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The Economic Tsunami that has Begun and the Drive for Cash

The Economic Tsunami that has Begun and the Drive for Cash

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4 years ago

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With swarms of locusts in Africa and the Middle East and a particularly virulent virus spreading around the globe, the coming crisis may feel like the end of days. An economic tsunami has been unleashed. A consensus appears to be emerging among economists of the largest contraction in global GDP in a generation. Separately, but partly related as well, oil prices have cratered to nearly $20 a barrel last week, the lowest in 18-years. Central banks are trying to head-off or mitigate the financial shock waves.

To be sure, the response by governments and central banks has been evolving as the magnitude of the challenge has become clearer. Rate cuts and asset purchases have been widely announced, though notable, countries with negative rates have not opted to cut them deeper. Many of those that were above the zero-bound, like the US, UK, Australia, New Zealand, Canada, and Norway moved aggressively. Liquidity injections were made, and asset purchase programs were re-launched or, as in the ECB's case, dramatically extended. In two emergency moves, i.e., between meetings, the Fed went from the economy and policy were in a "good place" to 125 bp rate cut, $700 bln long-term asset purchases, and new facilities to support commercial paper issuers, money market funds, and primary dealer lending.

Fiscal policy, too, has been brought into action. Increasingly, global leaders, including in the US, are going to war-footing. In this emergency, self-imposed constraints are being re-thought. On top of a trillion dollars a year deficits before the health crisis, the US is putting together a package of around $1.2 trillion. Two significant components stand out, direct payments to individuals (which ultimately could be means-tested) and aid to impacted industries. There may also be a payroll savings tax cut, but faces bipartisan opposition (it is regressive, shifts problem to underfunding social security, and there are arguably more effective ways to boost consumption). Another package that includes direct assistance to state and local governments is likely to be required at some point.  

When everything is said and done, officials are responding relatively quickly to the emerging economic and financial fallout.  The benefit of the 2008-2009 experience and response is helping in many respects. Many non-conventional tools had been developed and are being dusted off.  Yet the magnitude of the problem is greater than in past crises, and some measures of volatility have already outstripped the high seen a decade ago.

A significant part of the economy is shutting down. Consider that the hospitality industry, broadly defined to include air and ground travel, hotels, restaurants and bars, casinos, sporting events, performing arts, is about 14% of the US GDP. Auto production is coming to a standstill in the US and Europe. It is around 3.5% of US GDP. There may be some substitution that takes place; grocery and liquor sales rise. Still, as a ballpark effort to think about the coming economic downturn, at least 20% of the economy may be zeroed out for a bit. Hospitals and the medical industry may be one of the only sectors that grow, and health care is about 18% of the US economy.

A small taste of what is to come was seen in the US weekly initial jobless claims. The 70k jump in the week through March was the largest non-weather related spike in percentage terms. Many economists were surprised by how quickly the layoffs hit, but the report covering this week (March 26) is likely to surge further. Weekly jobless claims peaked during the Great Financial Crisis at 665k. We should be prepared to see this surpassed by several magnitudes in the coming weeks. Reports indicate that around 500k people in Canada sought unemployment compensation last week, compared with 27k in the year-ago week.  

Returning to that simplified look, the hospitality industry employs nearly 10% of the US workforce or roughly 13.8 mln full-time equivalents. When the tech bubble popped, the unemployment rates peaked (2003) near 6.3%. During the Great Financial Crisis, it reached 10%.  Unemployment was at 3.5% in February.  Those levels are most likely to be surpassed.  

Much of the high-frequency data has been superseded by events. The week ahead will see the flash PMI readings. They will begin giving a sense of the coming economic hit. In February, the eurozone composite PMI was 51.6 (manufacturing was still below the 50 boom/bust level at 49.2). A reading in the low 40s would ought not to surprise. The US composite was at 49.6 in February, the lowest in years. The question now is the magnitude of the decline. The NY and Philadelphia Fed surveys point to a dreadful number. The UK composite PMI in February was at 53.0, It had risen sharply from 49.3 in November and December after the election. Japan's composite PMI had been recovering from the October tax hike and tsunami to poke back above 50.0 in January before falling to new lows (47) in February, perhaps the Lunar New Year effect and the preliminary hit from China.  

II

The dollar soared last week, rising no less than 3% against all the major currencies. Norway's krone was an outlier. Its nearly 14% decline was more than twice as large as the second weakest, the Australian dollar (-6.5%). Threats by the central bank to intervene, and counter-intuitively, an unexpected 75 bp rate cut ahead of the weekend (bringing the deposit rate to 25 bp) seemed to help it steady briefly, but as the stock market and oil chopped lower, the krone stability proved illusory. 

