Tuesday, March 29, 2011

notes on the week ended Mar 26th

the still unfolding disaster in japan remains the most important news of the week, if not of the decade...not only does it have the potential of being an environmental disaster approaching the scale of a chernobyl in a heavily populated area, the current estimates are for it to be the most expensive natural disaster of all time, more than double the the cost of hurricane katrina...although the number of dead doesnt approach the sichuan or haitian quakes, the 13 million people in tokyo continue to experience power outages & aftershocks...moreover, their water supply has been contaminated with radioactive iodine at moe than double the safe margin, and residents have been warned not to use tap water for infants & small children...supplies in the city are running short, and most of the world's shipping companies are now refusing to dock in either tokyo or yokohama for fear of radiation contamination, interrupting the normal supply routes for the tokyo bay area population of 35 million...it's been reported that many of the residents of tokyo who are mobile or have a place to go have made a temporary move to the south...

it now seems certain that at least one of the reactor containment vessels on the fukushima nuclear site has ruptured and spilled into the surrounding circulating water, as two of the engineers attempting to hook up power to the circulation pumps experienced radiation burns after coming in contact with the building's water, that was reported to be 10 thousand times the usual radioactivity experienced during normal operation...earlier this week, that was reported to be unit 3; now i see it's reported as unit 2, which is a good indication that a lot of the details being reported could be inaccurate...there hasnt been any new mention that i've seen regarding the spent fuel pond which had leaked last week and caught on fire so im assuming they're continuing to refill it with water from the pacific as planned...radiation exceeding 400 times the normal level has been detected in soil samples as far as 40km from the site, and radioactive iodine has been measured at 19 times normal in seawater 16 km south of the nuclear power plants...late this week the evacuation zone around the nuclear plant was extended to 25km, or about 18 miles, but it's not clear that all the residents are leaving...

we're starting to get a sense on how the loss of many of the specialized manufacturing facilities in the area, which have either been shut down due to lack of power or were damaged by the quakes, are going to affect manufacturing downstream...in the US, i've read of auto assembly plants in lousiana, new york, indiana, kentucky, and texas either shutting down or curtailing hours, and in addition to already closed operations in other east asian countries, auto plants in spain & germany have also shut down...if the worst case plays out, around 30% of worldwide automobile production could be shut down within 6 weeks, representing a loss of 100 thousand vehicles a day...and in one of those who'd of thunk it twists, the only plant that makes a pigment called xirallic was shut down, which means you can no longer order a new car in black or three shades of metallic red....the pigment is also widely used outside of the auto industry to give ceramics, plastics, inks and packaging to impart a metallic sheen...electronics is the other industry that will be hit; as something on the order of 1/4 of the production capacity for silicon wafers used to make silicon chips has been lost in the earthquake zone...a large texas instrument plant, representing 10% of TI's worldwide production, will be shut down till at least late july, with the earliest shipping not expected until sept...other major consumer and industrial electronic companies that have lost big chunks of production include sony, toshiba, and fujitsu...morgan stanley estimates the production losses worldwide could take a total of 1/2% off of global GDP this coming year...

domestically, i cant see how any recovery story can play out in the face of this; manufacturing was really the only economic bright spot this year, as the major contributors to GDP have lagged: as ive noted previously, almost the entire increase in retail sales came from chains catering to the wealthy, and we've all seen how state and local governments, the second largest contributor to GDP, are cutting back...construction is dead, and a big share of capital spending is in the defense industry, notable as a poor employer in a jobs for the buck ratio...
New Home Sales and Recessions

the major economic news this week was the existing & new homes sales reports for feburary, and its hard to imagine they could have been worse...new home sales fell 16.9% YoY and existing home sales fell 9.6%, with even lower prices reported by the national assoc of realtors, with the median price of $156K being 5.2% lower than a year ago (there are about a half dozen different housing price reports other than case shiller and they've all been down a percent or three)  existing home sales were worse than the worst forecast, and new home sales were the worst ever...(click on adjacent chart)

on the foreclosure front, yves smith & firedoglake report that the administration favored settlement with the banks may be falling apart, as some of the more aggressive democratic state attorney generals arent satisfied with the terms; in another nail in the MERS coffin, Freddie Mac has ruled their electronic registration can no longer be used in foreclosures; also, the closure of the Stern foreclosure mill in florida has left the paperwork for 100,000 foreclosures incomplete and in limbo, and the lack of foreclosure fees has created a fiscal emergency for the Florida court system, prompting the supreme court justice to ask for a state bailout to keep the courts operating till june 30th..

you might recall that i mentioned the Fed's stress tests on the 19 largest banks last week, & how they could pay dividends again...this week BofA announced they intended to institute a 5c a share dividend, and the Fed slapped them down, limiting their dividends to a penny...the same limit will apply to citigroup, but only if they do a 1 for 10 reverse stock split...those moves alone should tell us a lot more about the health of those two institutions than any passing grade on the stress tests does...as ive contended all along, the suspension of accounting rules that allow the banks to continue to mark their assets to make believe means that by any real accounting, the banks remain insolvent, and the major purpose of the Fed's monetary policies of zero interest and quantitative easing are to allow them to slowly recapitalize on the difference between their borrowing costs and the yields on their investments...

a few graphs from the cleveland Fed: The Cost of Food and Energy across Consumers... the only point i want to make with this is that you should remember these charts when you see a report on how the "average american" is dealing with food and energy costs...sure, maybe the top half or 3/4 are doing ok, but some people are being squeezed to the edge of their ability to survive...

