Payroll Friday Strikes Again

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

With the lunacy of “payroll Friday” on full display, it isn’t much of a surprise to get overwhelmed by commentary that totally upends what investing used to be. There once was a mythical relationship that spanned and nurtured between stocks and the real economy. The former was representative about what to expect in the latter, and the latter benefited from that closer relationship. Over the decades of the eurodollar system advance and interest rate targeting and general central bank activism, the relationship flipped, flopped and may no longer generally apply.

Recognizing that isn’t especially insightful in 2015, but that is just further confirmation for how far (or low) economic conditions have been bastardized by the single-minded purpose of central banks toward nothing but debt and indebted finance. To wit:

“Probably best scenario in which the market was hoping for growth but not (so strong) that the Fed needs to hike in June,” said Ryan Larson, head of U.S. equity management at RBC Global Asset Management (U.S.).

With even Janet Yellen (JANET YELLEN!) publicly “shaming” stock markets that she herself had a great hand in supersizing, common sense and basic logic would dictate, demand, that the US go through the most spectacular growth period in history. Tepid growth won’t do from here, as record highs and historically stretched valuations don’t turn more “normal” through unstable growth; it’s either a full-blown boom or the more historically-conforming and greatly unsettling way of reverting to the mean.

In this particular case, even the Establishment Survey will no longer due. It’s more recent stumbles are starting to suggest that last year was, in fact, nothing but a statistical mirage. There is already the high degree of incongruity poking through as retreating productivity, but there is still no transition from these assumed jobs into wages and then spending (all that “demand” monetarism has been targeting, conspicuously without success, for almost eight years now). At some point, even S&P 500 companies will need revenue growth if only to supplement leveraged stock repurchases.

Despite strong job creation data for April, wage numbers are still weak and point to an economy that is still wobbling, Mesirow Financial chief economist Diane Swonk said Friday.
Average hourly earnings rose 2.2 percent from a year ago, although only by 3 cents to $24.87 from March, the Labor Department said Friday.
“The porridge is still too cool from my perspective and certainly from the Fed’s perspective and that’s why you are not going to see a June rate hike,” she said on CNBC’s “Squawk on the Street.”

The contradiction at the heart of that romantic monetary scenario should be more obvious, but the conventions of orthodox interpretations prevent observation from being observation. Economists are still, somehow, talking about “slack” in the economy when last year was supposed to have erased it. It seems clear that these conventional notions about “slack” no longer hold to the meaning of the actual word.

Such “strong job creation” came with only a tepid increase in the labor force, which has continued to shrink in 2015. Apart from that massive discontinuity in January (+1.05 million), the labor force has declined for the entire time that job creation has been reported at multi-decade highs.

Even for April, the questions abound as to what exactly businesses were doing. While the Household Survey rose much less than the Establishment Survey, the count of full-time jobs, the major deficiency in all of this, subtracted by 252k though supposedly offset by a gain of 437k in part-time positions. While neither of those figures are near accurate enough, the persistence of the full-time “problem” over this entire time explains almost everything about the economy outside the orthodox perceptions (and why that perception never seems realistic).

Russell Napier Explains What’s In Store For Gold If Cash Is Outlawed

Submitted by Tyler Durden  –  ZeroHedge

By Russell Napier of the Electronic Research Interchange

Why we didn’t have negative nominal yields in the Depression and the end of QE

Oh the time will come up
When the winds will stop
And the breeze will cease to be breathin’,
Like the stillness in the wind
’Fore the hurricane begins —
The hour when the ship comes in.

And the words that are used
For to get the ship confused
Will not be understood as they’re spoken,
For the chains of the sea
Will have busted in the night
And will be buried at the bottom of the ocean.

–  When The Ship Comes In (Bob Dylan 1963)

The Napier Euro High Yield Capital Guarantee Fund (discussed in the November 12th edition of The Solid Ground) is almost ready for launch. It offers a unique combination of attributes to investors. It has significantly better risk/reward characteristics than both deposits and government debt securities. In short, it is a room full of Euro banknotes.

