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America’s Economic Strength in Four Labor Charts

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Initial Jobless Claims as a Leading Indicator

When it comes to Initial Jobless Claims, labor is a leading – not a lagging – indicator.

All business investment decisions, from capital to labor, are responses to business expectations of economic growth. So while hiring and firing certainly lag business expectations, they move in step with the economy’s ebb and flow. Jobless Claims coincide with the GDP, as seen in the following chart:

joblessclaims1

Four factors make Initial Jobless Claims a leading indicator:

  1. High quality data. Unlike other data that is sampled and modeled, Initial Jobless Claims are comprehensive and more accurately depict the state of the labor market.
  2. Data gets released before any other macroeconomic data point. Initial claims are a real-time snapshot. Conversely, GDP data gets released a month after the period ended, and even then it covers economic activity as much as four months old. The decisions to hire or fire may coincide with business economic decisions, but the data gets reported a lot sooner.
  3. Shifts in hiring momentum lead economic inflection points. Payroll is the first place a business will turn when it needs to change momentum.
  4. Initial Jobless Claims focus on the most economically sensitive workers. The ebb and flow of claims is driven by demand for part-time and temporary workers. These are the workers who are first to be hired and first to be fired in any slight shift of economic conditions.

Leveraging Jobless Claims: Watch Out For 280K Claims

Recessions start roughly 12 months after claims fall to 280K+/-. More important than the actual number is the following pattern:

  • A sustained bottom (~10 weeks) at 280K+/-
  • A sustained rise (~10 weeks) in claims of +20K

Far from signaling a tight labor market, the 280K level signals the start of economic weakening. Right now claims are hovering around 290K. We need to pay attention.

joblessclaims2

The 95% Factor

Instead of an absolute number (like 280K Claims), focus on a relative number: the number of claims today versus the number of claims last year. An expanding economy will have fewer Jobless Claims today compared to the same period a year before: Y/Y claims are less than 100%.

Practically speaking, the rate to watch is 95%. At 95%, the Y/Y difference is under 15,000 claims. That’s noise in an economy with 125M on the payroll. In December 2007 – when the economy officially entered a recession – the Y/Y rate was 104% as there was 20K more claims than in the prior year. In March 2001, it was 140% of the prior year. But start the clock 12 months before those recessions officially began and the Y/Y rates were 97% and 96%, respectively.

The key point: once claims are within spitting distance of the prior year, a recession is 12 months away. We are currently at 91% (9% fewer claims in March 2015 compared to March 2014). While the current 290K level of claims indicates that we are approaching a bottom, the 91% rate says that we remain in healthy, economic expansion territory.

Breadth and Depth: Confirm With a State-Level Drill Down

Events in California and New York can skew the claims picture. Also, regional developments like hurricanes can distort the picture. But when the majority of states have Y/Y claims rates above 95%, trouble is brewing.

For example, look at the previous business cycle. Concerns about the economy began to surface in 2006. Second quarter 2006 GDP slipped to 1.2% and then to 0.4% in the third quarter. That 95% Factor was also signaling problems. In 2Q 2006, half the states still had Y/Y Jobless Claims below 95%. By 3Q, barely 15 states were below 95% (barely 1/3 the total). The recession started nine months later.

joblessclaims3

Jobless Claims Today: Like It’s 2006

There are two reasons to think the economy is like 2006 and heading for slowdown:

  1. Claims are again approaching 280K
  2. The Y/Y rate will hit 95% in July. Beginning in July 2014 (last year), claims began their sustained drop to 300K

Taking all this into account, the Jobless Claims data signals the claims bottoming in the second half of this year.

A state-level drill-down favors continued economic growth, a la 2006. There’s been a lot of distortion in the last few months. 2014 looks especially strong because it’s being compared to the weak second half of 2013 (a sequester followed by heavy snowstorms). By the same token, 2015 is looking especially weak because of recent unseasonal storms. But even with that distortion, the first quarter of 2015 shows broad strength as roughly half of the states fell below the 95% Y/Y rate.

Basically, the state-level data will be a better gauge starting in the second quarter.

joblessclaims4

What the Latest Payroll Data Really Means For the Labor Market

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A Better Indicator of Labor Demand

Outdated measurement methodologies used to calculate the unemployment rate and payroll data have encouraged the Fed to broaden its watch-list of labor data. Now the Fed is looking at other benchmarks like participation rate and wage growth.

