “strong worldwide demand for safe assets” that has intensified despite every major media outlet on earth declaring for more than a year how UST’s and German bunds are poised right on the precipice for a BOND ROUT!!!! of biblical proportions?
This is very comprehensive parade of deep, crucial markets all saying the same thing together – they really don’t know what they are doing. The world turned the wrong way (again), a surprise only to central bankers and those who still somehow believe in them.
That’s what always gets left out. Even if the repo spike, for example, was actually a product of 2a7, it still doesn’t get you to 300 bps. That level is alarming even in isolation. But it’s not in isolation, is it? You can’t (honestly) look at a market, even stocks, without appreciating corroboration and consensus for only darker and darker interpretations – all starting with liquidity meaning global money (including collateral flow).
If it was one thing you might listen about supply gluts or 2a7; when it’s everything, you can only ask yourself what’s the point? An unbiased review of all these markets (and more) paints a very grim view of where things already stand today. From this perspective, repo and WTI contango make perfect sense, neither really needing much explanation.
An oil crash or repo rate spike is intuitively self-explanatory, especially to these levels.
But Jay Powell is unshakable in his confidence. Therefore, Iran and supply glut. Or 2a7. Mixed signals. Etc. etc. etc. Nothing bad can ever happen, even all the bad things that keep happening.
- US Housing Market To Get Uglier In Near Future
Authored by Wolf Richter via WolfStreet.com,
Sales decline to steepen, no respite in sight.
The reasons for the housing-market downturn are in the eye of the beholder, as we will see in a moment. But whatever the reasons for it may be, the data on the housing market is getting uglier by the month.
Pending home sales is a forward-looking measure. It counts how many contracts were signed, rather than how many sales actually closed that month. There can be a lag of about a month or two between signing the contract and closing the sale. Last week, the National Association of Realtors (NAR) released its Pending Home Sales Index for November, an indication of the direction of actual sales to be reported for December and January. This index for November fell to the lowest level since May 2014:
“There is no reason to be concerned,” the report said, reassuringly. And it predicted “solid growth potential for the long-term.”
And the index plunged 7.7% compared to November last year, the biggest year-over-year percentage drop since June 2014. The drops in October and November are indicated in red:
All four regions got whacked by year-over-year declines:
- Northeast : -3.5%
- Midwest: -7.0%
- South: -7.4%
- West: -12.2%
The plunge in pending home sales in the West, a vast and diverse region, will prolong the plunge in closed sales for the region. Particularly on the West Coast, the largest and very expensive markets — Seattle metro, Portland metro, Bay Area, and Los Angeles area — have been experiencing sharp sales declines, a surge in inventory for sale, and starting this summer, declining prices.
Last week’s pending home sales data confirms that these trends are intact and will likely continue.
The NAR report blames the sales decline in the expensive markets in the West on “affordability challenges” – because prices “have risen too much, too fast,” it said.
And this is a true and huge problem: Home prices have shot up for years, even while wages ticked up at much slower rates. At some point, the market is going to run out of people with median incomes who are willing to stretch to the limit to buy a starter shack; and the market is going to run out of people with high incomes who are willing to stretch to the limit to buy a median house.
For example, at the peak, the median house price in San Francisco was over $1.7 million. That median house is nothing fancy. And the market has run out of high-income people blowing so much money on a modest house. Hence prices have come down sharply over the past six months.
“Local officials should consider ways to boost local supply,” the report says. Alas, there is all kinds of supply suddenly coming on the market. It’s not that there isn’t anything to buy; the problem is that everything is too expensive, and that sellers and buyers no longer see eye-to-eye.
But the decline in sales on a national basis, according to the report, is a “short-term pullback” that “does not yet capture the impact of recent favorable conditions of mortgage rates.”
Sure, lower mortgage rates are a relief for buyers. But wait… According to the Mortgage Bankers Association, the average rate of conforming 30-year fixed-rate mortgages with a 20% down payment has dropped to 4.94% during the latest reporting week. This is 23 basis points off the high of 5.17% in early November.