The launch of the fund will clearly mark the limits to monetary policy and thus the end to QE in Europe. The fund’s many attractive features include:

• a small negative yield (my fee), but it yields more than Euro bank deposits and most Euro denominated government debt securities.
• the assets are a liability of the central bank and not the commercial banks. While bank deposits, above the level guaranteed by governments, can be bailed-in and frozen during any bank reconstruction, the banknotes nominal value is assured by the central bank. The fund thus offers significant capital protection and enhanced liquidity to any bank deposit.
• unlike longer-dated debt securities of the government, the banknote will not suffer a loss in value should fears of inflation rear their ugly head. While the markets will begin to price future inflation into longer-dated fixed interest securities, the banknote holder suffers no loss at such apprehension. The fund would seek to move from banknotes should recorded inflation appear, as this would impact the real value of investments. The nominal value of the fund cannot decline if inflation expectations rise, ensuring significant protection compared to government debt securities.
• banknotes could be bid up, relative to deposits, as the authorities seek to restrict access. Last week Schweizer Radio und Fernsehen reported that a Swiss bank had refused to transform the deposits of a Swiss pension fund into banknotes and that the Swiss National Bank confirmed that they were against the hoarding of banknotes to avoid negative deposit rates. The ECB is just as likely to be against such bank runs as the SNB. Any move to restrict access to central bank liabilities (banknotes) and enforce the holding of commercial bank liabilities (bank deposits) is likely to lead to a premium of one over the other. Given the capital risk and lower yield on bank money, Gresham’s Law is likely to see banknotes becoming a store of value, while people seek to use the inferior bank deposit as a means of transaction. Banknotes traded at premiums to bank deposits, albeit in closed banks, in the US in the 1930s. A premium for banknotes would provide a rising nominal value for the fund.
• the fund would hold only Euro notes with a serial number beginning with X, the X denoting that these notes have been printed by Germany. Such notes could also be bid up relative to deposits and even other notes, should investors fear the demise of the Euro and the re-birth of the DM or a northern European ‘NEuro’. Should this occur, the nominal value of the fund would once more rise.
• a banknote owner will be able to shift capital to any jurisdiction where the Euro remains fungible. Restrictions on banknote withdrawals and transfers of deposits were imposed in Cyprus, as part of the plan to prevent the funding base of the Cypriot banks moving to other banks in the European Union. The ability to shift capital across borders, should such movement be outlawed, would likely lead to a premium developing for banknotes. Should this occur, the nominal value of the fund would, yet again, rise.
• notes would be held in denominations of 50 Euros. The authorities are already minded to ban the Euro 500 note (known by some as the ‘Bin Laden’ because it is known to exist but is rarely seen). It is rarely seen because the ‘Bin Laden’ is prized by criminals and those seeking to avoid taxation, meaning it’s increasingly likely to be recalled and abolished. Any ban on large denomination notes to combat illegal activity is unlikely, however, to affect the 50 Euro note given its key role in everyday transactions in Europe. Those bent on illegal activity may just have to get themselves bigger suitcases to stash their smaller denomination notes. A premium may develop for such notes, and such suitcases, and should this occur the nominal value of the fund would, you’ve guessed it, rise.

The fund produces an enhanced yield over bank deposits and most government debt securities, and cannot be subject to a decline in nominal value unlike bank deposits or government debt securities. In some fairly extreme cases it may even produce a capital gain relative to most money (bank deposits). The only likelihood of loss is in the case of an instant and material rise in inflation that would undermine the real value of the fund. However, unless such inflation developed virtually overnight the fund could be liquidated, without capital loss unlike government securities subjected to an inflationary shock.

Hillary Comes to Hollywood for Money-Raising Shindigs

Submitted by Nomi Prins  –  www.nomiprins.com

Hillary arrives in Hollywood today, to raise more than $2.5 million. Money and power mesh like peanut butter and jelly in Washington, Wall Street and Hollywood. The path toward influence is lined with the casualties or victories of status, wealth, and ego. Two presidential elections ago, Hollywood created its own underdog when it poured backing into the coffers of Barack Obama, shunning Hillary Clinton. But Hollywood loves a good comeback story in politics or on the silver screen. Enter Democratic presidential hopeful, Hillary and Hollywood money, Part II.