They must not realize that the best data to watch is Jobless Claims. The Initial Jobless Claims metric is the flip-side to Nonfarm Payroll. It measures labor demand by looking at firings whereas the NFP looks at hirings. The Initial Jobless Claims data is direct, unsampled, and comprehensive. The NFP data on the other hand is surveyed, sampled, and modeled.

I’d much prefer to rely on reality over a model.

Putting the Data to Work

Assume that the Jobless Claims data doesn’t give us insight into the Fed decision of when to raise rates (if at all). Instead, assume that the data tells us whether the Fed was right and whether there will be additional hikes.

If the Jobless Claims data supports the tight labor market story, for example, then it’s possible the Fed will raise rates again. On the other hand, if Jobless Claims diverge and don’t support a strong labor market, then no further hikes will be made… or worse.

The Jobless Claims Story: California vs. Non-California

Ex-California, Jobless Claims point to no change in the pace of labor demand. Looking at the not-seasonally adjusted data, the difference year-over-year in claims has been pretty constant; 30K-40K below last year’s. (The big swings come from last year’s storms.)

From the perspective of labor demand, the continued drop Y/Y in claims points to steady labor demand and a tightening labor market as the pool shrinks.

From the standpoint of momentum, it’s neither accelerating nor decelerating. The labor market is tightening at the same pace as this time last year.

image

But California is different. For most of 2014, California layoffs exceeded the previous year’s.

image(1)

Then everything switched when summer ended. Suddenly claims began to drop far below the previous year. Apparently California’s drought led to fewer hires. This in turn meant fewer firings when harvest season came to an end. (Farm workers are entitled to Jobless Claims benefits.)

image(2)

Overall, labor demand remains steady. As we go through 1Q and look for signs of labor market (and macroeconomic) strength or weakness, we must track the two signals independently.

California: Labor demand ex-agriculture was flashing weakness in 1H 2014. It’s too soon to tell the pattern for 1Q.

Not California: Labor demand remains constant.

The Gold Bubble in Context

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In an economic bubble, at a certain point pricing gets emotional and disconnects from whatever the original reasons were that kicked off the trend. Add easy money and the bubble gets really bubbly. The price movements attract attention and generate media play and then things really cascade upwards.

I’m not a gold bug and probably the last person to give guidance about gold. Though I know a thing or two about bubbles and this one is no mystery.

Asset Bubbles 12 Year

Gold has been bubbly in a special way.

The housing market boom and the NASDAQ dotcom boom bubbled up because of positive sentiments like, “Housing can never crash!” and “There’s no dotcom bubble because Alan Greenspan sees no signs of Irrational Exuberance!”

Gold on the other hand got bubbly because of negative sentiments like the fear of inflation and economic uncertainty.

Gold is traditionally a hedge against inflation and fear, or fear of inflation, which is precisely what the various rounds of QE kicked off: massive expansion of fiat currency.

Fear and panic were under the surface during and immediately after the recession. For the first time since the Great Depression, the US saw bank runs. Americans were having to line up for gas. Unprecedented unemployment and personal bankruptcies were rampant. Greece, Spain and Italy were close to collapse. Defaults loomed while fiat currency was reaching unprecedented heights. This was all happening AFTER the Great Recession ended.

In response to the persistent and extreme economic instability, gold prices continued to race up. From 2009-2011, the two years following the Great Recession, gold prices shot up 75% and they kept rising.

By late 2012, however, global economic crises were retreating. Central Bank coordination succeeded in calming markets. Since then gold prices have drooped 30% from $1800 to $1200.

What Happens Next? The Fear Trade Unwinds

Gold prices remain elevated – up 3X since 2005. Very little of this comes from inflation.

Quantitative Easing (QE) did not lead to unusual inflation. For proof, fans of the Federal Reserve like Paul Krugman regularly point to the CPI (Consumer Price Index) which has averaged ~2% per year since QE began. Critics jump up and accuse the Fed fans of cherrypicking data. Specifically that the CPI strips out precisely those things that would reflect inflation like food and gas.

So let’s take the critics’ concerns into account. Looking at inflation in meat, poultry, fish and eggs (per the Census Bureau), we can see the change in prices for the last three business cycles (from the end of the previous recession to start of the next recession):

  • 1991-2000 (9 years): 22%
  • 2001-2007 (6 years): 22%
  • 2009-2014 (5+ years): 22%

Ah-ha! The critics were right about higher inflation. It took 10 years for prices to grow 22% in the 1990s and we hit 22% in just five years from 2009-2014. That’s 2% annualized inflation in the 1990s versus 4% over the last five years. The pace has doubled.

