After the Euro zone denominated proceedings of most of last week we turned on Friday to a major update on the state of the US economy as we were due figures on both employment (non-farm payrolls) and unemployment. These figures turned out to be disappointing but in the current market sentiment which seems to find a reason for an equity market improvement regardless of what is happening saw the disappointing numbers as something likely to cause yet more monetary easing/stimulus measures from the US Federal Reserve. Accordingly after struggling initially the US Dow Jones equity index closed up 19 points which meant that it has risen around 370 points in three days. Other markets have also rallied over these past few days leading to some interesting implications.
Here we have seen some quite strong moves. If we start with the crude oil price we have seen a powerful move to new highs for 2010 which are also the highest price for crude oil for over 2 years. This morning the price of a barrel of West Texas Intermediate crude oil has touched US $89.75. There have been various influences on its rise. Rising equity markets are often associated with rising oil prices, the weather in much of Europe (the UK included!) is very cold, and there was an interview with Ben Bernanke the Chairman of the US Federal Reserve which I will discuss later. If we look back to the beginnings of 2009 then the price of a barrel of crude oil was in the low thirties. However back in May this year we saw a more recent low of US $64 per barrel of oil. So in the following seven months the price has risen by some US $25 per barrel or nearly 40%. Also if we think back to then one of the influences on a falling oil price was the Euro zone crisis of the time whereas now we find a Euro zone crisis associated with rising oil prices.
There are always many explanations for a rise in the price of gold. However one of them is concerns over inflationary trends and the correlated debasement of fiat money. As we can see from the oil price there are inflationary trends around and this is likely to have been an influence in the rise of the gold price. After the jobs figures on Friday the gold price shot up by more than US $20 per ounce virtually in a straight line and is now priced at US $1412 per ounce for yet another new high when it touched US $1418 per ounce earlier today.
After such moves for both one can probably expect something of a retracement in the short-term but it is plain that at this time there are concerns about inflationary trends in the world. Unfortunately conventional economic theory may struggle to pick this up as many economists base their thinking on core inflation which excludes food and energy.
The US unemployment and employment or non-farm payroll numbers
The headline figures came as something of a shock as according to the US Bureau of Labor Statistics we got.
The unemployment rate edged up to 9.8 percent in November, and nonfarm payroll employment was little changed (+39,000),
So we opened with two negatives as the unemployment rate rose by 0.2% and the level of employment creation was much lower than hoped for. If we continue with the report there were unfortunately other concerning numbers.
1. The Employment-Population ratio declined to 58.2% in November and accordingly went back to the low levels of 2009.
2. The Labor Force Participation Rate was steady at 64.5% in November (blue line). There had been hopes of an improvement towards what is regarded as more normal levels somewhere in the region of 66 to 67%.
3. The number of long-term unemployed is rising again which is concerning as it had previously show signs that it had peaked. But the number of workers who have been unemployed for more than 6 months and still want a job rose to 6,313,000 workers in November up from 6,206,000 in October.
It was not all bad news as the numbers of workers forced to cut their hours or work part-time fell to 8,972,000 which meant that the wider measure of unemployment or U-6 stayed at 17%. However this is a very high level. There were also revisions to October and September jobs figures which made them slightly better and average hourly earnings edged up. However these were unable to fully offset the weaker components of the figures and leave us with a completely different feeling to the October figures where employment creation appeared to be much stronger.
Care is always required because the non-farm payroll component of these figures is notoriously volatile but these figures leave quite a different impression to those for October. One matter that does appear clear is that the US economy is growing but if we look at the last few months figures it is not growing quickly enough to improve the unemployment picture and indeed it looks as though unemployment is in danger of rising again. This poses a policy problem for the US Federal Reserve or central bank.
An Interview with the Chairman of the US Federal Reserve
In an interesting coincidence of timing the Chairman of the US central bank Ben Bernanke was aired on CBS last night. I notice that he said fears of inflation are “overstated” although to be fair the interview was recorded before the recent oil price surge. However he also said something on unemployment too. According to Bloomberg.
We’re not very far from the level where the economy is not self-sustaining………..It’s very close to the border. It takes about 2.5 percent growth just to keep unemployment stable and that’s about what we’re getting……At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate.
