Phisix: The Myth of the Consumer ‘Dream’ Economy

Life is not about self-satisfaction but the satisfaction of a sense of duty. It is all or nothing. Nassim Nicholas Taleb

The Bernanke Put: If we were to tighten policy, the economy would tank

I don't think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank.

That’s from Dr. Ben Bernanke, US Federal Reserve Chairman’s comment during this week’s Question and Answer session in the congressional House Financial Services Committee hearing[1].

This practically represents an admission of the entrenched addiction by the US and the world financial markets on the central bank’s sustained easy money policy. This has likewise partially been reflected on the US and global economies. I say “partially” because not every firms or enterprises use leverage or financial gearing from banks or capital markets as source of funding operations. Since I am not aware of the degree of actual leverage exposure of each sector, hence it would seem to use “safe” as fitting description to the aforementioned relationship.

The fundamental problem with easy money dynamics is that these have been based on the promotion of unsound or unsustainable debt financed asset speculation and debt financed consumption activities, in both by the private and in the government, in the hope of the trickle down multiplier from the “wealth effect”.

The reality is that such policies does the opposite, it skews the incentives of economic activities towards those subsidized by the government particularly financial markets, banks, and the government (via treasury bills, notes and bonds as low interest rates enables sustained financing of the expansion of government spending) which widens the chasm of inequality between these politically subsidized sectors at the expense of the main street. For these sectors, FED’s easy money policies signify as privatization of profits and socialization of losses.

Yet the massive increases in debt as consequence from such loose interest rate policies, magnifies not only credit risk, thus affecting credit ratings or creditworthiness, but importantly the diversion of wealth from productive to capital consuming activities, which ultimately means heightened interest rate and market risks.

Eventually no matter how much money will be injected by central banks, if the pool of real savings will get overwhelmed by such imbalances, then interest rates will reflect on the intensifying scarcity of capital.

Capital cannot simply be conjured by central bank money printing, as the great Ludwig von Mises warned[2] (bold mine)

The inevitable eventual failure of any attempt at credit expansion is not caused by the international intertwinement of the lending business. It is the outcome of the fact that it is impossible to substitute fiat money and a bank's circulation credit for capital goods. Credit expansion can initially produce a boom. But such a boom is bound to end in a slump, in a depression. What brings about the recurrence of periods of economic crises is precisely the reiterated attempts of governments and banks supervised by them, to expand credit in order to make business good by cheap interest rates.

From such premise, interpreting “low” interest rates as a function of “weak” economy and “low” inflation seems relatively inaccurate.

Such assessment has been based on the rear view mirror. As of Friday, Oil (WTIC) at US $108 per bbl and gasoline at $ 3.12 per gallon, as noted last week[3] US producer prices have also been rising, which reflects on an inflationary boom stoked by credit expansion. If energy and commodity prices persist to rise, then “low” price inflation will transform into “high” price inflation. Thus “price” inflation, as corollary to monetary inflation, will likely add pressure on bond yields and interest rates.

Moreover record levels of US stock markets imply of intensifying asset inflation. Prior to the bond market turmoil, US housing has also caught fire. “Low” levels of price inflation or what mainstream sees as “stable prices” doesn’t imply of the dearth of accruing imbalances, on the contrary, these are signs of the boom bust cycle in motion channeled through specific industries, similar to the “roaring twenties[4]” or the US 1920s bubble and the 1980s stock and property bubble in Japan.

As the great dean of the Austrian school of economics, Murray N. Rothbard explained of the inflating bubble of 1920s amidst low price inflation[5]:

The trouble did not lie with particular credit on particular markets (such as stock or real estate); the boom in the stock and real-estate markets reflected Mises's trade cycle: a disproportionate boom in the prices of titles to capital goods, caused by the increase in money supply attendant upon bank credit expansion

The same bubbles on “titles to capital goods”, via stocks and real estate, plagues from developed economies to emerging markets, whether in Brazil, China or ASEAN.

And “weak” economy in the backdrop of elevated levels of interest rates powered by price inflation had been a feature of the stagflation days of 1970s.

Finally, while price inflation, scarcity of capital and deterioration of credit quality are factors that may lead to higher interest rates as expressed via rising bond yields, another ignored factor has been the relationship between the growth of money supply and interest rates.

As Austrian economist Dr. Frank Shostak explains[6]

an increase in the growth momentum of money supply sets in motion a temporary fall in interest rates, while a fall in the growth momentum of money supply sets in motion a temporary increase in interest rates.

Such momentum based relationship can be seen in the Fed’s M2 and the yield 10 year constant maturity or even with the Divisia money supply

On the top pane, in 2008-2010, as the Fed’s M2 (percent) simple sum aggregate (blue line) collapsed, the yields (percent change from a year ago) of 10 year constant maturity notes soared. Following the inflection points of 2010, the relationship reversed, particularly the M2 soared as the Fed’s 10 year yields fell.

The M2 commenced its decline on the 1^st quarter of 2012 while the UST 10 year yield rose in July or with a time lag of over three months.

The Divisia money supply, instead of a simple sum index used by central banks, is a component weighted index which has been based on the ease of, and opportunity costs of the convertibility or “moneyness” of the component assets into money (Hanke 2012)[7].

The Divisia money supply has been invented by invented by François Divisia, 1889-1964 and has now been made available via the Center for Financial Stability (CFS) in New York, through Prof. William A. Barnett[8]

As of June[9], the varying indices of the Divisia money supply based on year on year changes have all trended downwards since late 2012.

The slowdown in the growth of momentum of money supply have presently been reflected on the upside actions of yields of the bond markets.

