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Friday 06.03.2016

Gold is falling because of the Fed — but not for the reason you think

Gold investors can stop worrying. Despite recent chatter, interest rate tinkering at the Federal Reserve is not driving the price of gold.

That said, it’s easy to understand the confusion… The price of gold dropped to a three-week low after the Fed released the minutes of its April meeting on May 18, suggesting it may lift interest rates in June. If U.S. employment figures are strong and inflation moves closer to the Fed’s 2 percent target, the U.S. central bank may raise the federal funds rate (the rate it charges to lend money to other U.S. banks). As you likely know, the Fed raised its benchmark rate last December for the first time since 2006.

On Friday, Federal Reserve Chairwoman Janet Yellen hinted again at higher rates, saying a rate hike would likely be appropriate “in the coming months.” If it is a similar hike to December’s, that means it will rise another quarter of a percentage point leaving the rate in a range of 0.5 – 0.75 percent – still very low.

Gold is now down 6.3 percent from the 2016 high it hit on May 2. Even the so-called “smart money” is pulling back a bit from gold in anticipation of higher interest rates. Earlier this week, Bloomberg reported that hedge funds have cut their gold holdings since January. However, the truth is, a possible June rate hike is not the real reason gold prices have dropped. Gold dropped because higher rates would strengthen the U.S. dollar. You see, when the Fed lifts interest rates, investors buy more U.S. dollars – because those dollars (after an interest rate hike) pay more interest. Gold, on the other hand, does not pay any interest. So, when investors can earn more holding other low-risk assets like the U.S. dollar, gold prices suffer. But that’s about the only way the Federal Reserve can influence gold prices.

Boeing Is Laying Off Hundreds of Workers As It Struggles to Compete With Airbus

The 211 involuntary layoffs are in addition to another 8,000 jobs the company is slashing by year end.

Boeing plans to lay off 211 employees in Washington state on July 22, a state agency said, referring to a group that likely includes information technology workers that Boeing is letting go in a cost-cutting drive.

The Chicago-based aerospace and defense company said last week it would eliminate an unspecified number of IT workers through involuntary layoffs. The state Employment Security Department said late Wednesday that it had received notice of 211 layoffs planned by the company.

Boeing is slashing costs as it battles for sales with European rival Airbus and tries to widen its profit margins to mid-teens by the end of the decade, from 7.9% in the first quarter.

Are the Internet Boom Times Over?

The “Dumb Money” Is Finally Buying New Homes, Just as the “Smart Money” Exits

New home sales just went up a staggering 16.6% in April: 619,000 new homes were sold – the most since early 2008 just before the worst of the housing meltdown, and the highest rate of growth in 24 years. So is this a sign that the economy is back on track? Don’t count on it.

Home sales, like jobs, is a lagging indicator, not a leading one. It’s a sign of where we’ve been, not where we’re going. So this isn’t a big surprise to us. In fact, this is just like stock indicators near a peak.

The dumb money is finally pouring in while the smart money is exiting. Except this time, it’s just in real estate.

Millennials have held back on buying homes for a variety of economic reasons since 2008. Tighter lending standards, for one; the concern that home prices could fall again, for another; then there are $1.2 trillion in student debt, falling real wages, and higher unemployment for millennials (since more baby boomers are staying in the workforce longer).

Most Illinois schools won’t open without a budget deal

Here’s how dire the situation is for the Chicago Public Schools: after the district makes its pension payment on June 30, it will have just $24 million dollars on hand. That’s enough money to operate the schools for just two days.

While the schools are in danger of not opening this fall, two of the biggest stakeholders are playing the blame game; the district administration is pointing at Springfield, while the teachers are blasting the district.

And today, in a one-on-one interview, the Chicago Public Schools CEO issued a dire warning: “Without a state education budget, I would say that most of the schools in the state won’t open,” Forrest Claypool said.

