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Tuesday 05.31.2016

Economy dominates US election campaign but Fed is the real decider, not White House

As always, the economy is the central issue of the unfolding U.S. election campaign. In the weeks and months ahead, we shall be hearing about the candidates' economic programs, focusing on jobs, incomes, public finances and international trade policies.

To understand the limits, or the pure wishful thinking, of these programs, we have to see the binding constraints the U.S policies face in these areas.

People are yearning for a better economy and a rising standard of living. Primaries show that the "same old thing" message and its proponents have serious problems. Tough contests lie ahead. Votes have to be won with the proverbial "meat and potato" issues and a country at peace.

The initial position here is quite difficult. The budget deficit last year ended up at 4.5 percent of GDP, compared with budget deficits of 1.9 percent of GDP in the euro area and a 1 percent of GDP in China. No significant improvement in U.S. public sector accounts is expected this year or next.

Detroit Still Offers $1,000 Homes

As the City of Detroit bulldozes thousands of homes, it has maintained a small, and largely unsuccessful program that allows people to buy homes for as little as $1,000. The low-priced home purchases come with a long list of provisions.

Reuters recently reported on the extent to which Detroit plans to destroy parts of the city, which has lost half its population since the 1960s and has less than 700,000 residents today.

Nowhere in America bulldozes derelict homes with Detroit’s ferocity, as the city that has become a byword for U.S. urban decay seeks to engineer a recovery by tearing itself down.

A year after the city exited the biggest-ever U.S. municipal bankruptcy, a plan to demolish half of its nearly 80,000 blighted or deteriorating structures — nearly one in three city buildings — is showing some signs of success.

Here's how much the price of Obamacare changed this year for every state in the US

Prices for the average plan under the Affordable Care Act have been taking off lately, and this year is no different. Linda J. Blumberg, John Holahan, and Erik Wengle at the Robert Woods Johnson Foundation and Urban Institute, decided to find out just how much prices were increasing and why.

First off, the researchers said that using a national aggregate in order to gain an understanding of how and why premium prices are increasing doesn't make much sense due to the variance of the exchanges where the insurance plans are offered.

"We conclude that a national average rate of premium increase is a fairly meaningless statistic since different markets are having very different experiences," said the report.

"The focus of attention should be on understanding the wide variability by identifying the characteristics of markets that have experienced high premiums or high growth in premiums and of markets with lower premiums or lower growth in premiums."

Confidence In Eurozone Improves

U.S. oil prices rise on start of summer driving season

U.S. oil prices were lifted early on Tuesday by the start of the peak demand summer driving season, although international fuel markets were weighed down by rising output in the Middle East, which mostly serves Asian customers. U.S. West Texas Intermediate (WTI) crude oil futures were trading at $49.50 per barrel at 0042 GMT, up 17 cents from their last settlement.

Demand in North America is set to pick up along with the official start of the U.S. summer driving season this week, triggering a cut in the amount of open short crude positions that would profit from falling prices.

"Investor positioning points to further support for commodity prices as bearish bets continue to be reduced," ANZ bank said on Tuesday.

The amount of outstanding managed short crude positions of U.S. WTI crude futures fell to its lowest level this year last week. International oil markets, however, were hit by a rise in Middle Eastern crude exports, most of which go to Asia.

50 years of gold price vs Dow shows metal still a bargain

While it has come in for a beating in May, briefly dipping below $1,200 an ounce on Monday down nearly $100 an ounce for the month, the gold price is holding onto 14% gains for the year. Before the recent slump gold was enjoying it's best start to a year since the early 1980s.

While recovering from a steep sell-off at the start of the year, US blue chip stocks haven't been able to convincingly break through the 18,000 level it first breached at the end of 2014. So is gold relatively overpriced against stocks?

This 50-year chart of the blue-chip Dow Jones Industrial index from Macrotrends suggests otherwise. The graph tracks how many ounces of gold it would take to buy the Dow over any given month going back to 1966.