Is that so worrisome? It’s nowhere close to the fear of hyper-inflation, much less major inflation.

Additionally, the faster pace of food and gasoline inflation comes from a general global trend towards competition for basic resources. Indian and Chinese diets and purchasing power have expanded. They are eating more meat and burning more gasoline (China is now the biggest auto market in the world, for example). The rise in non-US demand pushes up prices. Today’s inflation is about the same as it was in the previous cycle. Adding to that global trend is the 2014 California drought, further boosting prices.

Looking back we can say that QE created no unusual inflation, but nobody knew that at the time. What we knew was major financial panic.

All this boils down to one key point. Gold has been a fear-based trade, and fear is dropping.

The Retail Market is Propping Up Gold… For Now

From 2008-2012 the Federal Reserve initiated three rounds of QE. Asset prices surged following each round. Loose money has a way of doing that.

Gold prices began to fall in early 2013 as talk of QE tapering picked up. Monetary tightening was now on the horizon.

For the gold-inflation trade, the bets had to shift. An end to QE meant a tilt away from an expanding fiat currency and against owning gold. Tighter monetary policy is anti-inflation and anti-gold for the gold-as-inflation-hedge crowd. Suddenly many top hedge funds began to reduce gold ETF holdings. (Some might say that they were anticipating a drop in gold prices, but it’s more likely they created the price drop simply by exiting the market.) Hank Paulson stuck around to hold the bag while George Soros and others began to exit.

For the gold-fear trade, the end of QE was an official proclamation that the Fed had slain the bad-news economic dragon. As big (smart) money left the table, retail (dumb) money kept buying.

Google Trends is Your Friend

Google Trends is a tool to analyze everyone’s web searches. Type in a word or phrase and Trends will report the frequency that it appeared in Google searches. It turns web searches into a gauge of interest and sentiment, which is another way to predict consumer and household behavior. Trends let’s anyone track thousands and even millions of people’s interest and concerns and it can be fine-tuned for a particular time period and location in real-time.

Google Trends says people are much less afraid. Start with general interest in gold.

Google Trends Gold

Gold searches are a coincident indicator. People searched on the word “Gold” in response to the media and a surge in gold prices. Back in 2008, when gold prices began to jump, so did Google searches on the word. Big jumps in searches accompanied big moves in prices.

Peak Google interest in late 2012 corresponded to peak gold prices.

Interest today has fallen to 2011 levels and below, which corresponds to a gold price far below $1200. It was closer to <$1,100.

Positive Household Sentiment is Bad for Gold

Google Trends shows no support for the fear-based trade.

Searches for key words like ‘Recession’, ‘Unemployment’ and ‘Bankruptcy’ are down sharply. Fear is down to pre-recession levels when gold was $600. That would be a 67% drop in price, about what happened to the NASDAQ. With QE gone, more sellers than buyers (in the form of hedge fund positions) and with fear of economic uncertainty down, why wouldn’t gold prices return to near 2006 levels?

Recession Unemployment Bankruptcy

Inflation and Interest Rates: This is Where it Gets Interesting

Until recently, searches were dropping for the words ‘inflation’ and ‘interest rates’. Though it is rising again as concern is increasing.

Apparently inflation expectations are rising. Apparently interest rate growth expectations are rising.

Inflation Interest Rates

Some of this may be self-fulfilling. The media has been spinning the specters of inflation and rising interest rates for almost a year, since the end of QE was announced. It could provide some near-term support for gold as an inflation hedge.

However the lack of follow through from inflation and interest rates may find that this support wanes.

An investor’s best bet is to continue watching the trends. That should be a key indicator on any future large moves in gold.

Japan’s Economic Death Spiral Continues

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The Sun Also Sets

I used to be a Japan hand. I spent my junior year in college in 1985 as an exchange student at Kansai Gaidai in Osaka. Upon graduating college in 1986, I worked for JETRO (Japan External Trade Organization), the Japanese government’s trade group. I then spent two years working in the Kagoshima State government’s international division. After this, I spent a year as a Research Fellow studying consumer trends at Kyoto University’s Economic Research Institute.