Claypool says the Illinois budget stalemate could prevent public schools from opening in the fall and he’s placing the blame squarely on the governor for opposing a new school funding bill. “The problem lies with governor Rauner, so I would ask (voters) to pressure the governor to do the right thing,” Claypool said.

Owning Gold Is Not Optional, Every Investor Needs It - Strategist

The Federal Reserve seems to be pulling in the reins on gold's 2016 rally as markets expect rate hikes as early as this summer. But could the Fed also be gold's salvation? What is the central bank's end game?

These are just a few questions discussed on Kitco News with Keith Fitz-Gerald, chief market strategist for Total Wealth Research, who says gold has never been more relevant for investors. ‘I don’t believe it’s optional and I do believe every investor needs to have it,’ he said Thursday.

Gold has recently lost ground, hitting a 3.5-month low, on heightened expectations of a rate hike in the U.S. as early as this summer. August Comex gold futures were last down $1.40 at $1,213.30 an ounce.

Despite the pullback, Fitz-Gerald maintains his view that investors should own the yellow metal. ‘I think individual investors can stick with gold and quality companies doing business in gold so that no matter what happens with the Fed’s next move, no matter what Wall Street tries to hijack next, no matter what lack of adult supervision Washington wants to demonstrate, there’s still potential for profits,’ he explained.

Home flipping is on the rise

A new report by RealtyTrac, a site specializing in marketing foreclosures, shows that buying and selling properties for profit – a practice known as “flipping” – is increasing.

The company reports that 6.6% of single-family and condo sales in the first quarter of the year qualified as “flips,” meaning they were bought and sold within a 12 month span. That's a 20% increase from the fourth quarter of last year and is up 3% from the first quarter of last year.

Daren Blomquist, senior vice president at RealtyTrac, says flipping dipped a bit in 2014 but has been increasing since then.

“While responsible home flipping is helpful for a housing market, excessive and irresponsible flipping activity can contribute to a home price pressure cooker that overheats a housing market, and we are starting to see evidence of that pressure cooker environment in a handful of markets,” he said. Those markets include Baltimore, Buffalo, New Orleans, Seattle, and San Diego, among others.

Will there be criminal charges filed against Hillary?

Flash the plastic – Bank of England unveils untearable plastic 5 pound note

Mark Carney, the governor of the Bank of England, has formally unveiled Britain’s first plastic banknote, the new fiver featuring Sir Winston Churchill.

The transition to plastic notes is a significant departure for a central bank that has used paper money since it was established more than 320 years ago.

Launching the note at Blenheim Palace, birthplace and ancestral home of the late wartime leader, Carney said the new polymer note was a “major innovation” and was cleaner, safer and longer-lasting than paper.

“It is resistant to dirt and moisture, so the note won’t wear out as quickly as the current fivers but will stay in good condition for longer,” Carney said.

The Surging Cost of Basic Needs

For low-income households, it’s no surprise that a large proportion of their spending goes to basic needs, such as housing and food, while high-income households have traditionally had more discretionary spending. But how do families cope when the cost of housing goes up, or the cost of transportation goes down? And how have their budgets adjusted in light of these changes in order to pay for everything?

A new report from The Hamilton Project of the Brookings Institution looks at how the composition of household spending across income levels has changed over the past 30 years. Analyzing data from the U.S. Census Bureau’s Consumer Expenditure Survey, the report found that budgets have indeed shifted—particularly for low-income families.

The report found that low-income households are devoting a greater share of their budget to basic needs compared with 30 years ago. In fact, low-income and middle-income households (defined as the lowest and middle quintiles of the income distribution) now spend roughly 80 percent of their budget on housing, food, transportation, health care, and clothing. For low-income households, 40 percent of their budget went to housing—a 5.5 percent increase from 1984.

One particularly worrying aspect of this is that low-income and middle-income families might be cutting back spending on food in order to compensate for rising costs in housing and health care.