But here is the thing: In January 2018, when the Pending Home Sales index plunged to the lowest level since December 2015 (indicated in the first chart above), the NAR blamed low supply of homes and surging mortgage rates.
Since then, supply has sharply increased, and mortgage rates?
Currently, the average 30-year fixed rate, at 4.94%, is still 54 basis points higher than it had been in January. And if an average mortgage rate of 4.4% was blamed for plunging home sales in January, then an average rate of 4.94% isn’t going to suddenly boost sales.
There is a lot more at play here than just wobbling mortgage rates. At the top of the list are woefully inflated prices that potential buyers now see as such.
And these potential buyers are now also confronting the fear that prices will decline, or further decline, after they buy. This is a scary thought, given the amount of leverage and the large dollar figures involved in a home purchase. Potential buyers now see that after the purchase, those fears could translate into some real and long-lasting headaches.
In Seattle, house prices dropped 4.4% in four months, the biggest four-month drop since Housing Bust 1, according to the Case-Shiller Home Price Index. Prices also deflated in the San Francisco Bay Area, San Diego, Denver, and Portland. Read… The Most Splendid Housing Bubbles in America Decline
- Robot Waiters In This Tokyo Cafe Are Controlled By Disabled People
A cafe with an all-robot wait staff controlled by paralyzed people has recently concluded its eight-month experiment in Tokyo, Japan.
Ten people with a variety of conditions including spinal cord injuries and the progressive neurodegenerative disease ALS (amyotrophic lateral sclerosis) were employed at Dawn Ver café, according to Sankei.
The robot’s operators earned about 1,000 yen ($9) per hour – the standard rate of pay for wait staff in Japan.
From home or hospital, they operated the small fleet of OriHime-D robots used in the cafe were developed by Japanese start-up Ory and were initially designed to be used in the homes of people with disabilities.
Sankei reported that robots could be told to move, observe, communicate with guest and carry objects to tables, even if their operator can only roll their eyes.
The pilot program started in April of last year and concluded on December 7 at the Nippon Foundation Building in Minato-ku, Tokyo. Researchers collected vital data on the connections between disabled people and robots, to encourage plans of integrating people who might otherwise be housebound earn a wage and interact with other people more easily.
“If the people operating the robots feel the joy of serving customers and working in a café, I think it’s wrong to leave that to AI,” said Kentaro Yoshifuji, the CEO of Ory Lab Inc.
This experiment, done in cooperation with The Nippon Foundation, Avatar Robotic Consultative Association (ARCA), All Nippon Airways (ANA) and Ory seems to have been a limited-time event, but a new crowdfunding operation aims to open a permanent location with disabled people controlling robot servers by 2020.
Maybe disabled people controlling robots in restaurants could be the first push back against AI. As we have warned before, AI robots were built to replace low-skilled workers that could trigger economic disruption far greater than we experienced over the past eight decades. By the end of the 2020s, automation may eliminate 20% to 25% of current jobs, so by allowing disabled people today to operate robots in the service sector, well, it is a start, but it will sadly not be enough to stop the AI takeover.
- House Defies Trump; Votes To Reopen Government With No Wall Funding
In what what can only be described as theatre, the Democrat-controlled House of Representatives voted late Thursday to pass two bills that would reopen parts of the government affected by the partial shutdown.
The only problem is that neither of the bills contain funding for what House Speaker Nancy Pelosi (D-CA) called an “inhumane” border wall – leaving Republicans and Democrats without any possible way forward during a Friday meeting at the White House following President Trump’s vow to veto any legislation that does not include money for perhaps his greatest election promise.
Trump will meet at 11:30 a.m. with Pelosi and House Majority Whip Steny Hoyer (D-MD) along with other congressional leaders, according to the Washington Examiner.
“We’ll go down there, we’ll talk,” said Hoyer on Thursday. “We’ll try to come to an agreement.”
That said, House Democrats held a Thursday afternoon hallway press conference where they took turns proclaiming how they would stand their ground against Trump’s wall.