FoodEnergy

it's not just the possibility of radioactive fallout that we will have to deal with...we've also learned this week that daylight in the northern hemisphere may also pose a hazard in the coming summer...due to unusually cold temperatures in the arctic ozone layer, approximately half of the ozone has been stripped from the atmosphere over the past two weeks, and since the conditions continue to prevail, there's even a possibility that the first northern hemisphere ozone hole ever recorded could open up...the scientists tell us that the low ozone atmosphere could affect areas as far south as new york city, which means most northern cities are at risk of increased exposure to ultraviolet radiation...a loss of 1% of the ozone over you translates into a 2% increase in UV-B reaching the surface, which is known to cause skin cancer and cataracts...moreover, the phytoplankton at the bottom of the ocean food chain has been observed to decline 8.5% in similar southern hemisphere events...

europe has been coming unglued again this past week, like it seems to once or twice a month...the portuguese failed to pass their budget, their prime minister resigned, and it looks like they'll be lining up behind greece and ireland in the bailout line...both their & irish borrowing cost hit records again this week, with both 2 and 10 year irish bonds over 10%...if you're interested in the blow-by-blow on portugal & the euro-summit, you can catch about 4 dozen links on it all at the end of this weeks blog post...

the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me...

Monday, March 28, 2011

we’re number 1

among the top 20 countries of the OECD, the rich countries’ club, America now has:

  • The highest poverty rate, both generally and for children;
  • The greatest inequality of incomes;
  • The lowest government spending as a percentage of GDP on social programs for the disadvantaged;
  • The lowest number of paid holiday, annual and maternity leaves;
  • The lowest score on the UN’s index of “material well-being of children”;
  • The worst score on the UN’s gender inequality index;
  • The lowest social mobility;
  • The highest public and private expenditure on health care as a portion of GDP, yet accompanied by the highest:
    • Infant mortality rate
    • Prevalence of mental health problems
    • Obesity rate
    • Portion of people going without health care due to cost
    • Low birth weight children per capita (except for Japan)
    • Consumption of anti-depressants per capita
  • The shortest life expectancy at birth (except for Denmark and Portugal);
  • The highest carbon dioxide emissions and water consumption per capita;
  • The lowest score on the World Economic Forum’s Environmental Performance Index (except for Belgium), and the largest Ecological Footprint per capita (except for Belgium and Denmark);
  • The highest rate of failing to ratify international agreements;
  • The lowest spending on international development and humanitarian assistance as a percentage of GDP;
  • The highest military spending as a portion of GDP;
  • The largest international arms sales;
  • The most negative balance of payments (except New Zealand, Spain and Portugal);
  • The lowest scores for student performance in math (except for Portugal and Italy) (and far down from the top in both science and reading);
  • The highest high school drop out rate (except for Spain);

excerpted from this article; see also shame on US!

Sunday, March 20, 2011

notes on japan, nuclear power, & the week ending march 19th

what has been happening around the fukushima nuclear facility in japan has been, of course, the big story the week, and it's also been the continuing question of the week, as all we're really getting is second hand regurgitations of the pablum releases of the japanese & US governments, which often conflict in important ways beyond details...so with that caveat, i'll try to explain what i've picked up, not from specifically looking for info, but because the story & its implications have saturated the internet...as of the time of this writing, (saturday evening) volunteer utility workers were attempting to reconnect power to the damaged plants, so the cooling pumps could be restarted to keep the reactor cores from melting down (any more than they may have already)...but even if this is successful, the real problem lies in one of the cooling ponds for spent fuel rods, which has been compromised and has leaked some or all of its water...various methods have been attempted to keep this spent fuel cool, including helicopter drops of water, at least some of which were aborted because of high radiation in the area...this situation seems to be the long term problem for the site, and one engineer opined that "The best thing to do is use as much of the Pacific Ocean as possible," ...as boron was in short supply in japan, both US & south korea are sending shiploads of boron, which slows down fission in nuclear reactions, to japan; whether that may eventually alleviate the problem or not is anyone's guess..

   a lot of what we have learned about these plants & Tokyo Electric over the past week is feeling like a little BP oil spill all over again...the plants and their operator have a history faked repair reports, cheapest way shortcuts, cozy government complicity, et al; & the weak design of the GE mark 4 reactor has been questioned since 1972... moreover, when it became clear that the cores were overheating, TEPCO postponed using seawater to cool them for almost a full day because the salt would damage their equipment...whether a correction of these aspects could have headed of this catastrophe or not is questionable, but it's clear that as long as profit motivated private enterprise is involved, corners will be cut that in the end come back & bite the rest of us...