We're Still Not Sure What Causes Big Recessions

There is an important, but quiet debate in the economics profession about what leads to big recessions: wealth or debt.

Almost everyone agrees, at this point, that the Great Recession of 2007-09 was caused by the financial system. But that leaves the question of what, exactly, happens in a financial system that leads an economy to crash. Formal economic models of financial shocks are not very realistic. They usually assume the harm comes from disruption to the banking system, which acts like a supply bottleneck that chokes off economic activity. But the Great Recession and similar episodes look very much like demand shocks, with low inflation and lots of spare capacity.

So economists are asking what kind of financial disasters have the biggest impact on demand. Roughly, the two answers are wealth effects and debt overhangs. The wealth-effects school holds that when asset bubbles pop, people suddenly feel poorer. This causes them to cut spending, which sends demand crashing. The debt-overhang school believes that people have sudden shifts in their willingness to take on debt -- when they go into balance-sheet repair mode, they stop spending.

The argument between these two schools fortunately hasn’t been very politicized (yet). But it does have important policy implications. If wealth effects are the big culprit, then taming asset bubbles becomes the central task for recession prevention. If it’s debt that does it, the key is to stop households from borrowing so much.

Hacking the Fed

Workers Don't Need Government's Help to Earn Higher Wages

One of the assets of the American economic model is a relatively flexible labor market, especially when compared with labor markets in many European countries. It explains some of the consistently lower U.S. unemployment rates and higher economic growth. Unfortunately, this flexibility is increasingly threatened by government policies that would increase the cost of employing workers. These policies include the Department of Labor's recent overtime rules, the call for employer-paid family leave, and a minimum wage increase.

Some of these calls are driven by pure politics and self-interest. The typical union business model, for instance, is built on the notions that workers are treated unfairly by employers, that abuse is systemic to the labor market and that things get worse over time. The argument is that hamstringing employers into paying workers more for the same amount of work would be beneficial to workers, in spite of evidence to the contrary.

Sometimes the support for intervention in the labor market is based on widespread beliefs that are quite wrong. Take, for example, the idea of a large "productivity-pay gap" in the marketplace—meaning that workers' productivity rose at a high rate over the past four decades but real earnings growth failed to keep pace and instead was nearly flat.

A popular chart produced by the Economic Policy Institute shows that net hourly productivity has grown by 91 percent since 1973 while hourly compensation has only grown by 10.5 percent. The data, EPI believes, prove that most employers unfairly force their employees to work long hours, at a much higher productivity level, without adjusting compensation appropriately. Many people, from President Barack Obama to Labor Secretary Tom Perez, have used the data to make the case for the DOL overtime rules that expand the scope of coverage of employees eligible for overtime pay and other labor market restrictions.

Bill Gross: Get ready for an 'entirely different' market

Bill Gross has some bad news for investors. In his June investment outlook released Thursday, the widely followed bond fund manager contended that bond and stock returns realized in the last 40 years are "a grey if not black swan event that cannot be repeated." Investors should not expect 7 percent returns on bonds or returns in the high single digits or double digits on stocks, Gross told CNBC on Thursday.

"The markets are entirely different and it would pay to travel to Mars as opposed to stay on Earth, because the returns here are very, very low," the manager of the Janus Capital Unconstrained Bond Fund, said on CNBC's "Power Lunch".

Gross said easy central bank policy could hold down bond returns. Central banks in Europe and Japan have adopted negative interest rates, while the U.S. Federal Reserve's target rate is at 0.25 to 0.50 percent.

German and Japanese 10-year bonds currently have negative yields, while their 30-year bonds yield less than 1 percent. The U.S. 10-year Treasury note yield sat around 1.8 percent Thursday.

Despite Economic Growth, Middle-Income Americans Have Less Than They Did 40 Years Ago

Over the past 40 years, the US economy has boomed. But what does that mean for the "American dream"? While the top 1% has had enormous gains, average US households aren't any better off today. In fact, they're falling further behind.

