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Thursday, July 19, 2012

Searching For Good News In All The Wrong Places

Well, continued claims tell an uncomfortable story. Last week's initial claims report looked good, but was attributed to seasonal factors and auto manufacturing changes (which were good news in and of themselves). However this week's report has given back all that goodness, and also continues the string of continued claim rises. Plus, the headline number will be revised upward next week.

I'm more concerned about the story the slow rise of continued claims may be telling. After all, initial claims just tell us about lay-offs. They don't tell us whether the rest of the economy is expanding enough to pick up the slack.

Unfortunately, at the end of March SA continued claims had dropped into the 3,2 range for the first time. They rebounded over the following two weeks to the low 3,3s, and then fell into the 3,2s and remained there until late May. Since then they have rebounded to the 3,3s consistently. Labor market conditions are definitely worsening somewhat, and this is a negative consistency which doesn't promise well for Q3, nor for the employment reports in July and August.

Now add to that the negative externals, and the picture is quite disturbing. Food prices are on the rise. Commodity speculation is being fed by easing moves from central banks, the expectation of further such moves, and real-world factors such as a poor monsoon in India and widespread drought in the US farm belt. China has been experiencing a multi-year drought in some of its fertile farmland. As for oil, the Iranian embargo etc is being used as an excuse for upward movements. But the reality is that commodities get a relative boost when stocks are constrained by the profit picture and government bonds have already collapsed their yields. Money is flowing to the places of least resistance.

This all implies price increases, but it's clear that consumers can't handle price increases, so we are in the land of economic compression and fracture. The commodities are a sucker bet.

But we're probably screwed. Only a quick drop in prices could have prevented the diffusion in weakness which would slowly further erode the employment picture in the US. And the US remains one of the world's bright outliers, growth wise. 

Existing home sales aren't going anywhere this summer, so exuberance is out.

What happens to the official unemployment level now depends more on retirements and other exits from the workforce than anything else, but if all else were remaining static, the unemployment level would now be rising. 

The European thang isn't going to get any better. It can only get worse. Greece is going, Italy will either blackmail Germany into coughing up or it will go, and Spain may have to go now, which is a pity, but could work. But we're looking at severe disorder NO MATTER HOW IT PLAYS OUT. Germany might agree to pay off Italy. If it does, Germany's bonds are going to plunge in value. Greece has no options - it can't raise revenue in a meaningful way.

Droughts - well, they are real, and it's up to mother nature. Historically speaking, sacrificing virgins never worked very well, so whatever happens, happens. It is a real constraint, and it comes at a bad time. 

Oil prices are almost deranged right now, but the money has to go somewhere. 

Historically speaking, the Fed does not like to announce big moves right in front of an election. It looks like electioneering. Further, the bond purchase program the markets are waiting for would be an economic negative for consumer spending, because it would go into commodities in preference to stocks. Commodity prices are probably the primary force dragging this economy into the ground.

Further, the Fed must be very careful. The best stimulus it can generate for the economy is low long rates. It has achieved that, although home sales show the limits of such a stimulant, and bond purchases may tend to increase those long rates. Also, core inflation remains high, and that indicates that a seemingly low CPI is labile and that the Fed can easily juice it. 

Lastly, the negative effects of a bond purchase program can be somewhat undercut by a weaker dollar which juices exports. However, in the current global environment any such effect will be muted. 

This economy, both in the US and globally, is trying to come into balance. Trying to destabilize the gyros is not a brilliant move. 

Philly Fed Survey remains in deep slump:

Last week's initial claims report looked good, but was attributed to seasonal factors and auto manufacturing changes (which were good news in and of themselves). However this week's report has given back

Initial Claims Danger v.6

Not liking that blue trend!
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