“We are not doing a wall,” said Pelosi – calling it “an immorality.”
Pelosi said the $5 billion Trump is requesting for the wall diverts money from other critical needs, although it is a tiny fraction of all federal spending. Still, she said the wall was a distraction put forward by President Trump who wants to shield his base from the negative impact of his agenda.
“It’s a wall between reality and his constituents, his supporters,” Pelosi said.
Shortly after Christmas, White House officials said they told Democratic leaders they would accept about half of their initial $5 billion request. But when asked about the offer, Pelosi suggested the Trump administration backed away from that idea.
“You can’t have an agreement that people walk away from,” she said. “Go to them and say, ‘Why don’t you stick to what you offered?'” –Washington Examiner
So at this point, tomorrow’s White House meeting looks like it will be a massive waste of everybody’s time – especially considering that Senate Majority Leader Mitch McConnell (R-KY) said on Thursday that he will not consider any House-passed bills that Trump won’t sign.
The two House bills would fund several agencies through September 30, and the Department of Homeland Security through Feb. 8. The DHS funding would give the agency $1.3 billion for border security which could not be used for Trump’s wall. Just five Republicans voted for the bill, while sevel GOP lawmakers supported the other bill funding the other agencies until the end of September.
Approximately 800,000 federal employees have been affected by the partial shutdown which began on December 23, representing around 25 percent of the federal government.
- Pence: No Shutdown Deal Without Border Wall Funding
Vice President Mike Pence told Fox News‘ Tucker Carlson on Thursday that there will be absolutely no deal to end the government shutdown without funding for a border wall.
“Our focus is on border security. What we’ve completely focused on is keeping the President’s promise, to build a wall and to pass legislation that provides other support for border security,” said Pence.
Pence also said that Trump wants to negotiate, noting that “the better part of a year ago the President expressed a willingness to deal with the issue of dreamers in a compassionate way.”
That said, the bottom line is this according to the Vice President: “We will have no deal without a wall”
NOTABLE: Mike Pence leaves door open to some sort of “amnesty” for undocumented immigrants as part of border security deal to end shutdown.
“We will have no deal without a wall,” Pence adds, during interview with @TuckerCarlson. pic.twitter.com/8p4zg8UJie
— Aaron Rupar (@atrupar) January 4, 2019
- Developer Leaks Image Of New Self-Propelled Cannon For Russian Forces
TsNIITochMash, the Russian industrial design bureau tasked with designing and manufacturing new weapons for the modernization of Russian Armed Forces, has just leaked out new schematics of its next-generation airdroppable artillery piece, slated for testing by the Airborne Forces and the Naval Infantry later this year.
The image of the new “Lotus,” a self-propelled, tracked artillery system, appeared in the design bureau’s 2019 corporate calendar, was leaked on social media via the bureau’s Instagram account, and was first reported by Sputnik.
Dmitri Melikhov, the chief engineer in charge of the Lotus project, was also featured on the image, who said, “the lotus flower was a kind of inspiration for us. Notwithstanding its outward fragility, it grows in the most difficult conditions. It is a perfect combination of beauty, grace, and indestructibility.”
According to the chief designer, the Lotus airborne artillery system boasts “high ballistic characteristics and effectiveness of ammunition, designed in accordance with the principal of the ‘golden ratio’,” i.e. not only optimal weight and dimensions, but also a graceful silhouette, said Sputnik.
The new artillery piece is expected to replace the Nona-S, a lightweight, air-droppable 120 mm gun-mortar, a Soviet design from 1981 which debuted in the Soviet-Afghan War.
According to Zvezda, the official network of the Russian Defence Ministry, the Lotus has a maximum firing range of 13 km (8 miles), a rate of fire of 6-8 shots per minute, and features new high-precision ammunition.
The system is believed to weigh 18 tons, has a maximum speed of 70 km per hour (43 mph), and a four-person crew.
Airborne Forces will be testing the new artillery pieces in the second half of 2019 at several missile test sites. If all goes well, series production of the new self-propelled gun will begin in 2020.