The momentum of changes of money supply will largely be determined by the rate of change of credit conditions of the banking system.

Rising bond yields largely attributed to the FED’s “tapering” chatter has spurred a huge $66 billion in the past 5 weeks through July exodus on bond market funds according to Dr. Ed Yardeni[10].

The destabilizing rate of change in bond flows appear as evidence of “If we were to tighten policy, the economy would tank”

Bernanke PUT’s Effect: Parallel Universes

The Q&A statement along with the Dr. Bernanke’s earlier comments in the House Financial Services Committee where he said central bank’s asset purchases “are by no means on a preset course[11]” has energized a Risk ON environment.

US stocks broke into record territories. Benchmarks of several key global stock markets rebounded. Global bond markets (yields) rallied along with commodity prices.

During the past two weeks, the financial markets have been guided higher by repeated assurances from Dr Bernanke aside from central bankers of other nations.

Given this cue, ASEAN stock and bond markets rallied substantially despite what seem as deteriorating fundamentals.

The sustained rout of the Indonesia’s rupiah appears to have been ignored by the stock and bond markets. Indonesia’s central bank, Bank Indonesia intervened in the currency market by injecting dollars into the system. Indonesia’s foreign exchange reserves dropped by $7.1 billion in June, the most since 2011, and which brings total reserves to less than $100 billion, a first in two years, according to a report from Bloomberg[12].

Indonesia’s unstable financial markets mainly via the bond and currency have prompted the World Bank to cut her growth forecast early June. Thailand’s central bank have downshifted their economic growth estimates along with their Ministry of Finance and the IMF[13].

The IMF has also marked down global economic growth due to “longer economic growth slowdown”[14], from China and other emerging economies whom have been faced with “new risks”

The Asian Development Bank (ADB) has also trimmed growth forecast for ASEAN at 5.2% where the Philippines has been expected to grow 5.4% in 2013 and 5.7% 2014[15].

In contrast to the ADB, the IMF, whom downgraded world economic growth, has upgraded economic growth projection of the Philippines to 7% in 2013[16]

In the world of central bank inflationism, “fundamentals” in the conventional wisdom hardly drives the markets. Stock and bond markets may substantially rise even as the economy has been mired in a prolonged period of negative growth or recession. This has been in the case of France in 2012-13[17].

An investor in Chinese equities would have only earned 1% per year during the last 20 years even as per capita has zoomed by 1,074 percent over the same period, according to a Bloomberg report[18].

This shows how the discounting mechanism of financial markets has been rendered broken, relative to reality, reinforced by the stultifying effects of central bank easing policies.

And amidst sinking stock markets and the recent spike in short term interbank interest rates due to supposed cash squeeze from attempts by the Chinese government to ferret out and curtail the shadow banks, China’s increasingly unstable and teetering property bubble continues to sizzle with home prices rising in 69 out of 70 cities. Guangzhou, Beijing and Shanghai reported their biggest gains since the government changed its methodology for the data in January 2011 according to another report from the Bloomberg[19].

Such dynamics reinforces China’s parallel universe

Never mind that Chinese rating agencies downgraded “the most bond issuer rankings on record in June” as brokerage houses have been preparing for “the onshore market’s first default as the world’s second-biggest economy slows” according to another Bloomberg article[20].

China’s rampaging property bubble appears to be in a manic blow-off top phase

The Myth of the Consumer ‘Dream’ Economy

Speaking of mania, a further manifestation of the “permanently high plateau”, new order, new paradigm, “this time is different” can be seen from the president of the Government Service Insurance System Robert Vergara, who proclaims that the Philippines has reached a political economic nirvana.

From a Bloomberg report[21]:

The country “is still experiencing a secular growth story,” Vergara said. “We have the kind of economy that every country dreams of.”

Being an appointee of the Philippine president[22] it would seem natural to for him to indoctrinate or propagandize the public on the supposed merits of the current boom as part of the PR campaign for the government.

The GSIS president says he expects a return of 9% or more for the Philippine equity benchmark, the Phisix, over the next 12 months, as earnings will increase by about 15% during the next two years. All these have been premised on the ‘dream’ Philippine economy which he projects as expanding by 6-7% during the next 2 years and whose growth will be anchored by record-low interest rates which allegedly will fuel consumer spending.

What has been noteworthy in the reported commentary has been that of the GSIS’s president implied market support for local equities, where “the fund would consider increasing equity holdings to as much as 20 percent of total assets if the gauge falls below the 5,500 level”. If a private sector investor will say this they will likely be charged with insider trading.

And if he is wrong, much the retirement benefits of public servants risks being substantially diminished. Otherwise, taxpayers will be compelled to shoulder such imprudent actions.

But has the Philippine economy been driven by consumer spending as popularly held?

According to the National Statistical Coordination Board’s 1^st quarter GDP report[23]:

With the country’s projected population reaching 96.8 million in the first quarter of 2013, per capita GDP grew by 6.1 percent while per capita GNI grew by 5.3 percent and per capita Household Final Consumption Expenditure (HFCE) grew by 3.4 percent. – 

The same Philippine economic agency notes that based on the 1^st quarter expenditure share of statistical economic growth, household final expenditure grew by only 5.1% (left pane). This has been less than the 7.8% overall growth rate of the economy.

Merchandise trade had hardly been a factor as exports posted negative growth while imports had been little changed. Government final expenditure grew by more than double the rate of household final expenditure or by 13.2%, and capital formation had been mostly powered by construction up by 33.7%.