   although some east coast japanese ports were damaged by the tsunami, and most of the infrastructure in a primary agricultural region has been destroyed, it appears the major problem facing japan right now is lack of electrical generating capacity; citigroup analysts say it may be "irreversible" and tokyo has been warned of blackouts during cold weather; this is not so much because of the loss of the infrastructure; rather, the 9.7 GW taken out of service with the six closed reactors is a lions share of the electric power in the east, which operates on US style 60Hz power; while the generating capacity in the west of japan is a legacy of 19th century german generators, which run at 50Hz, and the two systems dont talk to each other...the shortfall may eventually be made up by spare gas and diesel generating capacity, but as of yet i've yet to see a timeline as to when...

   so at present, even many of the japanese manufacturers who were not damaged by the quake have shut down their production lines, and as many are the sole makers of various automotive & electral components, manufacturing in taipei, china, and south korea is already being affected...so far, only one GM truck plant in louisiana has been shut down in the US, but japanese automakers in the US have cancelled all overtime to conserve what little parts inventory is still in the pipeline...how bad this can become globally is still anyone's guess, but in the one similar experience we had with a resin plant fire in japan in 1993, prices of semiconductors doubled in a matter of days...in just one example of the problem, making the i-phone alone involves 9 different companies, in Korea, Japan, Taipei, China, Germany, and the US...

   we are about to witness an interesting experiment with regards to the "danger" of government debt as well, because of all the industrialized countries, including the so called PIIGS of europe, no country has a higher debt to GDP ratio than does japan, which at around 200% is almost three times the effective publicly held debt of the US...so they will now be embarking on a large scale reconstruction of their infrastructure which will require even more borrowing than they have already planned for, yet over the past week their long term borrowing costs fell and the yen skyrocketed to its highest value against the dollar since world war II, prompting an emergency G7 meeting and a co-ordinated intervention in the currency markets by the Fed, the ECB, and the central banks of canada & the UK, the first time they've intervened in this fashion in 11 years..with britain embarking on austerity to curtail their debt (which has already knocked their GDP into negative territory), it will be interesting to see which of the two extremes of fiscal policy proves to be more effective in the long run...

   the nuclear "accident" has also touched off a lot of debate about the future of nuclear power in this country & elsewhere; about 2 dozen articles, analysis, pro & con are included in my blog sequence with "energy & the environment", whereas the economic impacts on japan are covered with "other non-western countries"...so far, both germany and china have curtailed their nuclear power programs, but the US energy secretary Chu says we're still good to go...my own position on nuclear power originates in my days as an anti-nuke activist in the 80s, so that obviously colors what i have to say now...my objection to nuclear power is that radioactive materials are entirely different than other types of pollution, in that it's mutagenic, tetragenic and carcinogenic to a degree that no other substance is...biological life is the only & a fragile counter-entropic (i.e., generating organization rather than defaulting to randomness) force on our planet, and we dont want to upset the delicate balance that allows life to organize molecules…radioactivity is known to be one of the most potent disorganizers of life, and as such increasing it would further lower the ecological potential of the planet…deaths in auto accidents (which nuclear apologists site) or from coal induced pollution dont upset the unpinning of life on the planet in the way ionizing radiation does…that no deaths have yet been caused immediately is not the issue; the issue is the mutagenic properties of nuclear radiation; it takes four generations for the effects to even start to show up in mice; we’ve barely gone thru 2 human generations since the widespread atmospheric testing in the 50s…we still dont have a way of dealing with the spent fuel and other nuclear wastes that are a by-product of producing power in this manner; germany encases them in concrete, china ships them off to the western provinces, but japan & the US both store them on site...but spent nuclear fuel is dangerous for 100,000 years, & has a half-life of 10,000 years, which is five times longer than christianity lasted...lest we forget; there is still 740,000 cubic meters of lethally contaminated crap to clean up at cherobyl alone; the stone "sarcophagus" which encases the site is crumbing, gases as hot as 200C are escaping, and it's basically been abandoned with the breakup of the soviet union (its not russia's problem, it's the ukraine's)...in the US, we have two serious problems which are remnants of our nuclear arms programs; one is the hanford nuclear reservation on the columbia river, where 53 million gallons of nuclear waste is being stored in 177 leaky underground tanks; the other is the savannah river site in s.carolina, where the government has stored the high level radioactive waste produced at the plant on site in 51 massive underground tanks, and proposed methods for withdrawing it have proven unsafe...something else co-incidential about those two sites; just offshore from washington state is the cascadia subduction zone, very similar to the japanese quake site, & the site of a 9.2 earthquake in 1700, and the savannah river site is near the site of 1886 charleston earthquake, second only to the new madrid quakes of 1811-12 among the largest quakes east of the rockies...they say the waste wont get into the water supply...