On May 7^th, three private fundraisers kick off the first of many legs of Hillary Clinton’s 2016 election Hollywood campaign. First, there is a breakfast reception at the Westwood home of Public Affairs consultant, Catherine Unger. Then comes a luncheon at the Pacific Palisades abode of Steven and Dayna Bochco. (Steven Bochco Productions contributed $373,000 to Democrats over the last four campaign cycles.) The main evening event takes place at the Beverly Park estate of Chairman and CEO of Saban Capital Group, Haim Saban, and his wife, Cheryl. The couple and the Saban family foundation are listed in the $10-$25 million bracket of the Clinton Foundation contributors. The crème-de-la-crème of Tinsel town will clank their glasses for their ‘Champion’ of inequality far above the inequality rampaging the City of Angels.

Co-hosting will be an assortment of legacy media heavy hitters including the Sabans, Casey Wasserman, a trustee of the William J. Clinton Foundation, and Jeffrey Katzenberg. Event tickets are $2700, the maximum individual limit for primary period contributions. This would put Hillary Clinton’s May 7^th Hollywood haul at about $2.6 million. More important than these initial outlays though, is their promise of solidarity. Hollywood stands ready for Hillary.

Indeed, Hollywood is expected to unite for a chance to spend money on Clinton’s campaign, in contrast to its prior loyalty abscess, which accelerated into cacophonous Barack Obama support early in the 2008 election cycle. The question is – will it spend as much? That answer will depend on the GOP and whether the rest of the Democratic field opens up, as with Senator Bernie Sanders’ April 29^th declaration that he would run for president as a Democrat.

The Bigwig: Jeffrey Katzenberg

According to the Washington-based non-partisan, non-profit research group, Center for Responsive Politics, DreamWorks Animation CEO Jeffrey Katzenberg reigns supreme over Hollywood glitterati in terms of most consistent and varied monetary support for the Democratic Party and its anointed ones.

Most people think of political contributions in terms of individual or aggregated corporate donations. That’s just the tips of the iceberg. Money flows into Capitol Hill in many forms. These include donating directly to candidates and bundling (or tapping all your rich friends and associates to contribute under your name before handing over a mega check). More ways to fork over dough consist of contributing to political action committees (PACs) or super PACs that do the same thing once removed, and ‘other’ avenues like paying $50K a pop to attend the Inaugural Ball, something stars such as Halle Berry, Sharon Stone, Neil Diamond and Jamie Foxx did for Obama’s 2009 victory gala.

Katzenberg was the top Hollywood bundler for Barack Obama’s 2012 campaign. Last year, shifting gears back to prep for the 2016 election, he co-hosted a fundraiser featuring Hillary Clinton that raised $2.1 million for the Democrats.

Wall Street Is One Sick Puppy

Submitted by David Stockman – The Contra Corner Blog

The robo-traders——both the silicon and carbon based varieties—–were raging again today in celebration of a “goldilocks” jobs report. That is, the headline number for April was purportedly strong enough to sustain the “all is awesome” meme, while the sharp downward revision for March to only 85,000 new jobs will allegedly enable the Fed to kick-the-can yet again—-this time until its September meeting. As one Cool-Aid drinker put it,

“Probably best scenario in which the market was hoping for growth but not (so strong) that the Fed needs to hike in June,” said Ryan Larson, head of U.S. equity management at RBC Global Asset Management (U.S.).

Today’s knee jerk rip, of course, is the fifth one of roughly this magnitude since February 20th, but its all been for naught. The headline based rips have not been able to levitate the S&P 500 for nearly three months now.