From the industrial origin calculation perspective (right pane) we see the same picture. Construction soared by an astounding 32.5%. This has fuelled the Industry sector’s outperformance, which had been seconded by manufacturing 9.7%. Financial intermediation has also registered a strong 13.9% which undergirded the service sector. Public administration ranked fourth with 8% growth, about the rate of the nationwide economic growth.

So data from the NSCB reveals that during the 1^st quarter, statistical growth has hardly been about the household consumption spending driven growth, but about the massive supply side expansion as seen through construction, financial intermediation, and secondly by government expenditures.

Yet here is what the Philippine ‘dream’ economy has been made up of.

Credit growth underpinning the fantastic expansion of the construction industry has been at a marvelous or breathtaking rate of 51.19% during the said period, this is according to the data from the Bangko Sentral ng Pilipinas as I previously presented[24].

How sustainable do you think is such rate of growth?

Meanwhile, bank lending to financial intermediation and real estate, renting and business services and hotel and restaurants grew by a whopping 31.6%, 26.24% and 19.18%, respectively. Wholesale and retail trade grew by 12.49%.

Banking loans to these four ‘bubble’ sectors which embodies the shopping mall, vertical (office and residential) properties, and state sponsored casinos accounts for 53.25% of the share of total banking loans.

Remember household final demand grew by a relative measly 5.1% and this partly has been backed by bank lending too. Bank lending to the household sector grew a modest 11.89% backed by credit card and auto loans 10.62% and 13.86%. Only 4% of households have access to credit card according to the BSP.

The explosive growth in bank credit can be seen both in the supply and demand side. But the supply side’s growth has virtually eclipsed the demand side.

So based on the 1^st quarter NSCB data the Philippine consumer story (provided we are referring to household consumers) has been a myth.

Basic economic logic tells us that if the supply side continues to grow by twice the rate of the demand side, then eventually there will be a massive oversupply. And if such oversupply has been financed by credit, then the result will not be nirvana but a catastrophe—a recession if not a crisis.

Given the relentless growth in credit exactly to the same sectors during the two months of April-May, statistical GDP growth will likely remain ‘solid’ and will likely fall in the expectations of the mainstream. The results are likely to be announced in August.

Prior to the Cyprus crisis of 2013, many Cypriots came to believe that this “time is different” from which many hardly saw the potential impact from a sudden explosion of public sector debt[25]

Unfortunately, a populist dream morphed into a terrifying nightmare.

BSP’s Wealth Effect: San Miguel as Virtual Hedge Fund

And for the moral side of the illusions of dream economy tale, given that only 21.5 of every 100 households have access to the banking sector, and as I previously explained[26], where domestic credit from the banking sector accounted for 51.54% of the GDP as of 2011, and also given that the wealthy elites control some 83% of the domestic stock market capitalization and where the residual distribution leaves 15-16% to foreigners while the rest to the retail participants, an asset boom prompted by BSP zero bound policy rates represents a transfer of wealth from the rest of society (most notably the informal sector) to the political class and their politically connected economic agents. 

This should be a good example.

Publicly listed San Miguel Corporation [PSE: SMC] recently sold their shareholdings at Meralco for $399 million[27] to an undisclosed buyer.

The BSP inspired Philippine asset boom has transformed San Miguel from an international food and beverage company into a virtual hedge fund which profits from trading financial securities of the highly regulated sectors of energy, mining, airlines and infrastructure.

The 32.8% sale of Manila Electric or Meralco [PSE: MER] and the prospective 49% sale of another SMC asset, the SMC Global Power Holdings, reportedly the country’s largest electricity generator with assets accounting for a fifth of the nation’s capacity, has been expected to raise at least $1.6 billion[28], according to a report from Bloomberg

SMC sales of its Meralco holdings extrapolate to a huge windfall. According to the same report, SMC has tripled return on equity from its conversion to heavy industries.

Moreover, SMC has acquired about 40 companies for about $8 billion which has been partly funded by leverage where “the company and its units have 272 billion pesos worth of debt due by 2018 and San Miguel has 152 billion pesos in cash and near-cash items, the data show.”

Asked by a reporter about the prospects of the sale, the SMC’s President Mr. Ramon Ang bragged “Does San Miguel need the money? No. We can always borrow to fund any opportunity.”

Obviously, a reply based on easy money conditions.

As explained in 2009, the radical makeover of San Miguel has been tinged by politics[29]. The energy, mining, airlines and infrastructure which the company has shifted into are industries encumbered by politics mostly via anti-competition edicts. Thus asset trading of securities from these sectors would not only mean profiting from loose money policies, but also from also arbitraging economic concessions with incumbent political authorities.

The viability of these sectors particularly in the energy and infrastructure (roads) are endowed or determined by political grants. For instance in the case of Meralco, the Office of the President indirectly determines the “earnings” of the company via the price setting and regulatory oversight functions of the Energy Regulatory Commission which is under the Office of the President[30]. The private sector operator of Meralco has to be in good terms, or has blessing of, or has been an ally of the President. These are operations which can’t be established by analysing financial metrics for the simple reason that politics, and not, the markets determine the company’s feasibility.

San Miguel’s new business model allows political outsiders to get into these economic concessions through Mr. Ang’s political intermediations which it legitimately conducts via “asset trading”. SMC’s competitive moat, thus, has been in the political connections sphere.

SMC has also been a major beneficiary from the BSP’s wealth effect and wealth transfer from zero bound rates and from the Philippine government’s highly regulated or politicized industries.

Nonetheless leverage build up for asset trading necessitates a low interest rate environment. Should interest rates surge, and asset markets fall, Mr. Ang’s $35 billion dream might turn into an unfortunate Eike Batista[31] story.