ok, off the soapbox and back to the congresscritter's insanity...after two weeks of unproductive debate, the house and senate both passed the sixth “continuing resolution” of this fiscal year, which will fund government operations until april 8th...about $6 billion of budget cuts were agreed to by both parties, but it wasnt enough cutting for some house republicans, as 54 voted against it...the 13 votes against it in the Senate were on the principle that we shouldnt be funding the government a couple weeks at a time...

  the Fed announced that it completed it's stress tests on the nation's 19 largest banks, and to no ones surprise they all came thru in flying colors, which apparently means they can start paying dividends again...JP Morgan, Wells Fargo and SunTrust also announced stock buybacks, which reduces their bank capital, something they complained would happen under the weak Basel III capital requirements, because it would reduce their ability to lend...

there were conflicting signals in economic reports out this week, as the Philly Fed index of manufacturing activity saw its best growth since 1984, right after a similar strong report from the NY Fed district...however, both industrial production and capacity utilization declined for february...the best capacity utilization growth was for textile mills, which i can only assume that's because so many have been shuttered that any pickup shows a % growth; also, port export traffic showed a YoY decline....meanwhile, new home starts fell to their second lowest ever (since 1959) at 479K, and building permits were at the lowest level since record keeping started in 1968; multi family starts were also down, while both multi-family permits & home remodeling showed a year over year increase...not much of surprise there, as census figures are now showing home vacancy rates as high as 25% in some cities, and as high as 18% over the entire state of florida....producer prices showed a one month gain of 1.6%, almost entirely food and energy, with produce alone showing a 50% jump for the month...consumer prices showed a seasonably adjusted .5% gain, but the core inflation rate, which influences Fed policy, was only up .2%...so according to the official numbers, inflation is up either 1.1% YoY or 2.1% YoY, depending on whether you choose to eat & heat or not...GDP declined 0.8% in january, according to macroadvisors, who also forecast quarterly GDP growth to be 2.4%, barely over stall speed...and stagflation, a word i hadnt seen since the 70s, showed up in reports at least three times this week...                                                     (click on above chart to enlarge CPI components)

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me...

Sunday, March 13, 2011

notes on the past week & thoughts on oil speculation…

it's hard to write about the week just past without mentioning the devastating earthquake in japan, but there's not much i could say that would add to what you've probably already seen if you've caught any news at all; just to put that 8.9 earthquake in perspective, the energy released by that movement was nearly 800 times greater than the energy released by the 7.0 earthquake that struck haiti last year (the richter scale is logarithmic)...my GGO blog coverage on that or any such natural disaster will be limited to the economic & environmental impacts; as there's no way for a once a week blog to serve as a "breaking news" site anyhow...if you want more in addition to your regular media, End of Empire News has been monitoring the news outlets on the situation there and has been posting videos & links to updates more than once once a day since the story broke...

not much has changed in the budget debate in congress, since all we got last week was a two week continuing resolution, which only funds govt operations at last years level until march 18th...we're still without a budget for the current fiscal year, never mind the 2012 budget that obama released a little over 3 weeks ago; & right now the tea party wing in the house is digging in & refusing to compromise, even with their moderates, on their $61 billion of ideological spending cuts, in areas such as education, medicaid, air & water quality, & the weather bureau (had their cuts been enacted, you might have had no tsunami warnings) and the democrats are offering a package of around $10 billion; both proposals were rejected by the senate...at this rate, the democrats will be bought out 2 weeks at a time & the tea party will get their way...i've already explained why govt spending is not the problem, that it's the solution, so i wont harp on fiscal policy today...

something that often happens to me while combing through hundreds of articles each week is that i'll see a relationship between two on different topics where none was meant to be; one such occurrence was after encountering the adjacent chart on how much corporations werent paying their fair share to reduce the deficit; later, i ran into the wall street journal “Number of the Week”: Companies’ Cash Hoard Grows to $1.9 trillion, which bragged that "executives have been able to act with lightning speed, slashing costs during the recession and hiring only as much as they need during the recovery— tactics that have generated record profits, if not jobs" in order to accumulate the largest corporate cash hoard in history...this, while their apologists are out in force complaining that big government spending is crowding out the private sectors ability to expand & hire...

there was quite a bit of press after bill gross, co-CEO of PIMCO, the world's largest bond fund, announced in an interview that he'd totally eliminated US treasuries from his flagship "total return" fund, with most of the commentary almost implying that US debts were somehow insecure; first of all, this is nothing new; he stated he was going to divest the fund of treasuries when QE2 was first announced, suggesting that he believed with US interest rates so low, better opportunities we to be had elsewhere, and with bernanke buying, he'd be only too happy to sell to the Fed...my read on what he's up to by going so public now is that when QE2 is over & the Fed stops buying & the price on Treasuries goes down from his bad mouthing them, he'll be back in to buy them again..