There are two broad explanations of the dollar's surge. The first and seemingly, the main view is that the dollar is a safe-haven. A recent Wall Street Journal headline captured this idea: "Dollar Surges as Investors Seek Shelter."  There is a sort of commonsense appeal.  In this incredibly uncertain and unprecedented time, people, companies, and financial institutions are hoarding dollars. The US remains the world's largest economy, the deepest capital markets, and despite the knocks, remains the most important currency in the world, the numeraire. 

The other explanation digs deeper into the role of the dollar in the international flow of capital and goods and services. The US currency is often borrowed in financial transactions to purchase other assets. When the assets, like stocks, bonds, or even gold, are sold, the dollars have to be repaid. It is a fixed amount of dollars that have to be repaid regardless of how the asset price, including the foreign exchange translation, has been impacted. Many supply-chains are financed with dollars, and as trade slows, those dollars will be returned, in effect. Depending on how it is measured, there is between $12 trillion and $14 trillion in dollar-denominated liabilities.  

It is understandable why US banks are reluctant to lend. Their sources of revenue, like advisory, underwriting, M&A, have dried up, and many small and medium-sized businesses will need some kind of relief (to avoid allowing what begins off as a liquidity issue turning into a solvency issue).  Larger enterprises are drawing down their credit lines.  

Several different channels can be accessed for dollar funding. During the Great Financial Crisis, the Federal Reserve offered swap lines to numerous central banks that would then auction them to the foreign banks to allocate. The swaps lines worked then and were one of the under-appreciated crisis-mitigating tools.  he Federal Reserve made several of the swap lines permanent. However, the premium was not particularly attractive (overnight index swaps plus 50 bp), and swap lines were largely dormant. 

The Fed has made three moves in the past week. First, it cut the premium to 25 bp and offered a longer-duration facility (84-day funds complementing the seven-day swap). This applied to the six banks for which swap lines were permanent. Second, the Federal Reserve offered temporary swap lines to a wider-range of countries, including several emerging markets, such as Mexico, Brazil, Singapore, and South Korea. Third, before the weekend, the Fed offered the central banks with permanent swap lines (ECB, BOJ, BOE, BOC, and SNB) a temporary daily rather than weekly seven-day swap auction. 

The idea is that the provision of those dollars will satisfy the demand, which arguably was amplifying the disruption. While for the euro, yen, and sterling cross-currency swaps normalized, it did not alleviate the immediate upward pressure on the dollar. Unlike during the financial crisis, the problem now is not counter-party risk but the access to cash dollars. The dollar made new highs against the euro, yen, sterling, and Swiss franc after the swap lines were drawn upon last week.  

If swaps do not work to ease the pressure, additional steps on the escalation ladder may be necessary. Both the Reagan-Volcker dollar rally in the first half of the 1980s and the Clinton-Rubin rally of the second half of the 1990s ended with coordinated intervention. Unlike the previous experience, other major central banks do not appear nearly as concerned about currency weakness.  

Several central banks from emerging market countries have intervened directly and through offering fx swaps or options themselves. The Philippines closed its markets for a couple of days last week, and it still fell 17.5% for the week, which turned out to be among the worst in the world. Unilateral action is another rung in the escalation ladder, but its effectiveness is questionable, after a surprise or headline effect. It is tempting for some officials, like Norway's Norge Bank to verbally threaten intervention, it might work once briefly, but it loses the element of surprise and tempts speculators to "ask to see the money." Also, in Norway's case, the low risk of intervention outside of its time zone may encourage speculation against Nokkie after its markets close.  

***

There is great uncertainty as we, the entire world, deal with something, and on a scale that is unprecedented. It is frankly frightening. In this difficult time, I find it comforting to recall historical examples where, after a slow beginning, incredible progress was made. It is almost as if Hemingway's description of how bankruptcy happens is applicable to this experience: gradually and then suddenly. The North in the US Civil War, the US in the Great World War, and in the race to the moon, are specific American examples that come to mind, but of course, there are countless examples from all over the world.   

The large machinery of large modern organizations may take a bit of time to get going, but then they do. Incredible results are possible, and it does appear that over the past week or so,  as the magnitude of the challenge has become clearer, the large machinery is beginning to turn. Prior views and convictions are being questioned, and the previous redlines, like Germany's black zero budget, will be overcome by the need for bold action. Broad swaths of the world are going on war-footing to combat the virus, some civilian capacity will be re-tooling to make ventilators or masks, to developing vaccines all in numerous countries, and beginning the serological work of immunity testing. 

Of course, statecraft continues as national interests are pursued, and businesses and investors have to consider the future, but rarely has there been such a global effort driven by a single purpose. In this dark time, do not discount human ingenuity and the power of lifeboat ethics.   




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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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2 hours ago

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March 9, 2024

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

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17 hours ago

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March 8, 2024

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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250


Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  

2-US_Job_Quits_Rate-1-2

3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 




From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:

IMG_5092

In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%
IMG_5093_320f22

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…

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17 hours ago

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March 8, 2024

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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