Japan was in its prime in the 1980s, and I was there. I ended my five-year focus on Japan when I read 1989’s The Sun Also Sets: The Limits To Japan’s Economic Power by Bill Emmott, editor of The Economist. The book lays out several points, among them was that Japan’s advantages were not sustainable and were easily copied. In fact, Japan was following a very basic mercantilist approach to becoming a major exporter. They made high-quality products, manipulated the currency to fuel exports and erode competition, and maintained a positive trade balance by blocking imports through trade barriers. Emmott predicted an end to each of these advantages, and he was right.

Once the cheap yen advantage was removed, Japan began a downward spiral from which it has not recovered, and I don’t think they ever will. Japan has the UK disease; a once great island empire fighting to stay relevant on the economic stage.

Japan won’t recover from its downward spiral.

Japan: A Bystander on the Digital Highway

In the world of bytes and bits, Japan has become a bit-player.

Japan’s fading economic might can be summed up in its share of global semiconductor sales, which has collapsed from 40%+ to barely double digits.

Japan Share Global Semiconductor

At the same time – and very much related – Japan’s share of Global GDP (per the OECD) has fallen from 10% in 1990, to 7% in 2004 and 5% today.

As the Semiconductor market has marched up an impressive 9.2% CAGR, Japan has actually shrunk.

Japan and Global Semiconductor

The latest smartphones come from Korea (Samsung) and America (Apple) and are manufactured in Korea, Taiwan and China. The software comes from America. The latest camera, the GoPro, is American. The electric car that everyone wants is American (Tesla). The consumer electronics that everyone buys come from Korea. Telecommunications and computer products come from American or elsewhere, but definitely not Japan.

A simple snapshot of Japan’s fading importance is evident in US imports as seen below:

US Imports Through August ($B):

                        2013     2014     Gain/Loss     

China            $281     $294     +$13

Germany      $74       $81       $+7

Korea            $42       $45       +3

Japan            $93       $89      -$4B

Other Countries See Exports to the US Growing while Japan’s are Shrinking

Participation in the Digital Economy Matters

Japanese companies have lost the lead in their traditional markets because they don’t make products for the 21st Century digital economy.

In 2013, out of $2.3T in imported goods, the top US imports were:

  • Oil $390B
  • Machinery $311B
  • Electronic and Medical Equipment (ex Smartphones) $300B
  • Vehicles $253B
  • Smartphones $100B
  • Pharmaceuticals $63B

Of the $2T non-oil imports, Japan’s share was $142B (7%).

China’s electronic equipment exports to the US ($120B) almost equaled Japan’s total exports to the US.

Production is Contracting

Semiconductors reflect the shift in Japan’s economic relevance. When Japan led the consumer electronics world, semiconductor sales led industrial production:

Industrial Production

Today semiconductors lag overall industrial production.

Make Stuff People Want, Make It Cheaper

The central problem, as noted above, is that Japan doesn’t really make stuff people want. That’s a long-term problem without an easy solution.

In the short-term, the only means to boost exports will be for major monetary stimulus to crush the yen, and not a little bit. It needs to contract at least 15%. That would boost exports.Going back to semiconductors, a lot of production would shift to Japan if the yen drops.

Yen Devaluation

Back in November 2012, I predicted that Japan would have to go nuclear on the yen; drive it to 100. The BOJ did exactly this, forcing the yen up from ¥80 to ¥100. It worked as production surged, but it has run its course.

More Yen Devaluation Please, Mr. Abe

In early August of this year, I called for yet another gutting of the yen, and of sizable degree. I estimated at least 10% or companies won’t change their behaviors.

A cheap yen only goes so far. It works in commodity products where price is the issue (consumer electronics, cars, etc.). The long-term problem is that the products desired by global consumers are not the products Japan makes, which means exports will slow and production will contract. Eventually the yen will reach 140 yen/dollar.

¥115 is coming, but it still won’t stop Japan’s death spiral. Japan’s economy continues to shrink and the game plan is boost exports by crushing the Yen, but don’t expect it to work.

East Meets West: How the Valley Effects China

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iPhone Sales: Evidence of Online Spending

Moneyball Economics visited a few local stores selling iPhones for the big, long-awaited iPhone 6 release. There were lines but not that deep and none reaching outside the store.  Wait times were no more than two hours. Photos of lines going around the block – like in NYC – reflect unusual circumstances, far from the norm elsewhere.

Apple Store Line

(photo source unknown)

The evidence was certainly not enough to drive the 6.5M figure being whispered for in-store sales. In this case, online sales become much more significant.