Mr. Batista, the Brazilian oil, energy, mining and logistics magnate was worth $34 billion and had been the 8^th richest man in the world a year ago.

Mr. Batista’s highly leveraged or indebted companies crashed to earth when commodity prices collapsed, and exposed such vulnerabilities. Debt deleveraging likewise uncovered the artificial wealth grandeur which has been embellished by debt.

Mr. Batista’s debt fiasco reduced his fortune to only $2 billion. At least he remains a billionaire.

Yet given his political connections, Mr. Ang may expect a bailout from his political patrons.

Risks remain high. Do trade with caution

---

[1] Reuters.com HIGHLIGHTS-Bernanke's Q&A testimony to House panel July 17, 2013

[2] Ludwig von Mises Theory of Money and Credit p.423

[3] See How Stock Markets React to Rising Oil Prices July 15, 2013

[4] Wikipedia.org Roaring Twenties

[5] Murray N. Rothbard, The Lure of a Stable Price Level, America’s Great Depression Mises.org September 13, 2011

[6] Frank Shostak, What Next for Treasury Bonds? May 03, 2010

[7] Steve H. Hanke, Rethinking Conventional Wisdom: A Monetary Tour d’Horizon for 2013, Energy Tribune January 23, 2013

[8] Wikipedia.org Divisia index

[9] Center for Financial Stability CFS DIVISIA MONETARY DATA FOR THE UNITED STATES, July 17, 2013

[10] Ed Yardeni Great Rotation? (excerpt) Yardeni.com July 16, 2013

[11] Bloomberg.com Bernanke Says Fed Bond Purchases Not on ‘Preset Course’ July 18, 2013

[12] Bloomberg.com Rupiah Drops for Record 11th Day as Central Bank Manages Decline July 19, 2013

[13] Wall Street Journal Thailand Cuts Growth Forecast as Global Weakness Hits Asia, July 19, 2013

[14] MSN.com IMF cuts 2013 global growth forecast July 9, 2013

[15] Business Mirror ADB cuts growth forecast for Asean July 17, 2013

[16] Philstar.com News Analysis: IMF raises growth forecast for Philippines but study shows income gap widens July 11, 2013

[17] See Phisix in the Shadow of Greed and Fear May 20 2013

[18] See Stock Markets and the Economic Disconnect: China Edition July 16, 2013

[19] Bloomberg.com China Home Prices Rise as Big Cities Post Record Gains July 18, 2013

[20] Bloomberg.com Record Downgrades Foreshadow First Onshore Default July 19, 2013

[21] Bloomberg.com Biggest Philippine Pension Fund Sees 9% Stocks Rally on Earnings July 17, 2013

[22] Wikipedia.org Government Service Insurance System Organizational Structure

[23] National Statistical Coordination Board, Highlights Philippine Economy posts 7.8 percent GDP growth May 30, 2013

[24] See How Volatile Bond Markets May Affect the Phisix June 3, 2013

[25] John Mauldin The Bang! Moment Shock Advisor Perspectives.com July 13, 2013

[26] See The Flaws of BSP’s Real Estate Monitoring and Banking Stress Tests May 20, 2013

[27] Wall Street Journal Money Beat Blog San Miguel Raises $399.5 Million via Sale of Meralco Shares July 18, 2013

[28] Bloomberg.com San Miguel Raising $4 Billion Will Fund Brewer’s Transformation July 12, 2012

[29] See San Miguel’s Shifting Business Model: Risks and Opportunity Costs January 25, 2009

[30] See Bubble Thoughts Over Meralco’s Bubble August 2, 2009

[31] BBC.com Eike Batista, Brazil's fallen billionaire July 11, 2013

A Coming Change in North Korea’s Politics?

Starving North Koreans appear to be forcing changes in the political sphere.

From Austrian economist Gary North at the Tea Party Economist:

The last bastion has fallen. The last hold-out is no longer holding out.  North Korea now allows collective farms to lease land to peasants. The peasants pay 30% of the crop to the collective.

This is sharecropping.  This is what the USA had in the South after 1865. This is a move to capitalism.

We can be sure of this: output will rise. This is what Deng did in 1978. He freed up agriculture. The boom began within a year.

Starvation is the mother of political invention.

The peasants will buy into this if they believe they will really get to keep 70%. It may take a couple of years to persuade them. They have reasons to be skeptical. They are suspicious. But if the collectives abide by the rules, Communism is finished.

The experiment has failed.

From Smartphones to the Internet of Things

The team at Lux Research foresees a transition from Smartphones to the Internet of things: (hat tip Lux’s founder/Forbes contributor Josh Wolfe) [bold original]

“Smartphones plateau and decline.” It could be the title of a scary summer shark flick for the electronics industry, but it’s a reality that a mounting body of evidence supports: handset sales, profits, app downloads, and even innovation itself are flatlining, hitting financials at Samsung and Apple (which both now spend more on patent litigation than R&D) while RIM, HTC, and Nokia struggle to survive at all. In the same process that desktops, notebooks, feature phones, PDAs, and every other information appliance in history has passed through, smartphones are poised to peak and then plummet between now and 2016, leaving electronics industry execs scrambling for the safety – the next big thing

So what are the next big things?

-Wearables includes Smart watches and glasses

-The Internet of Things (IOT) which comprises Low-cost computing, communications, and sensors

-Industrial IOT such as Smart buildings, water management and more

-The Lux team calls the “blue ocean strategy” the biggest promise of all. This is the networking things in motion. The things that move – from smart-textile garments and self-driving cars to robots and satellites

Read the rest here

The information age will continue to pave way for radical advances in creative destruction, disruptive- innovation technologies that will reconfigure people’s lifestyles, and thus the economic environment. For investors, these represent as profit opportunities to ponder at.