- Top Prosecutor Says "No Doubt" Detained Canadians Violated Chinese Law
In a statement that’s sure to enrage the Canadian government, China’s top prosecutor said on Thursday that the two Canadian nationals detained in China last month on vague charges of “endangering national security” had “without a doubt” violated China’s laws and would be prosecuted.
The arrests of former diplomat Michael Kovrig, who had been working in the country as an advisor with the International Crisis Group, and businessman Michael Spavor, who had helped arrange trips to North Korea on behalf of westerners, have been interpreted as retaliation for Canada’s arrest of Huawei CFO Meng Wanzhou, the daughter of the telecom giant’s daughter, who was recently released on bail after being charged with misleading banks and violating US and EU sanctions on Iran. Meng was arrested at the behest of federal prosecutors in New York, according to Reuters.
Spavor and Kovrig
Ottawa has demanded that China release the men and furnish an explanation for their arrest, but Beijing has offered few details about the circumstances surrounding their detention. Meanwhile, Canadian diplomats have been allowed only limited access.
Recently, Reuters reported that Spavor was shown as “active” on Viber, an instant messaging app blocked in China, after his arrest, and that he was also shown as being active on Facebook and Instagram, suggesting that Chinese security personnel had infiltrated those accounts.
Yet though China insists the arrest of the two men has nothing to do with Meng’s detention, it has continued to hold the men as an investigation into their conduct continues.
“Without a doubt, these two Canadian citizens in China violated our country’s laws and regulations, and are currently undergoing investigation according to procedure,” Zhang Jun, China’s prosecutor general, said.
Under Chinese law, officials have much broader latitude to detain and interrogate suspects involved in national security cases, though, as Reuters pointed out, China’s rule of law is often subordinated to the whims of the Communist Party.
Another Canadian national – a teacher – was recently deported from China after being detained on charges of working illegally in the country. Another Canadian citizen is facing a retrial on charges that he helped smuggle “an enormous amount” of drugs into China – a charge that typically carries a very harsh punishment, often including death.
- December Payrolls Preview: Beware "Good News Is Bad News"
While the government may be closed, the BLS is one of the agencies that managed to secured funding, which is why tomorrow at 8:30am ET the December payrolls report will be released. Consensus expects +180k payrolls with average hourly earnings seen falling to 3.0% from 3.1% while the jobless rate remains unchanged at 3.7%.
While the report is unlikely to make a major dent in market sentiment, especially if it disappoints as trader mood on the economy is already quite dismal, it is safe to say that data takes more importance with a data-dependent Fed amid signs of economic momentum losing steam globally; that’s why any major upside surprises would be a classic case of “good news is bad news” because should the report indicate more labor market overheating (and after today’s surprisingly strong ADP that is a possibility) market expectations of no more rate hikes may be dashed.
Here are some more details what to expect tomorrow, courtesy of RanSquawk:
CONSENSUS FORECASTS:
- Non-farm Payrolls: Exp. 177k, Prev. 155k
- Unemployment Rate: Exp. 3.7%, Prev. 3.7% (NOTE: the FOMC projects unemployment will stand at 3.5% at the end of 2019, and 4.4% in the longer-run)
- Average Earnings Y/Y: Exp. 3.0%, Prev. 3.1%
- Average Earnings M/M: Exp. 0.3%, Prev. 0.2%
- Average Work Week Hours: Exp. 34.5hrs, Prev. 34.4hrs
- Private Payrolls: Exp. 175k, Prev. 161k
- Manufacturing Payrolls: Exp. 20k, Prev. 27k
- Government Payrolls: Prev. -6k
- U6 Unemployment Rate: Prev. 7.6%
- Labour Force Participation: Prev. 62.9%
THE HEADLINE TREND: The 12-month average of headline nonfarm payrolls is 204k (Dec 2017-Nov 2018), and as such, the consensus view looks for a slowing in the pace of payroll additions. This is in spite of the weather-related impact of the November 2018 report, some suggest. Analysts at Barclays expect a slowing in the trend rate of payroll growth this year, on account of a smaller impulse from fiscal stimulus, which has led them to expect less employment growth. “As a result,” Barclays says, “we expect growth in nonfarm payrolls to slow from the roughly 200k per month pace observed in 2018 to something closer to 160k per month in 2019. Goldman expects 195K jobs tomorrow, higher than consensus but a modest slowdown in the trend of job growth, and a weather-related boost worth 25k or more. On the negative side, Goldman notes that “the pull-forward of holiday retail hiring into November could weigh on December job growth in that industry.”
