Friday was a day dominated by the US employment and unemployment report. Ironically a good report may well have been bad for markets as it would have led to doubts about there being more quantitative easing in the US. If you think about it such a state of affairs reflects how much central banks have involved themselves in the world’s economies, and some of the distortions they have created are becoming plain to see. As I will discuss later in this article the figures from the US were weak and disappointing. This led to expectations of the QE2 coming down the slipway at the Federal Reserve’s next meeting on the 2nd/3rd of November and accordingly US equities rallied and indeed the Dow Jones Industrial Average broke the 11,000 barrier to close at 11,006. Thus the prospect of central bank intervention sends equities to a 5 month high whilst poor economic data is ignored in another example of events and developments being twisted.
Another area where the prospect of more monetary easing from the US Federal Reserve is having an impact is the exchange rate of the US dollar. This has been falling since June as US economic prospects have weakened and the chances of more monetary easing from the Fed have risen. The US dollar (trade-weighted) index has now fallen to 77.2 from its high of 88.7. Where this has particularly had an impact is on the dollar/yen exchange rate which fell to 81.37 although it has now recovered to a still low 82. This move is now so marked that even a London radio station has it on its news as I type this. Of course it is also an area where the implicit intervention of the US central bank is clashing with the explicit intervention of the Bank of Japan. So far the Bank of Japan is a clear loser as it is failing to weaken the yen exchange rate.
The impact of a strengthening Yen combined with talk that the Bank of Japan will soon lower its forecasts for economic growth in Japan lead to the Nikkei 225 equity index dropping some 95 points to 9588 overnight. This means that the spread between it and the Dow has risen again to 1418 points or 14.8% of the Nikkei’s value. This has not been a good year for the Nikkei if you compare it too its peers,indeed it hasn’t really been much of a good twenty years.
The International Monetary Fund meets to try to end the “currency wars”
The IMF met over the weekend to talk about what Brazilian Finance Minister Guido Mantega rather memorably called a “currency war”. In case you were unaware this currency war has spread to Latin America where both Brazil and Peru have intervened to try to stop their currencies rising against the US dollar. Indeed if anything the situation is worsening as Brazil,Poland and South Korea have recently introduced capital controls too.
The essential problem for this meeting was that so many of the attendees have completely opposite objectives. In some ways the worst position is that of the United States which is plainly following a policy of weakening the US dollar but criticises other countries for attempting to weaken their currencies! Close behind is China who has run an under valued exchange rate for several years and even since the recent relaxation the Yuan has only risen by just over 2%. Now we have more and more central banks intervening against the US dollar. Not only is there not much chance of a resolution here what we need is for the group at this meeting to realise that rather than being a potential solution to the problem they are in effect the main cause of it. Sadly self-awareness does not seem to be a strength of this particular group.
We will get a report on the subject from the IMF which sounds to me like something out of the annals of Sir Humphrey Appleby of Yes Minister fame. One matter which always gives me a wry smile about these meetings is the way all these (self) important people are willing to travel all around the world for somewhat pointless meetings which often also have the gall to issue communiques on global warming!
I have written before about rises in commodity prices and remember the IMF saying it would hold a conference on this subject too. Apart from its contribution to hot air in the world little has come from this initiative so far. Indeed commodity prices are continuing to rise. The Commodity Research Bureau spot index has now crossed the 490 threshold to close on Friday at 492.14 and the theme was again “agflation” as two components rose by more than 1% and these were foodstuffs, and fats and oils. On an annual basis this spot index has now risen by some 30.9%.
Currently corn prices are very strong and these seem to have risen on the back of, if you are very nice to them, some incompetence from the US Department of Agriculture which seems unaware of how much corn it has in its silos. We are back to official incompetence again. However I am also reminded of the film “Trading Places” which I have always considered to be a comedy but it is now looking ever more like a prescient satire on the future.