Humor: A Modest Bury-Dig Keynesian Employment Proposal

From Simon Black of the Sovereign Man:

Decades ago, John Maynard Keynes famously wrote in his book The General Theory:

“If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines. . . and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again. . . there need be no more unemployment.”

To Keynes, all that mattered was that people were employed doing something, anything. The quality of employment didn’t matter.

Clearly this line of reasoning worked out well for the Soviets; as was said of their economic system producing mounds of left boots with no right boots, “We pretended to work, and they pretended to pay us.”

Today, famous Nobel Prize-winning economists like Paul Krugman echo Keynes’ sentiment.

Krugman has even suggested that spending trillions of dollars to defend against a phony alien invasion would save the economy.

This, coming from a man who has won society’s most ‘esteemed’ prize for intellectual achievement.

Given several years of a ‘print money with wanton abandon’ monetary policy, it seems like Ben Bernanke goes to bed at night with Keynes’ General Theory on his bedside table.

But following these principles, Mr. Bernanke has backed himself into a corner. He has printed so much money that the mere suggestion of scaling back his bond-buying program sends financial markets roiling.

He’s now forced to speak from both sides of his mouth– on one hand suggesting that he will “taper”, and on the other hand that the Fed is “by no means on a preset course.”

In other words, they have no plan or exit strategy. They’re just making it up as they go along.

Bernanke further claims that his money printing and bond buying will remain in effect until the unemployment rate falls dramatically.

This is a perplexing qualifier since unemployment remains quite high despite trillions of dollars created over the last few years.

Considering that the ‘quality’ of jobs doesn’t matter in this Keynesian worldview, though, I’ve come up with a simple idea.

The Fed is now printing $85 billion / month… roughly $1 trillion annually. So if they really want to move the needle, I propose that Mr. Bernanke cuts out the middleman (i.e. the ‘economy’) and hires workers himself.

To do what, you might ask?

Count. Specifically, count the amount of money he’s creating.

It’s simple. You assign everyone a range of numbers and have them count as he prints.

On average (I’ve tested this), it takes about 5-6 seconds per number.

Sure, one two three four is quick. But how long does it take to say 16,847,512,971…? (You’re saying it right now, aren’t you?)

I’ve calculated that it would take a special workforce of roughly 1 million people, including supervisors and support staff, in order to count the amount of money that Mr. Bernanke is creating.

This assumes that these folks count eight hours per day, with two weeks of paid vacation and ten federal holidays. This is, after all, a cushy financial sector job.

At $50,000 per worker, Bernanke would be adding substantially to the economy… not to mention really moving the needle on the unemployment rate.

“Oh but this is ludicrous…” Of course it is. And so is conjuring trillions of dollars out of thin air to monetize the debt.

And it’s a hell of a lot easier than putting together an alien invasion hoax. Besides, I’m sure the government could never bring itself to stage a false flag operation. Not in the Land of the Free… right?

US Part Time Jobs: Obamacare and Regime Uncertainty

Dr. Ben Bernanke and his team at the US Federal Reserve appears to be in a quandary over the surge of part time jobs.

From the Bloomberg:

The number of workers holding full-time positions fell in the U.S. in June as part-timers hit a record after rising for three straight months, according to the Bureau of Labor Statistics household data. Part-time employment has been outpacing full-time job growth since 2008. Economists cite still-tough economic conditions as the root cause, with some saying President Barack Obama’s 2010 health-care law exacerbates the trend.

U.S. Federal Reserve Chairman Ben Bernanke told a House committee July 17 that policy makers consider underemployment, which includes part-time workers who want full-time jobs, one of the gauges of labor-market strength…

The number of part-time employees in June rose by 360,000, the Bureau of Labor Statistics reported, based on its survey of households. Full-time workers fell by 240,000, erasing much of the gains from April and May. The share of Americans who work part-time for economic reasons, meaning they can’t find full-time jobs or because their hours have been cut, is 78 percent higher than in December 2007, when the 18-month recession began.

So what the mainstream sees as “strong” economic growth has been founded by part time jobs.

The charts above from Zero Hedge shows of how part time jobs came at the expense of full time jobs last June.

Importantly, much of the new jobs comes from the low wage segments of the service industry, particularly leisure and hospitality, retail trade and education,  health and other temp jobs, as observed by  the Zero Hedge.

Talk about economic "vigor".

Asked whether Obamacare has contributed to the part time jobs, from the same Bloomberg article (bold mine)

“It’s hard to make any judgment,” Bernanke said when Stutzman asked if the Patient Protection and Affordable Care Act’s mandates are slowing the economy. Bernanke said that it has been cited in the economic outlook survey known as the Beige Book, which the Federal Open Market Committee considers in assessing the economy.

“One thing that we hear in the commentary that we get at the FOMC is that some employers are hiring part-time in order to avoid the mandate,” Bernanke said. He added that “the very high level of part-time employment has been around since the beginning of the recovery, and we don’t fully understand it.”

For the official whose opinions and decisions moves the global financial markets and likewise plays a significant role in influencing activities on the main street and on the global economy, “we don’t fully understand it” looks really very reassuring. This means that “we don’t fully understand it” has been the basis of all grand experimental policies being conducted by the FED.