We crunched numbers from the US Bureau of Labor Statistics, adjusting them for inflation, and found that during the past 40 years, middle-income households have seen their income decrease 13 percent, and the number that really matters -- discretionary income -- has decreased even more, by almost 30 percent. This was true for all households, not just married households.

While pre-tax income is an interesting metric, the number that really matters for Americans' well-being is discretionary income -- the money left over after taking out income taxes and paying for necessary expenses such as food, clothing, shelter, housing, transportation and health care. We factored these expenditures into our calculation, and the data is clear: Middle income Americans are worse off than they were 40 years ago.

How can this be? While popular rhetoric looks to blame taxes for burdening the middle class, the opposite is true. According to data from the Bureau of Labor Statistics, middle-income households pay significantly less -- more than 65 percent less in fact -- in income taxes than they did 40 years ago. Other studies back this up. The Center on Budget and Policy Priorities and the Congressional Budget Office agree that middle-income households are paying near historic lows in terms of income taxes.

Draghi: Negative Rates Right Policy to Restore Economy

Mortgage brokerage CEO jailed for stealing homes, renting them back to struggling homeowners

The former owner and chief executive officer of a California mortgage brokerage will spend nearly the next eight years in federal prison after pleading guilty to charges that he falsely promised to help distressed homeowners avoid foreclosure.

But instead of actually helping the struggling homeowners keep their homes, David Singui, and his company, Direct Money Source, stole the equity in the homes and served as the homeowners’ impostor landlord for a period of years, the U.S. Attorney’s Office for the Central District of California said this week.

According to the U.S. Attorney’s Office, Singui, 52, pled guilty to conspiracy, loan fraud, aggravated identity theft and tax evasion charges stemming from a scheme that caused struggling homeowners to lose more than $4 million and cost lending institutions more than $11 million.

In a release, the U.S. Attorney’s Office said that Direct Money Source offered a “Fresh Start Program,” which claimed it that could help distressed homeowners avoid foreclosure by connecting them with a “credit investor,” who would buy their homes, and hold it for them for a year, allowing the borrower to repair their credit. Then the “credit investor” would sell them back to the original homeowners, at a lower interest rate.

Walmart Testing Drones To Help Manage Warehouse Inventory

As predicted, so it has come to pass: after asking the Federal Aviation Administration for permission to start testing drones for things like managing warehouse inventories, Walmart says it’s started that process, and could have the little guys up in the air and on the job in the next six to nine months.

At a media tour Thursday at a distribution center in its hometown of Bentonville, AR, Walmart says the drones would help make the warehouse inventory system more efficient, the Associated Press reports.

The drones will fly around capturing images in warehouses in real time, and flagging misplaced items, doing a job in a day or less that usually takes a month.

When the retailer asked the FAA for permission to go ahead with its testing program, it said it might consider using drones for things like home delivery and curbside grocery pickups, but it’s unclear if Walmart will be moving ahead on those drone plans as well.

Over $10 Trillion in Sovereign Debt Now at Negative Yields

The era of zero interest rates somehow migrated into the era of negative interest rates. The only good news is that the negative interest rates did now arrive in the United States. 24/7 Wall St. has been amazed about the amount of sovereign debt around the globe that now trades with a yield under 0.00%.

Now a report came out from Fitch Ratings showing that there was a whopping $10.4 trillion in sovereign debt with negative yields in May. This means that rather than earning money for investors, investors are effectively paying a tax or are paying a penalty just to get their cash back in the future.

Fitch noted that unconventional monetary policies, regulatory risk mitigation by banks, and a flight to safety in global financial markets are all key contributors to the negative rates of sovereign debt.

The amounts of fixed-rate sovereign debt trading at negative yields was broken down as $7.3 trillion in long-term debt and $3.1 trillion in short-term debt (as of May 31).

Friday 06.03.2016

NEWS to Disturb the Comfortable...

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