^SPX data by YCharts

In fact, however, the incoming data since February 20 has been uniformly bad. The chop depicted in the graph, therefore, only underscores that the market is desperately churning as it attempts to sustain an irrationally exuberant high. Indeed, today’s jobs data was not bullish in the slightest once you get below the headline. Specifically, the number of full-time jobs dropped by 252,000 in April—–hardly an endorsement of the awesomeness theme.

True enough, the monthly number for this important metric bounces around considerably. Yet that’s exactly why the algo fevers stirred by the incoming data headlines are just one more piece of evidence that the stock market is completely broken. What counts is not the headline, but the trend; and when it comes to full time jobs there are still 1.1 million fewer now than at the pre-crisis peak in Q4 2007.

Needless to say, a net shrinkage of full-time job after seven and one-half years is not exactly something that merits a 20.5X multiple on the S&P 500 or 75X on the Russell 2000. That’s the case especially when that same flat lining jobs trend has been underway for nearly a decade and one-half. To wit, since April 2000 the BLS’ full time job count has grown at only0.35% annually.

Now how in the world do you capitalize earnings at a rate which implies gangbusters growth of output and profits as far as the eye can see, when the US economy is self-evidently trapped in a deep rut that represents a drastic downshift from all prior history? Thus, compared to the 0.35% rate since the turn of the century, full-time employment grew by 1.8% per annum during the prior 15 years.

When a trend rate downshifts by 80%, you just aren’t in Kansas any more—even if Keynesian economists and MSM financial journalists don’t know it. On that score, MarketWatch’s headline says it all:

“Jobs growth is ‘back on track,’ economists say after payrolls report”

The problem is that they blithely assume its the same old, same old cyclical track diagramed in the Keynesian textbooks of yesteryear. Well, let’s see. Between 1985 and 2000, the adult civilian population (16 years +) grew by 34 million and the number of full time jobs increased by 26 million or by fully 76% of the population gain.

By contrast, during the fifteen years since the turn of the century, the adult population grew from 212 million to 250 million, but the number of full time jobs rose by only 6.2 million. In short, the nation gained 38 million more adult consumers, but only 15% of them have been employed as full-time producers. And that dismal trend is guaranteed to get worse because its baked into the demographic cake. That is, today’s 45 million retirees will become 75 million less than two decades down the road.

In welfare state America its virtually certain that through one artifice or another taxes will go up and the national debt burden will rise to crushing heights in order to keep the baby boomers’ entitlements funded. While Keynesians and Wall Street stock peddlers are clueless about the implications of this——it actually doesn’t take too much common sense to get the drift. Namely, under a long-term path of fewer producers, higher taxes and more public debt, the prospects for rejuvenating the previous historically average rates of real output growth are somewhere between slim and none—-to say nothing of the super-normal rates implied by the markets’ current bullish enthusiasm.

Peering Behind The GDP Curtain

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

With the publication of the Atlanta Fed’s GDPNow estimates we get a better sense as to how not only the GDP calculations work internally (something largely hidden until now) but how GDP figures evolve with new pieces of information and settings. Along with their webpage snaphshot, the Fed branch has opened up its Microsoft Excel Spreadsheet for the whole world to peer inside the GDP envelope. There is an enormous amount of information contained within the various spreadsheets, but I think, as a start, it is very interesting to see how GDP has been formed over time; especially with regard to its subcomponents.

The prominence gained by the Atlanta Fed’s model more recently is certainly due to the fact that it was almost spot on for Q1 2015. While economists all over Wall Street were still expecting around 1.5% to 2% just before the BEA release, GDPNow was at +0.1%, only microscopically off of the initial BEA estimate of +0.2%. The model was not, however, always so accurate, which is something to keep in mind as it posits just +0.8% for Q2 (some turnaround).

The model has undergone several calculation modifications, which does make earlier estimates less reliable in some respects. As you can see above, the first runs were quite optimistic, which isn’t that unexpected given the origination here (Atlanta Fed after all). More recently, the model has been much better and much closer to the range for much of the time.