[As a side note: Dr. Bernanke applies the same concept on gold prices, stating that “Nobody really understands gold prices and I don’t pretend to understand them either” but curiously has the audacity to make conclusions on gold prices based on his “non-understanding”]

I believe that the crucial changes in the character of US employment has been related to the record cash pileup by US non-financial corporations

As the Wall Street Journal noted in June, (chart from creditwritedowns.com)

The Federal Reserve reported Thursday that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.

Both variables, the reluctance to invest (as expressed by huge cash holdings) and the change in the character of the US labor force, have been products of regime uncertainty. 

Regime uncertainty as defined by Austrian economics professor Robert Higgs represents the “pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights”

On whether Obamacare has been responsible for such trend changes, Dr. Bernanke’s adroitly fudges the issue by referring to “the beginning of the recovery”.

The reality is that the Patient Protection and Affordable Care Act (PPACA) or the Affordable Care Act(ACA), popularly known as Obamacare was signed into law in March of 2010, basically “the beginning of the recovery”. 

Some provisions of the said law has been slated for January 2014 and the rest in 2020 according to Wikipedia.org  [Update: The US house of representatives has just voted to delay the implementation of the Individual mandate]

As I pointed out in the past, Obamacare comes with 21 new or higher taxes.

And small businesses are the main sector that appear to be hardly affected.

Small businesses have been the heart of the US economy. According to the National Small Business Association, 

-Small business represents 99.7 percent of all employer firms.

-In 2010, there were an estimated 27.9 million small businesses in the U.S.—5.9 million with employees and 21.4 million without employees.

-Small businesses employ about half of the country’s private sector workforce.

- Small firms accounted for 64 percent or 9.8 million of the 15 million net new jobs created between 1993 and 2011.

Yet from a recent survey conducted by the US Chamber of Commerce, “unease around Obamacare appears to be increasing among small businesses” according to the Huffington Post.

In a survey conducted by National Federation of Independent Business (NFIB) last June, small business optimism continues to be plagued by taxes and government regulations and red tape

As the NFIB chief economist William Dunkelburg wrote (bold highlights mine)

The economy remains “bifurcated”, with the big firms producing most of the GDP growth with little help from small business. That balance is shifting, but unfortunately because larger firms are losing ground, not because small business is growing faster. Housing and energy are helping, and that does involve a lot of small businesses but the rout in housing was so severe that there are now supply constraints developing in new home construction due to lost capacity that cannot be easily reconstituted. Home prices are now increasing at double digit rates. Consumer net worth is allegedly doing well due to stock prices and house prices rising. But the quantity of items held, real wealth (houses, cars, fractions of a company owned), is not increasing that fast, just the prices. Been there, done that.

While US government sponsored surveys or the US Federal Reserve of Philadelphia and Minneapolis says that only a small portion has been affected by Obamacare, circumstantial developments (part time jobs and high cash by non-financial corporations due to reluctance to invest) says otherwise.

Nonetheless, “Big firms producing most of the GDP growth with little help from small business” has been a common feature in today’s QE-ZIRP based global financial economy where monetary policies have been engineered to buoy asset markets (stocks, real estate) via credit fueled destabilizing speculations (bubbles).

The reality is that the Dr. Bernanke's policies has substantially been responsible for these. FED easing policies combined with Obamacare and the increased regulatory mandates (the Federal Register is now over 81,000 pages long. Obamacare has 906 pages, Dodd Frank has 849 pages) and aside from a surge in taxes (US tax code now 72,000 pages) all contributes to the uncertainty over the investor’s property rights, hence the lack of commitment to invest and the corresponding changes in the hiring and employment dynamic.

Detroit: US Largest City to File for Bankruptcy

As US stock markets soar to record highs, Michigan’s most populous city of Detroit once the cradle of the US automobile industry files for bankruptcy

From the BBC:

The US city of Detroit in Michigan has become the largest American city ever to file for bankruptcy, with debts of at least $15bn (£10bn).

State-appointed emergency manager Kevyn Orr asked a federal judge to place the city into bankruptcy protection.

If it is approved, he would be allowed to liquidate city assets to satisfy creditors and pensions.

Detroit stopped unsecured-debt payments last month to keep the city running as Mr Orr negotiated with creditors.

He proposed a deal last month in which creditors would accept 10 cents for every dollar they were owed.

But two pension funds representing retired city workers resisted the plan. Thursday's bankruptcy filing comes days ahead of a hearing that would have tried to stop the city from making such a move.

A Wall Street Journal report estimates “Municipal-worker retirees are set to get less than 10% of what they are owed under the plan.” Ouch.

Detroit's riches to rags synopsis from the same BBC article:

The city, once renowned as a manufacturing powerhouse, has struggled with its finances for some time, driven by a number of factors, including a steep population loss.

The murder rate is at a 40-year high and only one third of the its ambulances were in service in early 2013.

Declining investment in street lights and emergency services have made it difficult to police the city.

And Detroit's government has been hit by a string of corruption scandals over the years.

Between 2000-10, the number of residents declined by 250,000 as residents moved away.

Detroit is only the latest US city to file for bankruptcy in recent years.

In 2012, three California cities - Stockton, Mammoth Lakes and San Bernardino - took the step.

In 2011, Harrisburg, Pennsylvania tried to file for bankruptcy but the move was ruled illegal.

But Thursday's move in Detroit is significantly larger than any of the earlier filings.

Detroit ranks 9th in terms of highest taxes based on US cities according to the Marketwatch.com. On the obverse side of high taxes has been unsustainable government spending from bureaucracy to welfare.