another piece of media bullshit that was brought to my attention midweek was a CNBC article that alleged welfare made up 35% of national income in 2010...its origin was from the investment research firm Trimtabs, so i went to the trimtabs site and couldnt find the methodology, and couldnt put my hands on the real numbers myself quickly by searching, but i did notice that "research" being quoted elsewhere...so i sent the articles to friends at angry bear, and Kash did a proper debunking here: Government Transfers: It's All About Health Care ....but even so, calling social security and medicare welfare is just wrong; most people have been paying into those programs as insurance against aging for 40 years; to call them welfare is to call all insurance welfare...and the social security trust fund is separate from the general fund, invested in treasuries, & fully funded until 2037...so why are all the attacks being leveled at social security?  well, the trust fund is made up of Treasury securities, which are promises to pay money that the government has already borrowed & spent for other purposes back to the trust fund...so that money will now have to be repaid, plus interest, by future taxpayers to the social security trust fund...so those who want to cut social security or otherwise eviscerate the safety net want to do so in order to permit the government to avoid paying back that debt, and thereby not have to raise taxes to do it...

DESCRIPTION

last week i included a chart on the number of weeks the unemployed were without work and mentioned that according to a report by the National Employment Law Project, most of the new jobs created during this recession have been low paying…this week Krugman led a blogosphere-go-round with an article about the Falling Demand for Brains, that even the most skilled & educated were being replaced by machines; that seems to reflected in the breakdown of duration of unemployment by education chart from the Cleveland Fed here, which shows that unlike the 90s where those out of work the longest were the uneducated, those out of work the longest are now those with a college degree or more…

despite attempts by the Fed and the Treasury to whitewash it, there was progress in the foreclosure fraud investigation by the 50 state attorney generals as they sent a 27 page proposed settlement to the mortgage servicers; the banks, and especially moynihan of BofA were outraged, of course, but the blogosphere was split between those who saw the banks being rewarded and those who thought it was an improvement...as ive followed this with yves smith, im inclined to see it as she does, "A Bailout as Reward for Institutionalized Fraud"; in other foreclosure fraud news, oregon joined the handful of states to halt foreclosures based on titles transferred thru MERS...there were also a couple interesting reports out from CoreLogic; the first, that 23% of all mortgages were now underwater, amounting to over 11 million properties with a total negative equity of $750 billion, the second, that their index of home prices had declined 2.5% in january, and was now at a post-bubble low..

when the week began, the focus was on the situation in libya, and how it might impact the price of oil; as it appeared that libya might deteriorate into a protracted civil war, and with warnings of a "day of rage" in saudi arabia on friday, the price of oil had topped $106 by midweek with brent over $115, but slid back to below $101 by weeks end as the saudi situation remained controlled...there have been some ongoing discussions around the blogosphere (ie, see Krugman/Yves Smith (2) & Krugman again) as to whether the price of oil is being driven up by speculation or by fundamentals, and i got involved in one of those discussions this week...and right now, my takeaway from that is that i dont even really know what speculation is; here's my thinking...the NYMEX or WTI price we most often seen quoted is usually the price of the near term future's contract, which means right now we're seeing the price quoted for oil to be delivered in april...today's price, or the spot price, tracks pretty close to that contract...but the oil being delivered to refineries today is not at that price; its more likely at the price the refiner contracted for delivery of that oil over a year ago; some may have hedged their position with intervening trades, but i doubt that any of the oil being refined today was purchased at last week's spot price...quite similarly, neither an OPEC member nor an US independent driller would be selling the oil coming out of the ground today at the spot price, because they too would have contracted to sell their production well in advance of the time when the oil is extracted from the ground...the head of exploration for a domestic driller i know wont explore for oil or put a new drilling bit in the ground unless he can contract to sell that oil above $80, so his entire team of petrogeologists sat on their hands for a whole year when oil slid below $70 in '09...now lets examine how these logical players might respond to changing market conditions, especially as we have seen over the past few weeks...a refiner, for instance, sees in rising prices a sudden threat to his ability to get oil at what he considers a reasonable price and enters the market to contract for delivery well into the future, even locking in $115 oil just to be safe...the producer, on the other hand, holds off on contracting to sell his future oil as he believes prices will be higher in the future...so as future demand is excessive, and supply is being withheld, the price continues to rise, fulfilling the expectations of both...obviously, this works in reverse when prices are falling, and exacerbates the price move downward in the same way...

   now lets bring the "speculators" into the picture...one "proof" that they were diving prices higher was that they owned six times as many barrels of oil as could be stored at the WTI facility in Cushing OK...but by my understanding of the futures markets, for every long contract, there has to be a short; which means that someone had to have written a contract to sell that imaginary oil to those speculators who owned it...that means that at any given price (in this case, $105) there are equal numbers of speculators betting that oil would go down from that price as there are betting that it would go up...and just as we saw with the primary producers and users of oil, if those betting that it will go up believe it will continue to go up, they hold their positions and add to them, and those betting on a fall hold off their bets until the price has risen enough that they believe they can profit on the downside...for the "speculators", its always a zero-sum game; some win, some lose, but by the time the contracts in this casino expire, the only one who collects the vigorish is the bookie...