Again, the intent is not to match the revised (and revised again) BEA figures but rather the initial run from more incomplete (so they say) data sources. All of this is to that the model has been rather good at matching rawer GDP figures in and out for most of its timely calculations. That provides, then, a reasonable assertion that its subcomponents are, even if not exact then close, a decent representation of these economic pieces over time.

I think that is an important point that is often missing in the quarterly accumulations. GDP by itself is lumpy and is not well attuned to some of the more frequent economic changes, ebbs and flows that are missed by straddling nothing but three-month intervals. We have other economic accounts, of course, that provide more frequent updates, but until now we had very little specific grasp as to how those affect individually the GDP figure itself. Since mainstream convention still uses GDP as a primary means for measuring economic health, this is not a trivial exchange.

The Markets Move in Mysterious and Dangerous Ways …

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Squirrely Market Action Upends Consensus Trades

Bloomberg notes that there have been a number of “mysterious” and rather large moves in a number of markets of late (dollar down, bonds down, stocks weakening, crude oil and copper prices soaring).

These moves are perhaps less mysterious than they appear. In essence nearly every consensus trade is recently getting blown out of the water – and the consensus has been huge in some of these trades (e.g. only a few weeks ago a continued rise in the dollar was deemed certain by nearly everybody; note that this particular consensus is so far barely diminished).

Image credit: fmh

Uncle buck unexpectedly buckles. Below you can see that speculative enthusiasm hasn’t been dented much – yet – click to enlarge.

Dollar index net hedger position (the inverse of the net speculative position) – speculators continue to hold one of the largest net long exposures to the dollar in history – click to enlarge.

As the Bloomberg article notes in closing:

“There doesn’t seem to be any single driver that would explain all of these moves, though plenty of analysts are pointing to the unwinding of consensus positions such as trades built around the expectation of continued deflation and quantitative easing in Europe. Others have highlighted more technical factors and illiquid markets that have amplified  the moves.

Whatever the reason, the recent seismic activity in these markets has, no doubt, been painful for some big investors.

(emphasis added)

The sentence we have highlighted is quite important. Normally one would e.g. expect treasury bond yields to fall on days when the stock market is weak. Lately this hasn’t happened at all – instead, the two markets appear to be exhibiting growing positive correlation. We would submit that this is precisely because there are so many players heavily exposed to consensus trades. As soon as one or two of these trades begin to blow up, inter-market correlations begin to increase, as margin calls force leveraged traders to sell whatever they can.

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• Wall Street Soars On Hopes Of Fed Reprieve, Yet Sting In The Tail (AEP)

• Wall Street Is One Sick Puppy (David Stockman)

• Currencies’ Wild Ride to Get Wilder as US Rate Rise Beckons (Bloomberg)

• Low Productivity Alarms US Policy Makers (FT)

• Countdown To The Stock-Market Crash Of 2016 Is Ticking Louder (Paul B. Farrell)

• ‘Good’ Jobs Report? 15 Million Unemployed People Want To Work (MarketWatch)

• UK Braces for Battle Over Europe After Cameron’s Victory (Bloomberg)

• The $364 Billion Real Estate Threat Inside China’s Biggest Banks (Bloomberg)

• Deflation Works! (Bill Bonner)

• Documents Distributed by Greece’s Varoufakis ‘Baffle’ Eurozone Officials (WSJ)

• Illinois Supreme Court Strikes Down Law to Rein in Public Sector Pensions (WSJ)

• Democracy Is A Religion That Has Failed The Poor (Guardian)

• Petrobras: The Betrayal of Brazil (Bloomberg)

• The Clintons and Their Banker Friends- The Wall Street Connection (Nomi Prins)

• Germany Spies, US Denies (Bloomberg)

• Trans-Pacific Partnership Will Lead To A Global Race To The Bottom (Guardian)

• Is There Such A Thing As A Skyscraper Curse? (Economist, March 28)

• Global Crime Syndicates Are Buying Expensive Australia Real Estate (Domain)

• Australian PM Adviser Exposes Cimate Change As Hoax, Shames All of Science (SBS)