From Reuters:

Detroit's state and local tax burden as a percentage of annual family income surpassed the average for other large U.S. cities. For example, the tax burden at the $25,000 income level was 13.1 percent in Detroit versus an average of 12.3 percent.

Buss said that Detroit has seen a significant expansion in deficit spending over the last two years, reaching an accumulated $326.6 million at the end of fiscal 2012 from an accumulated deficit of $196.6 million in fiscal 2011. The city has had a budget deficit every year since 2003…

Total revenue in Detroit has fallen sharply over the last 10 years by over $400 million or 22 percent, according to the analysis. State revenue sharing has also been cut, although the city, which accounts for 7 percent of the state's residents, gets by far the biggest amount on a per capita basis -- $335 per resident -- far more than other Michigan cities with populations over 50,000.

Half of Detroit's top 10 employers are governmental entities, led by the city itself with nearly 11,400 workers, down from 20,800 in 2003, followed by the Detroit Public Schools at 10,951, the report said. Two health care systems and the federal government round out the top five. Chrysler, the only automaker in the group, ranks eighth, employing 4,150 workers, a drop of more than a half from 2003.

Also part of the decline of Detroit has attributed to “raced based” policies which sparked a “White Flight” according to economist Walter Williams.

Local politics shaped by labor activism or labor unions likewise compounded on the loss of competitiveness.

So Detroit seems as the US version of Greece: declining economy predicated on the lack of competitiveness shaped by repressive social policies and by excess political baggage via the welfare and bureaucratic state.

Detroit signifies a harbinger for a world addicted to debt based 'political' consumption spending.

Nonetheless The USA Today lays out “What happens next” or the possible legal steps on the Detroit Bankruptcy 

And furthermore, while Detroit represents the largest city or the largest municipal bankruptcy in history, there are yet other local troubled spots (graphic from New York Times).

Yet if the current inflationary boom in the US morphs into a bust, then we will see even more candidates similar to Detroit. 

Worse, even the US government is at the risk of becoming a Detroit, especially if interest rates (as expressed by the bond markets or of the return of the bond vigilantes) continue with its upside trek.

Mayhem in the US Treasury Markets, No Problem, China to the Rescue!

When you're down and troubled and you need a helping hand and nothing, whoa, nothing is going right.

Close your eyes and think of me and soon I will be there to brighten up even your darkest nights. —James Taylor, You’ve got a friend

China’s government has played the role of “savior” to what could have been a US treasury market crash last May. 

As the US Treasury markets seized up, the Chinese government added $25.2 billion to its US treasury holdings which represents the highest hoard ever.

From China Daily USA:

China, the biggest creditor to the United States, increased its holdings of US Treasury bonds by 2 percent in May to $1.32 trillion, even as foreign demand for the bonds fell for a second consecutive month, according to the US Treasury.

China had increased its holdings of US bonds by 1.6 percent in April, which was revised higher after an initially 0.4 percent drop. Japan, the second-largest buyer, trimmed its holdings 0.2 percent to $1.11 trillion in May…

US residents increased their holdings of long-term foreign securities, with net purchases of $27.2 billion, while foreign investors decreased their holdings by $39.2 billion, said the Treasury report.

The sum total in May of all net foreign acquisitions of long-term securities, short-term US securities, and banking flows was a monthly net of $56.4 billion, said the Treasury Department. Net foreign private inflows were $46.6 billion, and net foreign official inflows were $10 billion.

TIC data shows that total foreign ownership of USTs reached a fresh record of $4097.9 billion in May, surpassing the February highs of $4097.4. 

China’s additional acquisition of $25.2 billion of USTs has been the swing factor. This implies that China’s actions played a crucial role in providing counterbalance to the resurfacing of the bond vigilantes. [The Philippines joined the "you've got a friend" movement adding $.2 billion last May]

This also demonstrates of the deepening dependency by the US government on her Chinese counterpart.

Austrian economist Gary North explains;

The U.S. government is running about a $650 billion deficit this fiscal year. The People’s Bank of China is doing its part to help out. It just bought another $25 billion of this deficit last month.

Why is it doing this? To hold up the value of the dollar.

Why is it holding up the value of the dollar? To make it less expensive for Americans to buy goods made in China.

But then protectionists in Congress scream bloody murder, because China is subsidizing exports to Americans. Then they vote for federal spending that runs a huge deficit. So, in order to hold down government interest rates, the Treasury Department must find buyers of this debt, other than the Federal Reserve System. The Chinese central bank is a large buyer.

So, every time Senator Chuck Schumer of New York insists that China must be stopped from rigging its currency, he is really saying that the Chinese central bank should stop buying IOUs issued by Congress. Then he votes for another spending program.

The Chinese central bank creates money out of nothing, just as the Federal Reserve does. Then it takes this newly counterfeited money and buys U.S. government debt, just as the Federal Reserve does. It bought $25 billion of this debt last month. The Federal Reserve bought $45 billion. So, when it comes to currency-rigging, which central bank is the greater culprit?

This is the race to the bottom. Which central bank will destroy its currency first? Or, if the central banks decide not to inflate any more, which central bank will cease counterfeiting money, thereby causing an economic depression?

The two economies, China’s and America’s, are addicted to the drug of fiat money. The first central bank to quit counterfeiting — the first one to “taper” — starts the international recession. Which will it be?  The first one to stop inflating permanently will turn the recession into a depression. Which will it be?

In May of 2012, the Chinese government has been given direct access to the US Treasury which basically bypasses the crony Wall Street. That reveals of the significance of the US-China relationship.

Such dependancy extrapolates to a Dr. Jekyll and Mr. Hyde relationship where on the financial front, the US and the Chinese government have been operating stealthily as staunchest allies, as against the geopolitical front, which media paints both parties as nemesis or adversaries.