    and of course, what ive just explained about oil futures hold for other commodity or energy futures as well; for fuel, you have the same refiners who were on the buy side of the oil contracts on the sell side for gasoline & diesel, and you have companies like Fed-Ex, GetGo, and Delta Airlines buying the contracts...but who are the other players, the ones who control the day to day movements in price? if you recall the pie graph that i included with last weeks letter, the notational amount of futures contracts outstanding is five times US GDP! that amount of money at risk couldnt possibly just be a handful of bored backgammon players, could it?  if we recall the bankruptcy talk around the time of the oil spill, we heard that because it's presence in the energy markets, BP was also too big to fail; i recall that BP's "paper oil" in the derivatives market was about 10 times their known real reserves, but couldnt find a link to that, but did find that BP makes about $3 billion annually from trading operations alone...the other big players? it wouldnt surprise me to learn that russia, the largest producer of oil, would be involved with sovereign wealth fund, as well as the saudis...and possibly other big trading houses like goldman or Glencore (as i recall, the derivatives market in europe is larger than that in the US)

    so all these "speculators" are involved in setting the price on any given day, moving ten or more times paper oil daily than any physical oil is ever moved, but we still come back to the nature of the futures contract; for everyone buying a contract, there has to be someone willing to write that contract to sell imaginary oil at that same price, both parties to the speculation are at risk and large amount can be made or lost in a day, and traders like BP can even make more money by driving prices down than they can by selling oil...

   of course, we cant put that paper oil or gasoline in our tanks and use it; what we want to know is what the real supply situation is; and not are we only concerned about the price, but we have to keep in mind that any major interruption of supply could lead to the 2 block long gas lines & 10 gallon rationing similar to what we saw during the 1973 oil embargo...with that in mind, ill direct you to professor jim hamilton, whose analyzed the ability of the saudis to raise production in the event of a cutoff from libya or elsewhere; the bottom line: the saudis were either unwilling or unable to raise their oil production between 2005 and 2008 when prices spiked to $140 a barrel, and there's no reason to believe they would or could do it today...

i would be remiss if i didnt at least mention that in europe, greek, irish, portuguese and belgian borrowing costs all hit record highs again this week, after moody's knocked greece's credit rating down three notches in the face of german intransigence on the bailout package, and spanish debt was also downgraded later in the week; however, despite low expectations, EU talks on friday did produce an agreement, so we'll see in the coming weeks how far down the road that will kick the can; if you're interested in more links on this or other international news, they're at the end of this week's blog post, starting right after all the links on the developing oil crisis...

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me...

Monday, March 7, 2011

february unemployment reports, et al

this was the first week of the month, so that means friday was the labor department unemployment report...you're all probably tired of hearing me complain about the inaccuracy of their methodology already, so i'll dispense with that and just tell you that according to the report, we added 192,000 jobs in february...if you recall last months dismal report on job creation, the total for the two months is still only about the number needed to keep up with additions to the population, without really reducing the 7.7 million who have become unemployed since the recession started (one problem is that many companies are now refusing to even interview those who are unemployed)…the labor force participation rate is lower than any time since the early 80s, before reagan busted the unions & forced the women out of their homes & into wage slavery…by not counting those who've dropped out, BLS skewers all the numbers the government reports...im getting so cynical that when i see someone reporting their unemployment numbers as factual, i think theyre just a shill for the administration…so im going to compare the numbers in the BLS household survey to those interviewed by gallup: BLS says that U3, the headline unemployment number, is 8.9%; gallup finds it to be 10.3%; BLS has U6, which is the total of those unemployed and involuntarily part time, at 15.9%, the gallup survey reported 19.9% in that category...john williams at shadow stats, who computes employment stats by the pre 1994 government methodology, has U6 at 22%...the gallup unemployment charts are included below, as well as others that ive embedded with the links below, as my attempts to include them in my text here have proven futile...

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some are also trying to read something positive into the fact that weekly jobless claims fell to 368,000, below 400,000 for the second week in a row, which is the first back to back at that level since the recession began...and the 4 week moving average did drop to the lowest level in 3 years...but that contrasts with a report from employment consultants at challenger that planned layoffs are now at the highest level in 11 months, and they dont even track the large number of public employees that will be losing their jobs at the state & local level...

the problem is still that we have 14 million unemployed, even by the official count, and 6.2 million of them have been unemployed for 6 months or more...about 4 million have left the labor force, another 8.4 million are working part time and want full time work, & there's also an estimated 2 1/2 million who dont count & who've exhausted their 99 weeks of unemployment rations, so they're without anything coming in...the role that government should be playing in this situation is to put those willing of these people to work; govt borrowing costs have been lower than they've ever been, so this is the time to be funding the infrastructure repairs this country needs....and once the multiplier effect of people working & spending plays thru in the economy, government revenues will rise and return to a normal level, facilitating the servicing of the debt incurred by that stimulus...unfortunately, much of the inadequate 2009 stimulus was misspent, and the political will to return to the correct fiscal path is absent...im sorry but this form of democracy and market capitalism has become totally dysfunctional, and i cant see a solution short of some kind of a revolution that would toss aside the old institutions & the ways of running things and install something rational in their place...