So if you read between the lines you get the feeling that with inflation fears overstated according to Ben Bernanke and unemployment a problem then more easing and either an expansion to QE2 or perhaps a QE3 might be on the horizon. Adding the comment that an expansion in monetary stimulus is “entirely possible” will only feed speculation. But we have a situation where the somewhat surprising strength in US equities on Friday may not be so surprising. Also we have moral hazard piled on moral hazard.
Let me make this clear I am already worried by the level of central bank intervention in world markets. Mr. Bernanke’s policies are extremely interventionist which is a danger but recording a programme several days before it is aired has the danger that whilst after the programme is aired everybody is equal, in the time gap before it is shown there is the danger that some are more equal than others ( with apologies to George Orwell)! The programme was recorded on the 30th of November and since then as I recorded above the US equity market has been rather strong to say the least. Central bankers should avoid even the suspicion of this sort of thing.
The continuing Euro zone crisis
In the Financial Times today Jean-Claude Juncker Luxembourg’s prime minister who also chairs meetings of euro zone finance ministers, and Giulio Tremonti, Italy’s finance minister have written an article suggesting that the creation of a European Debt Agency with the ability to issue so-called E or Euro zone bonds would improve matters. So rather than individual countries issuing their own national bonds there would be a pan-Euro zone bond. This idea has been floated around for a while,mostly in my view by people whose knowledge of financial markets veers towards fantasy. Mr Juncker gives us the advantages of such a plan but the disadvantages appear to have slipped his mind. Some of his fantasies are expressed in these two sentences and the emphasis is mine.
An E-bond market would also assist member states in difficulty, without leading to moral hazard. Governments would be granted access to sufficient resources, at the EDA’s interest rate, to consolidate public finances without being exposed to short-term speculative attacks.
Of course Mr.Juncker feels that there has been no moral hazard in what has happened so far in the Euro zone crisis! However let me explain why this is a fantasy. He is plainly hoping that a pan-European EDA would issue bonds at an interest-rate that say the German treasury can issue at. He will be relying on the fact that markets will not spot that as well as German taxpayers and economic efficiency such an arrangement will also depend on Ireland,Greece, Portugal, Spain, Italy and Belgium all countries with how can one put it either current or potential fiscal concerns. So interest rates on this debt will be higher than those at which the German treasury can issue which immediately begs the question of why the Germans should join this programme as it guarantees a higher cost to their debt. I have written in previous articles that the recent extension in effect of Germany’s creditworthiness to some of the peripheral Euro zone countries has coincided with her longer-term interest rates rising by around 0.5 to 0.6%. So Mr.Juncker is relying on the Germans not spotting this ruse. Without Germany the plan falls down somewhat.
The German Finance Minister Wolfgang Schäuble has already pointed out many of the flaws in the plan so Mr.Juncker’s ability to pull the wool over German eyes did not last even one day. The ability of the Euro zone to shoot itself in the foot continues to be a feature of its crisis.
We hit again on the fundamental flaw in the construction of the Euro zone which is that it is a monetary union constructed without fiscal union. I suspect that Mr. Juncker is using his E-Bond plan as a way of moving the Euro zone towards more fiscal union without having to actually ask voters. It can be presented as an improvement and then when trouble hits emergency measures can be imposed. In a way though he is raising the fundamental problem that the Euro zone has to sort out. Does it want fiscal union and all that implies, or not?
As we stand Europe’s leaders appear divided which is not a good start. They often blame each other for Europe’s problems and when they tire of this they usually blame the financial markets. When they do occasionally agree we see an enormous amount of hype and hyperbole which is never matched by the actual deeds and this in itself leads to further problems and disappointment. One of the ironies of the current situation is that in many ways with their continual squabbling the leaders of the Euro zone are in fact one of the worst examples of the sort of unity their words call for.
Last week with its bond purchases under its Securities Markets Programme the European Central Bank bought the leaders of the Euro zone some time. The aggression and timing of the move was a success in terms of buying time but we should not forget that it takes a genuine solution to the current problems further away. As the SMP buys ever more bonds that one day will need some form of restructuring or even default then the balance sheet of Europe’s central bank looks ever riskier to me and it is quite conceivable that we could be in an era where central banks as well as private-sector banks need bailing out. In a strategic sense the ECB is in a hole and it is digging rather than trying to get out of it. It will make getting out of the hole ever harder if it is forced to carry on with such a plan.