The implication as I wrote a year ago:

Of course the inference from the above statement is that the Scarborough Shoal controversy has been mostly a false flag. What you see isn't really what has been. Politicians and media has taken the public for a ride at the circus.

I would add that not only has the media portrayed conflict between US-China been to promote the military industrial industrial complex, it serves as convenient pretext for the political class of these respective nations involved in territorial disputes, to expand control on their constituents via more financial repression, more taxes, more regulations and other forms of political control...all in the name of nationalism. 

At the end of the day, the world operates in a gamed system.

Behavioral Bubbles and the Business Cycle

Writing at the Project Syndicate, Yale professor of economics and author of Irrational Exuberance Robert Shiller sees bubbles in Columbia and many parts of the world.  (hat tip Zero Hedge) [all bold mine]

From the world of rational expectations and efficient market hypothesis, Mr. Shiller points out that bubbles do not exist

This raises the question: just what is a speculative bubble? The Oxford English Dictionary defines a bubble as “anything fragile, unsubstantial, empty, or worthless; a deceptive show. From 17th c. onwards often applied to delusive commercial or financial schemes.” The problem is that words like “show” and “scheme” suggest a deliberate creation, rather than a widespread social phenomenon that is not directed by any impresario.

Maybe the word bubble is used too carelessly.

Eugene Fama certainly thinks so. Fama, the most important proponent of the “efficient markets hypothesis,” denies that bubbles exist. As he put it in a 2010 interview with John Cassidy for The New Yorker, “I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”

Contra EMH, Mr. Shiller says that bubbles are not rational

In the second edition of my book Irrational Exuberance, I tried to give a better definition of a bubble. A “speculative bubble,” I wrote then, is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” This attracts “a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

That seems to be the core of the meaning of the word as it is most consistently used. Implicit in this definition is a suggestion about why it is so difficult for “smart money” to profit by betting against bubbles: the psychological contagion promotes a mindset that justifies the price increases, so that participation in the bubble might be called almost rational. But it is not rational.

The story in every country is different, reflecting its own news, which does not always jibe with news in other countries. For example, the current story in Colombia appears to be that the country’s government, now under the well-regarded management of President Juan Manuel Santos, has brought down inflation and interest rates to developed-country levels, while all but eliminating the threat posed by the FARC rebels, thereby injecting new vitality into the Colombian economy. That is a good enough story to drive a housing bubble.

Because bubbles are essentially social-psychological phenomena, they are, by their very nature, difficult to control. Regulatory action since the financial crisis might diminish bubbles in the future. But public fear of bubbles may also enhance psychological contagion, fueling even more self-fulfilling prophecies.

And bubbles eventually pop…

One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.

It would seem more accurate to refer to these episodes as speculative epidemics. We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.

This is what happened in the bull market of the 1920’s in the US, with the peak in 1929. We have distorted that history by thinking of bubbles as a period of dramatic price growth, followed by a sudden turning point and a major and definitive crash. In fact, a major boom in real stock prices in the US after “Black Tuesday” brought them halfway back to 1929 levels by 1930. This was followed by a second crash, another boom from 1932 to 1937, and a third crash.

Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

In the real world, speculative bubbles operate on cycles. A boom is followed by a crash. Why there seems to be “no final denouement” on these episodes has been that policy responses to bubble crashes has been to “reflate” unsustainable bubbles, ergo the repetition, the cycles. Social policies have essentially been designed to prevent the market clearing process.

The other reality is that the “social-psychological” phenomenon of every bubble is a symptom rather than a cause, since peoples actions does not emerge from a vacuum. The behavioral aspect represents a narrative of people’s reactions to a largely “unseen” stimulus which prompts the “herding or lemming effect” and thus resulting to “irrational exuberance” or speculative bubbles.  

Yield chasing actions, thus are “rational” from an individual’s ex-ante point of view and “irrational” from an “ex-post” (hindsight is 20/20) perspective or from a third party interpretation of an evolving bubble, similar to me or to Professor Shiller.

In other words, "rationality" represents the time inconsistent dilemma on the individuals and on the markets. And that the yield chasing dynamic attendant to these events signify as the immediacy effect or temporary discounting.  

Another reality is that grand bubbles will hardly exist WITHOUT resources fueling them.

Thus the limitations of people’s highly exuberant behavior and actions or “speculative bubbles” will ultimately depend on the limits of resources that enables and facilitates such activiites. 

As Austrian economist Roger W. Garrison explained, first "you can’t just spend expectations" and importantly, (bold mine)

individuals who are in possession of increased money balances and who have correct, or rational, expectations still may not spend in a pattern consistent with the New Classicist view. A spending pattern that is internally inconsistent on an economywide basis does not necessarily imply inconsistency for the individual. That is, macroeconomic irrationality does not imply individual irrationality. An individual can rationally choose to initiate or perpetuate a chain letter—sending one dollar to the person on the top of the list, adding his name to the bottom, and mailing the letter to a dozen other individuals—even though he knows that the pyramiding is ultimately unsustainable. Similarly, it is possible for the individual to profit by his participation in a market process that is—and is known by that individual to be—an ill-fated process. So long as it is possible to buy in and sell out before the process reverses itself, rational expectations may exacerbate rather than ameliorate the misallocation of resources induced by monetary expansion.

To repeat, people’s actions doesn’t operate on a vacuum. 

Social policies are hardly neutral, they shape people's incentives and action. Monetary policies via credit expansion serve as the fuel for every bubble.