THE FED: With the Fed in data-dependent mode, and financial market jitters rife (revolving around the narrative of slowing global growth, trade wars/tariffs, equity market valuations, credit, Fed tightening, government shutdown, etc), questions have returned as to whether a positive report will be negative for risk, or vice versa. The rationale is that a poor report will imply the FOMC taking a slower approach to normalisation, which many think will help risk assets. However, despite the market’s jitters and other risks, ING notes that business surveys remain in good shape, with any slowdown in job growth more a function of a lack of available workers rather than any cut backs to business expansion plans (at this stage, it notes). “The positive from this is that competition for workers will advantage employees through higher wages and benefit packages, which should be supportive for confidence and spending. This will also add to inflationary pressures in the economy and will keep the Federal Reserve on course to raise interest rates further in 2019,” ING says, but adds that “officials will tread a more cautious path with intensifying economic headwinds coupled with the fact the Fed is also running down its balance sheet meaning we expect two 25bp rate hikes in 2019 versus the four experienced in 2018.”
JOBLESS CLAIMS: It is difficult to use the latest weekly jobless claims data to gauge the underlying trend of the labour market, given that periods around Christmas can be tricky, while the weather and government shutdown related developments could also obscure the data and implied trend. Accordingly, looking at initial jobless claims in the week ending 15 December (the BLS nonfarm payroll report reference period is the week of the 12th of the month) was 270k, the data showed a slight fall from the 225k in the November reference week, while the four-week moving average did rise to 222.75k from 218.75k.
ADP PAYROLLS: ADP reported a forecast beating 271k nonfarm payroll additions in December; the consensus expected 178k. Moody’s economist Zandi noted that “businesses continue to add aggressively to their payrolls despite the stock market slump and the trade war. Favourable December weather also helped lift the job market. At the current pace of job growth, low unemployment will get even lower.” Analysts at Pantheon Macroeconomics argued that the data presents upside risks to its 225k forecast: “Typically, ADP tends to undershoot the official numbers in months after weather events – November’s survey week was the coldest since 1997, at least – but we’d be very surprised by a 300Kplus reading in the official NFP data,” Pantheon said, “we can’t imagine that 271K gains are remotely sustainable, but this report comes as a welcome jolt to the market’s favoured narrative that the economy is slowing sharply.”
BUSINESS SURVEYS: The ISM manufacturing survey for December saw its employment sub component fall by 2.2 points to 56.2; ISM said employment continued to expand, supporting production growth, but at the lowest expansion levels since June 2018, when the index registered 56.0. Markit noted in its US manufacturing PMI for December the pace of job creation eased to an 18-month low, but didn’t provide the index levels. NOTE: The December non-manufacturing ISM report is published next week, after the release of the Employment Situation Report, while the latest Markit services PMI report is scheduled for release on 4 January, after the release of the BLS payrolls data.
JOB CUTS: Challenger reported US employers had announced 32,423 job cuts in December, falling from the 53,073 seen in November. “We’ve seen a number of companies responding to changing consumer behaviour this year, and with tax savings and a strong economy, making staffing decisions ahead of a potential downturn next year,” Challenger said, “while December did see some fallout from suppliers, especially in the Midwest after GM’s November decision to cut 14,000 workers and close five plants, the big story this year was in Retail,” and adds that “while Retailers have made significant job cuts this year, the industry is also doing the bulk of hiring, albeit seasonally. It remains to be seen if Retailers cut these jobs in the New Year.” Challenger also noted that the majority of job cut announcements were due to companies restructuring, while adding that it still remains to be seen what the impact of tariffs and trade deals will be on job cuts, warning that “the large-scale job cut announcements due to these tariffs have yet to be announced, it seems.”