a number of other payroll and employment reports also became available this week; according to a new report by the National Employment Law Project, most of the new jobs created during this recession have been low paying, with those paying less than $13 hr accounting for 49% of job growth, on the other hand, while 40% of job losses were high paying, (identified as over $19/hr), only 14% of the new jobs were created in those industries...that ties into a gallup poll that showed the least educated were now the most likely to find jobs, with job conditions were worsening for those with some college, & the labor department report that the net increase in hourly wages over the recession was only 0.3%, with all the productivity gains during that period accruing to corporate profits...furthermore, a MIT Hamilton Project showed that median wages for men have dropped $15,000 or 32% since '69 when adjusted for inflation, which is something clear to anyone who grew up in the 50s, when there was a large middle class that could be supported well on the income of one male breadwinner...echoing that MIT project was a chris martenson interview of john williams of shadow stats, where he stated that by his measurements, US household income today is below where it was in 1973...in connection with the bloated government meme of the right, an old angry bear economist who's now blogging again showed that state & local employment declined from 65 per 1000 population to 62.5 per thousand since the recession started...

you may recall that my mentioning in previous weeks that we were heading for a march 4th showdown, wherein house republicans who insisted on budget cuts were threatening to shut the government down if they didnt get the cuts they wanted; after weeks of bickering, that was averted with a two week continuing resolution including $4 billion in cuts that obama agreed to, so the government will now continue to operate until march 18th...for reasons i dont understand, the federal government starts its fiscal year on october 1; this year, with the election looming, they were unable to agree to a budget, so they passed a continuing resolution to fund everything at the same level as previously until Dec 3rd; again unable to agree then, they extended that to year end, then again till march 4th...we have now deteriorated to the point that government agencies can hardly plan two weeks in advance; unsurprisingly, the pentagon is complaining they cant function that way...

this week also marked the release of 266 page pdf called USA Inc. authored by George Shultz, Paul Volcker, Michael Bloomberg, Richard Ravitch and John Doerr...its a compilation of graphs and financial statements for various segments of our economy & government...i find pdfs difficult to read, but the charts & graphs are worth a look...a few selected images are reproduced on websites here and here...i'm going to include here another graph i found this week and link you to the blog post i found it on: Too Big to Fail? Wall Street and Main Street: How Big Are They? this is something that been dogging me since i first read about it over two years ago; the nominal amount of financial transactions conducted by wall street is 43 times the country's GDP, 57 times the size of the main street economy...add the derivative operations of the european banks, we're talking an unfathomable quadrillion dollars, or $190,000 per person on the planet...clearly there is systemic risk here, a one tenth of a percent fluctuation here could crash the entire facade, but i still dont have an adequate grip on the implications or dangers...

the banks' electronic mortgage swapping shell corporation, MERS, is now going to be the subject of a federal investigation, and another county, guilford in n.carolina, is going after them for recording fees they skirted while in operation...but unless someone can get at the banks who ran that scam, a lot of counties may be left holding the bag... according to the research firm Trepp, the delinquency rate for CMBS (commercial mortgage-backed securities) hit a new record in February at 9.39%, as commercial real-estate is suffering the same price declines as seen in housing...for the most part, it's these deals that have been causing the large number of small & medium sized bank failures over the past couple of years

in another one of my themes, february YoY retail sales continued the same trend set in january and over the holidays, with the improvement in buying over recession levels all concentrated in the upscale chains…Saks was up 15%, Neiman’s up 13%, Limited 12%, Nordstrom 7.3%, Macys 5.9%….on the other hand, Costco was up only 4%, BJ’s up 3.9%, Ross 3%, TJX 3%, Target only up 1.8%, & the Gap was down 3%.…an earlier report had walmart same stores sales down for the 7th consecutive quarter, as walmart is losing market share to dollar stores...

i know the rising gas & oil prices are on everyone's mind except for the handful of economists who are being driven around by chauffeurs, but food prices hit a new high in february for the 8th consecutive month as well, according to the UN's FAO...the Economist had a special report on the world food situation this week, with a set of 9 articles; IMF economists warned that despite this years weather related spike, prices are unlikely to retreat in the future due to structual changes in demand...& with cotton again spiking to a new high and fuel costs high, theres also a likelihood that more food cropland will be diverted to cotton or ethanol...after a 19.4 cent jump in gas prices the previous week, we added another 11c/gal this week, and the national average now sits at $3.49, with many now seeing $4 gas at the pumps again, especially in california, where refineries are dependant on higher priced imports...(& even alaskan crude sells at a premium to brent)...diesel fuel has been running a few cents higher, prompting trucker protests of a surtax proposal in maryland...WTI closed the week at $104.42, and Brent closed near $116 bl...im gradually learning some of the nuances in oil pricing; for instance, bakken sweet from north dakota was still at $65/brl at the wellhead at the start of the week, because costs to transport it to a refinery were that much of a differential...and it takes refined diesel fuel to transport that crude by train or truck...