Apple hit the whispered 10M unit sales, about $5B worth. It’s hard to find any company that can expect $5B in sales for a week, much less $5B a year, and that’s just a kickoff for the smartphone holiday spending. This promises to be a $60B+ global event over the next few months.

It’s quite possible. A real iPhone release has been two years in the making (the iPhone 5 was a placeholder). A massive and loyal user base is waiting to upgrade.

China’s Struggle for Growth

The Chinese economy is in trouble. The domestic consumer economy is a pale shadow of the export economy, and exports are sluggish and slowing. According to the Port of Hong Kong, total exports grew 2% Y/Y on a rolling average basis, but August contracted (-3%) Y/Y.

Hong Kong Exports

The smartphone will push up the figures in the next few months, but not for long.

It’s hard to be positive about China’s prospects for growth over the next year. As an export-dependent economy, China has no reason to feel positive. The EU is tipping back into Recession. US demand for Chinese goods has matured. None of these things will be countered by growth in the emerging economies.

Surveys of China’s producers (Markit’s Purchasing Managers Index or PMI) indicate production is one cold breeze away from contraction. (Markit surveys 420 manufacturing companies each month.) Production is 50%+ of the economy.

Additionally, new products simply aren’t appearing fast enough. It’s a post-smartphone world. US and EU markets are saturated. The Chinese domestic market has a lot of growth potential, but the total global growth that Chinese manufacturers have been serving is slowing down. Replacing the production is critical to maintaining growth.

The promise of the next high-volume consumer product is centered on connected devices. The idea is that every smartphone owner will want at least two or more peripheral gadgets; glasses and a watch, at the very least.  These devices aren’t taking off though. Instead of a few billion smartphone users and billions of connected devices, we’re seeing a few million connected devices. Apple had to delay the release of their watches into 2015, causing some delay in pick-up. Samsung has theirs ready but sales have been puny at best.

Desperation and Distribution Channels

If Chinese companies can’t grow out of the slowdown, then they can expand out of it. Instead of manufacturing for other companies, many Chinese companies are looking to sell under their own labels and some are looking to move into local markets and participate in the distribution channel. This requires massive infrastructure investment and the payoff is not happening anytime soon.

Chinese manufacturers are starting to seek growth outside of their traditional areas of expertise. High tech companies now entering the ice cream space, for example.

Predicting this slowdown back in 1Q, SouthBay Research said that – despite official Chinese government assertions – some stimulus would be needed by Summer 2015. Indeed, the PBOC just stepped in with some big monetary help and it won’t be the last.

There’s a reason why Caterpillar expects sales to China to collapse (-10%). Global demand is slowing. At the same time, domestic demand has relied on the property bubble, and we all know how spectacularly it burst.

Capital Flight From China to the US

Faced with slowing global demand, a sluggish domestic economy, a collapsing real estate market and a seriously under-performing stock market, Chinese investors are looking for better performance. The US stock market is calling like an oasis in the desert.

While investments in gold have more downside risk and US real estate seems to be peaking, the US equity markets are liquid and seem to have gas left.

Alibaba is a juicy example of capital flight in action. The #1 company in China had the biggest IPO of all time. However Alibaba did not IPO in China and that’s serious loss of face. The likely reason is that important Chinese investors (insiders including government officials) could maximize their returns and, more importantly, keep the money outside of the reach of the Chinese government.

It will be interesting to watch the carrots and sticks the Chinese government puts up to slow capital flight.

Expect Stimulus to Combat Slow Growth

The housing market is crashing, pulling down domestic consumption. Look for some action here in the form of lower down payments or moves to lower interest rates.

Expect monetary stimulus in the form of extra lending.

With slower global demand, China’s consumers are the key going forward. The Chinese government will attempt to keep the yuan flat. A cheaper yuan helps exports but hurts consumers.

This is all good for US equities. A boon in Chinese demand will lead to greater US company sales and a flat yuan keeps the dollar-denominated profits stable (most US companies price in dollars to avoid the yuan trap but there is still exposure to a falling yuan and the erosion of dollar-denominated profits).

Normally a strong dollar is bad for the stock market as it reduces value of offshore profits, slows exports and moves money into alternative investments like bonds. However trends like a Chinese capital flight into the US equity markets will add some tailwind.

This all leads back to our anecdote about iPhone 6 sales. Growth in the mobile phone market is stagnant and other mobile device growth sluggish. The strongest company in China had the largest IPO of all time, but in the US equity market. The Chinese economy is in major need of a kick-start if it wants to keep up with the world.