Finally, here is Goldman with several arguments for a stronger and weaker report:
Arguing for a stronger report:
Winter weather. Snowfall was elevated on a seasonal basis during the November payroll survey week, with winter storms in the Northeast and Midwest appearing to reduce regional and industry-level payrolls by around 20-30k (Exhibit 1), while also boosting the household “not at work due to weather” category. Taken together, this would suggest a boost to job growth relative to trend of 25k or more in tomorrow’s report.
ADP. The payroll processing firm ADP reported a 271k increase in December private payroll employment, above consensus expectations of +180k. While the inputs to the ADP model likely contributed to the strength, we believe the main takeaway from the ADP report is that the pace of job growth remained solid at the end of the year.
Job availability. The Conference Board labor market differential—the difference between the percent of respondents saying jobs are plentiful and those saying jobs are hard to get—rose 0.4pt to +34.6 in December, a new cycle high. JOLTS job openings rebounded in the most recent report (7,079k in October) and remain near the cycle high.
Company level one-offs. The conclusion of a two-month strike at Marriott hotels will add 4k to December job growth, while the layoff programs at Verizon (10k employees affected) and General Motors (14k workers to be affected) may not weigh on job growth until later in 2019.
Arguing for a weaker report:
Retail seasonality. We believe the timing of the November and December establishment surveys will likely weigh on retail job growth in tomorrow’s report, as the particularly early Thanksgiving holiday (November 22) probably shifted the timing of holiday retail hiring into November from December in the payrolls data. Retail job growth was firm in the November report (+18k, a six-month high), and December job growth has been flat or negative in each of the last four similar calendar configurations (-12k on average). Taken together, we believe the pull-forward of holiday retail hiring into November could weigh on job growth in that industry by around 10k in tomorrow’s report.
Service-sector surveys. Service-sector business surveys generally declined in December, as our headline non-manufacturing index decreased 2.9pt to 54.2, while the employment component also declined (-1.2pt to 53.6). Service-sector job growth rose 132k in November and averaged 147k over the last six months.
Neutral factors:
Jobless claims. Initial claims drifted up only marginally in December (averaging 223k over the payroll month vs. 218k in November). Continuing claims also remained range-bound, edging up 3k between the November and December survey weeks.
Manufacturing surveys. The employment subcomponents of manufacturing-sector surveys were mixed in December but generally remain at elevated levels. Both the headline aggregate (-5.2pt to 54.1) and employment (-2.2pt to 56.2) subcomponent of the ISM manufacturing survey decreased sharply in December, against expectations for a smaller decline. However, the employment subindexes of both the Philly Fed manufacturing index and the Empire Manufacturing index increased, and our manufacturing employment tracker remained at 57.5. Manufacturing payroll employment rose by 27k in November and has increased by 21k on average over the last six months.
Job cuts. Announced layoffs reported by Challenger, Gray & Christmas pulled back 10k in December to 51k (SA by GS). On a year-over-year basis, announced job cuts rose by 13k.
Tariff uncertainty. Trade tensions remain elevated, with the US imposing a 10% tariff on $200bn worth of Chinese imports on September 24. We continue to expect that the growth and employment effects of trade frictions will be modest in the US, and accordingly, we are not embedding an explicit drag in our December payroll estimates. That being said, we note the risk that increased uncertainty or the prospect of retaliatory tariffs may have weighed on hiring.
Pre-holiday transportation hiring. Transportation and warehousing payrolls have seen elevated growth in December in recent years, often followed by softer growth or outright declines in January and February. However, it appears that the BLS seasonal factors may have finally evolved to anticipate these trends (Exhibit 2), suggesting minimal scope for a large increase in this category.