Gallup Reports Underemployment Surges To 19.9%, February "Jobs Situation Deteriorates": As Bad As 2010 - On one hand we have the Department of Truth about to tell tomorrow that NFP based on various seasonal and birth death adjustments increased by 250,000. On the other hand, we have Gallup which actually does real time polling without a procyclical propaganda bias. And Gallup does't have any good news: "Unemployment, as measured by Gallup without seasonal adjustment, hit 10.3% in February -- up from 9.8% at the end of January. The U.S. unemployment rate is now essentially the same as the 10.4% at the end of February 2010." And the one indicator that nobody in the mainstream media will touch with a ten foot pole: "Underemployment, a measure that combines part-time workers wanting full-time work with those who are unemployed, surged in February to 19.9%. This resulted from the combination of a sharp 0.5-point increase since the end of January in the percentage unemployed and a 0.5-point increase in the percentage working part time but wanting full-time work. Underemployment is now higher than it was at this point a year ago (19.7%)."

Charts of the Day: U.S. Unemployment above 10%, Underemployment near 20% - With the jobs numbers coming out tomorrow, it bears noting that the official U.S. data have been marred by low labour participation rates. The reality is that while the jobs picture is improved, many of the long-time unemployed have dropped out of the labour force and are not being counted as unemployed as a result. This has led to the unemployment rate declining at a rate which is not consistent with the fundamental picture in the labour market. The data from polling firm Gallup do not have this problem.  Below is their chart of the unemployment rate for 2010-2011.

Gallup's U.S. Unemployment Rate, 2010-2011 Trend

U.S. Underemployment, 2010-2011 Trend

 

<<<< The Wage Struggles of Men - The Hamilton Project has produced a fairly stunning chart, suggesting that median real wages for men have dropped significantly more than is commonly understood: Here’s Michael Greenstone, an M.I.T. economist and the director of the Hamilton Project, explaining: The red line is the usual picture of median earnings for full-time men. The problem with this line is that the percentage of men working over time has been declining over time. This attrition or dropping out of the labor force is not random, though, as the decline in full-time work it is disproportionately concentrated among low-skill men. This means that the red line is being propped up by the fact that it is increasingly comprised of higher skilled men. One sensible correction for this is to calculate the median wage for all men (not just the full-time workers). This is the blue line in the below graph. Why is this important? The full-time sample (red line) suggests that median wages have been stagnant since 1969. The blue line or full sample of men (which accounts for reduced labor force participation) suggests that median wages have declined by 32% or $15,000 (in constant dollars).

 

U.S. Economy Trades High-Paying Jobs For Low-Paying Positions, Report Finds - In the last 12 months, the U.S. economy has largely traded high-quality jobs for poorly-paid positions, according to a new report by the National Employment Law Project.  Though the economy has added more than a million jobs over the last year, new positions have skewed towards relatively low-wage industries, the New York-based non-profit finds in "A Year of Unbalanced Growth: Industries, Wages, and the First 12 Months of Job Growth After the Great Recession." The report finds a "striking imbalance" between the jobs being added and those lost over the last year:

  • Lower-wage industries constituted 23 percent of job loss, but fully 49 percent of recent growth
  • Mid-wage industries constituted 36 percent of job loss, and 37 percent of recent growth
  • Higher-wage industries constituted 40 percent of job loss, but only 14 percent of recent growth

<<<< A Look at State and Local Gov't Employment - The struggle by state and local goverments to reduce spending continues. Yesterday Ben Bernanke gave a speech on the subject. As Bernanke points out, there are really two problems caused by this wave of budget-cutting. The first is the sharp reduction in the actual services that S&L governments are expected to provide to their residents. Voters do not like electing politicians who raise taxes, of course; but will they reward politicians that have substantially reduced government services? I'm not sure, but I am quite sure that these cutbacks by state and local governments will become even more noticeable to voters over the coming year than they already are, particularly since the vast majority of S&L spending is on quite visible things like roads, police and fire departments, and of course the biggest single element, education. The following chart shows the number of state and government employees per 1,000 people in the US since January 2003 (which is when the US economy was at a roughly similar point in the business cycle, emerging from recession but not yet enjoying a strong recovery). The blue line is all S&L employees, while the red line (measured on the right axis) shows only educators.

<<<<The picture speaks for itself.

the above are my weekly comments that accompanied my sunday morning links mailing, which in turn was selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me...

Sunday, March 6, 2011

a teacher, a taxpayer, & a bank CEO

an unemployed worker, a school teacher, a pensioner, a taxpayer and a bankster CEO are sitting at a table…in the middle of the table is a plate with a dozen cookies on it…the bankster reaches across and takes 11 cookies, looks at the taxpayer and says, "Look out for those guys... They want a piece of your cookie."