Greece and the IMF
Not content with failure on so many fronts the head of the IMF Mr. Dominique Strauss Kahn has declared also that the IMF is prepared to extend the term of its loans to Greece if the Euro zone is also willing to extend the term of its loans. This is odd because he is also telling us that Greece is doing “exactly what they need to do”. Those more interested in reality than hyperbole and hot air might like to take a look at my article of the 1st of October on Greece’s new tax amnesty and I would like the opportunity to ask Mr. Strauss-Kahn if this amnesty is part of doing “exactly what they need to do”. This is what the newspaper Kathimerini thinks.
Papandreou must take control of the state apparatus and close the tap that keeps pouring money into a corrupt system. If he doesn’t, the people’s sacrifices will have been in vain
It is a grim result when you end up recounting a litany of failures. In a way it is yet again Greece’s situation which is symbolic of such much else. Mr. Strauss-Kahn statement is full of internal contradictions and blaming it on an external bogeyman of financial conditions ignores all the independent reports who argued from the beginning that simple mathematics would defeat the rescue plan. The loans could easily become a permanent feature of the landscape.
If one looks at Greek government bond yields there has been some recent improvement to just under 10%. Such rates still leave her solidly insolvent and any improvement has to be looked at with the suspicion that there has been official intervention as the ECB’s Securities Markets Programme has recently sprung back to life.
US employment and unemployment report
The Bureau of Labor Statistics produced a report which had the following features.
1) Non-farm payroll employment decreased by 95,000 in September
2) the Unemployment Rate was unchanged at 9.6%
3) Private-sector employment increased by 64,000.
4) Government employment declined by 159,000 which if you take out the impact of the 2010 US Census which was 77,000 you are left with a loss of 82,000 jobs.
5) Therefore overall there were 18,000 payroll jobs lost if one excludes the impact of the 2010 Census
So we have a recovery which is still shedding jobs which is not very hopeful. If you look at what has happened in previous US recessions you see that in a typical recession we should have started to see positive job creation some 6/9 months ago and yet we are still shedding them. This fact is not improved by the extraordinary size of the stimulus measures that have been applied to the US economy by her government and her central bank.
Unfortunately there are other matters at play. We have seen a rise in part-time employment and also rises in those leaving the labour market over this year. If we look for these trends in Friday’s numbers we see the following. The number of workers in part- time jobs was at 9.472 million in September, which was up sharply from August and reached a new high.
US U-6 Unemployment rises again
This measure attempts to cover all the bases for measuring unemployment as it factors in the effect of part-time and shorter hours working as well as the impact of those leaving the labour market. It’s definition is according to the Bureau of Labor Statistics.
Total unemployed, plus all persons marginally attached to the labor force, plus total employed part-time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force.
This number gives quite a different picture to the number for the unemployment rate as U-6 rose to 17.1% in September from 16.7% in August. One can put this in perspective by looking at the high for it over this period which was 17.4% in October 2009. In other words if you use this measure the US employment situation is now nearly as bad as it was when it peaked during the recession.
After seeing these numbers, financial markets were always likely to start pricing in the impact of the so-called QE2 and I do not mean the Queen, the liner or the proposed aircraft carrier for the Royal Navy! If we stop and think for a moment however we can see that we have seen in recent times an extraordinary increase in official involvements in markets. If anyone else was doing this they would be investigated by the authorities. However I have a more subtle point which seems to escape their notice, this is that if you look at the way things are going it may well have been better if they had not involved themselves. The situation has created obvious paradoxes such as you apparently solve a debt problem by bailing out debtors. It is in these paradoxes that we can see that these moves were, sadly, destined to fail. Yet we have leaders such as Mr.Strauss-Kahn who appear to think that the proper response to failure is to try the same thing again.
What we need is genuine reform of our banking sectors rather than more bail outs. But with matters such as the apparent debacle in the US mortgage foreclosure market gaining strength it would appear that genuine reform is further away rather than nearer and this is the most damning indictment of authorities in out time that I can think of.