- Bear Markets & Fed Mistakes
Authored by John Mauldin via MauldinEconomics.com,
Powell Was Right but the Fed Is Wrong
Last week. I argued Jerome Powell did the right thing by raising rates a mere 25 basis points. He forcefully declared the Fed’s independence from the market and politicians for the first time since Volcker. Greenspan, Bernanke, and, in particular, Yellen all gave the markets a “put” option—basically a third unofficial mandate to make sure that asset prices keep rising. Now, of course, that’s not the way they would express it, but that is, in fact, what they did. They created a series of bubbles, which spectacularly (and predictably) blew up, particularly screwing the little guys who didn’t know better and could least afford losses. We should not be where we are today, and we would not be here today, without their seriously screwing up Federal Reserve policy.
But they had the hubris to take credit for fixing the crises they created. Exactly like the arsonist taking credit for fixing the fire he started. They have no shame. Jay Powell is not the culprit in raising rates. The main problem is that Janet Yellen failed to raise rates before him, and I think she did so out of political bias for a Democratic president and then to help a Democratic candidate (Clinton). She would vigorously deny this, of course, but if it looks like a duck and quacks like a duck…. The Federal Reserve was not independent of either the markets or politicians during her watch. Shame on her. Double shame on her!
Now, having said Chairman Powell did the right thing, let me tell you where he and the current Fed leaders are royally
screwing upmaking a mess. I’ve mentioned it before, but I want to highlight it as we go into the New Year. This is critically important.No serious scientist would run a two-variable experiment. By that I mean, you run an experiment with one variable to see what happens. If you have two variables in your experiment and something either good or bad happens, you don’t know which variable was the cause. You first run the experiment with one variable, then do it again with the second one. After that, you have the knowledge to run an experiment with both of them.
The Federal Reserve is running a two-variable experiment without the benefit of ever having run a one-variable experiment to determine what the results would be. It is decidedly the stupidest monetary policy mistake in a long line of Fed mistakes.
(Like I said earlier, the gloves are off. This is my opinion. You may disagree.)
What are the two variables? They are raising interest rates (albeit slowly) and aggressively reducing their balance sheet. I think many of the problems we see in the market are results of this combination. They should do one or the other, not both.
Of these two, everybody wants to blame the last rate hike, but let’s look at the other variable.
While the Fed radically reduces its balance sheet, the European Central Bank is also ending its QE (quantitative easing), as are other central banks. They are taking away the market’s crack cocaine. Note also that all of the
crack cocaineQE began to disappear worldwide toward the beginning of October. While I realize correlation is not causation, especially with only one data point, I find it suspicious that the markets turned volatile about that same time.I find it just as plausible that the balance sheet reduction is as responsible for the market volatility as the increased rates. If QE made the markets go up, especially in concert with the ECB, the Bank of England, and the Bank of Japan, then it’s no surprise if ending it makes the markets fall.
Let’s get real. The Fed Funds target is now at 2.25%, barely above inflation. Zero real interest rates mean they are still essentially giving away free money, and free money causes bubbles. If Powell was trying to “lean into the market” and cut off budding inflation (that frankly I don’t see), he would have rates at 4% or 5%. Now thatwould mean we should blame the Fed for pushing us into recession and other bad things.
But, in fact, rates are still barely over inflation. Janet Yellen should have had them there four $#%%!@#$$ years ago. You want to castigate someone? You want to point fingers? Janet Yellen and the two previous Fed chairs are good places to start.
Warning: I’m next going to insult a bunch of smart, maybe even brilliant, people. This is not polite nor is it politically correct. I will try to be better in 2019, but right now, I am pretty pissed. (Again, this is Uncle John talking and not your normal, humble analyst. Uncle John uses words like that.)
Powell and the Federal Open Market Committee listen to extremely smart PhDs from all the best schools with their fabulous multi-algorithmic models, which prove that you could raise rates and reduce the balance sheet at the same time with no problems.
Bluntly, those smart people (many of whom are actually quite brilliant, and I’m sure they are nice people, and their kids and dogs love them) mistakenly trust models based on past performance, and even worse (much, unbelievably, really badly, worse, which I can’t emphasize enough!) on monetary theory that is clearly, evidently, badly, manifestly wrong.
They have been using these models to forecast future market actions and the economy for decades, and they are about 0 for 300 in being right. It is statistically impossible to be that bad unless your models/assumptions are fundamentally flawed, which they are. Their underlying economic theories manifestly don’t work. Because they have no politically and academically acceptable theories to substitute, they are slaves to their own mal-education. They think this makes them smarter than the markets. I can’t say it any stronger than that. I have actually been in the room when someone was aggressively (I use that word precisely, as it is the correct word for that particular conversation) remonstrating a Federal Reserve economist about said models. He went so far as to say that the best thing that Powell could do would be to fire all those PhDs and ignore their models.
As you might imagine, the Fed economist was not happy with that analysis. The veins in his neck were popping, he was red faced and his voice was raised. Having known him for 10 years, I was rather shocked. He is actually a rather mild-mannered guy. But this clearly got his goat.
Now, here’s the shocking thing… and the lesson that I learned, which was burned into my brain. He asked a very simple question, (neck veins popping): “You can’t take away a model without replacing it with another model. What model will you replace it with?” The interlocutor, who is perhaps the best observer of the bond markets I know, stammered a little bit and then forcefully said, “You can’t actually model the future,” or something to that effect. (This was back when I was drinking, it was later in the evening and more than a few bottles of wine may have been involved. As you might guess, like me, he was not a fan of models. And it was the nature of this gathering to disagree with each other late at night…)
Personal sidebar: my day job for the last almost 30 years has been to look at money managers, who usually have a model that looks at past performance and projects it into the future. Every hypothetical performance model I have ever seen looked absolutely awesome. I can’t say that I’ve seen a thousand of them, but it is not an exaggeration to say that I’ve seen more than a few hundred… well, maybe many hundreds. And then I have observed the performance of those models after I have seen them. Bluntly, it makes me skeptical of all models—including the ones that I build myself.
When I say the words “past performance is not indicative of future results,” I damn skippy mean them. All past performance models were built in a particular macroeconomic environment. Unless you can find a macroeconomic environment that is similar (as in, very closely similar) to where we currently are and where we are currently going, your particular model deserves a tad bit of skepticism. Maybe it will work and maybe it won’t. It is up to the macro analyst (that would be guys like me) to try and figure out which one will work well enough to confidently invest your money (as in, your money and mine).
I can’t tell you how hard and difficult and truly daunting that is. Especially after you have done it for many years and have the scars to prove it. I know, I know, I should write a rather lengthy essay/book on choosing money managers. Let me just leave it at this: If you have a buy-and-hold, 60/40, traditional portfolio, I think you are going to be hammered in the future. It will not serve you or your retirement well. You may not like what happened to your portfolio this month and we’re not even in a recession. Not even close. Well, maybe closer than we would like but it is still in our future. But I digress…
I’ve also looked at a lot of macroeconomic models. You can’t understand the depths of how much I would deeply love to find a macroeconomic forecasting model that was actually reliable. To have such a crystal ball would not only be soul soothing but also extremely profitable for my clients and, admittedly, me. It would be the Holy Grail.
All those PhDs at the Fed still haven’t found the Holy Grail after 40 or 50 years. Hell, they haven’t even found a decent cup of coffee. But they think they have, so their bosses confidently run a two-variable experiment with our economic system.
Time for an Emergency Fed Meeting
Just between you and me, I think the Fed has raised rates for the last time this cycle. I think in the first quarter of 2019, the FOMC members will begin to see the data weakening and realize that further hikes would make the situation worse, not better. But in any case, they should use their best judgment and ignore both political pressure and market volatility. If inflation rises and the economy strengthens, then hike another time. I don’t expect either to happen. (My actual forecast is next week. I have to save something for that letter.)
However, they also need to end this two-variable experiment nonsense. It is a major monetary policy mistake. Powell should call an emergency FOMC meeting (as in, next week) at which they suspend the balance sheet unwinding. One thing at a time. That is not responding to the markets. It is correcting a prior policy error.
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