In January of 1980 when gold in inflation-adjusted terms hit an all-time high of roughly $2,400 an ounce the ratio was 1.3 ounces and during the Great Depression it took 1.9 ounces to cover the Dow. That compares to highs around 40 between mid-1999 and mid-2001 when gold reached lows of $250 an ounce. When the nominal price of gold hit a record high above $1,900 in August 2011 the ratio was 6.4, but has now more than doubled to just under 15.

Watch this hacker break into a company

The U.S. Consumer Finally Embraces Thrift -- and Dollar Stores

A new job or raise landed over the past year doesn't seem be leading people in the U.S. back to spending like they did during the 2004-2007 economic boom.

In fact, judging by the strong first-quarter results from the nation's dollar stores, U.S. consumers have embraced a mindset of thrift. Dollar General (DG) , which operates more than 12,700 stores across 43 states, notched a solid 2.2% same-store-sales increase in the first quarter. Both customer traffic and the average amount spent by a shopper increased. Sales jumped in all areas of Dollar General's businesses, led by demand for consumable goods, such as paper towels and home-cleaning products. Sales in the company's consumables segment, which represents more than 76% of its total business, rose 8% from the prior year.

Dollar General's earnings came in at $1.03 a share, up 23% year over year, and smashing through Wall Street estimates for 94 cents a share. "In an environment where many retailers struggled, we delivered good performance," boasted Dollar General CEO Todd Vasos on a call with analysts. Interestingly, Dollar General isn't solely finding good performance among penny-pinching senior citizens and those on food stamps. Pointed out Vasos, "The millennial shopper is a segment that I was particularly excited to see emerge as a core consumer for Dollar General, as this segment is so important to the future of retail and Dollar General."

According to Dollar General, female millennials make up about 12% of the chain's shoppers and 24% of its overall sales. On average, says Dollar General, the female millennial -- who often does the shopping for her family -- is in its stores three times a month. "She wants healthy food items and likes to be on the cutting edge and try new products. And while national brands are important, she also trusts our private brands and utilizes the entire Dollar General store as a way to stretch her budget."

Default Chain Reaction Looms Over China’s $3.6 Trillion WMP Market

The risk of a default chain reaction is looming over the $3.6 trillion market for wealth management products in China. WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other. Such holdings may have swelled to as much as 2.6 trillion yuan ($396 billion) last year, based on estimates from Autonomous Research this month.

The trend has China watchers worried. For starters, it means that bad investments by one WMP could infect others, causing a loss of confidence in products that play an important role in bank funding. It also suggests WMPs are struggling to find enough good assets to meet their return targets. In the event of widespread losses, cross-ownership will create more uncertainty over who’s vulnerable — a key source of panic in 2008 when soured U.S. mortgage securities triggered a global financial crisis.

Those concerns have become more pressing this year after at least 10 Chinese companies defaulted on onshore bonds, the Shanghai Composite Index sank 20 percent and China’s economy showed few signs of recovery from the weakest expansion in a quarter century.

“There’s abundant liquidity in the financial system, but a scarcity of high-yielding assets to invest in,” said Harrison Hu, the chief Greater China economist at Royal Bank of Scotland Plc in Singapore. “All the risks are accumulating in an overcrowded financial system.”

Why This Friday's Payrolls Report Could See A Big Miss

When the main economic event this week hits this Friday at 8:30 am EDT, when the BLS releases the May payrolls report, Wall Street consensus wil be expecting a 160,000 print, a number which will have a big impact on market expectations for a Fed rate hike at the June or July FOMC meeting. However, consensus may be disappointed for one reason: the Verizon strike could chop off as much as 35,000 workers from the headline payrolls print.

As DB's Joe LaVorgna explains, the May Nonfarm payrolls (+135k forecast vs. +160k previously) should show a substantial impact from 35k striking Verizon workers during the survey period. Private payrolls are likely to increase by only 125k (vs. 171k). This is one reason why the unemployment rate should remain steady at 5.0% for the third consecutive month. Average hourly earnings (+0.1% vs. +0.3%) could also be impacted by the Verizon workers as there is historical evidence that strikes of similar magnitude have distorted AHEs and hours worked.

The original SouthBay forecast did not include the Verizon strike because I was not sure if the BLS would include it. That may sound strange given that the strike met all the criteria for being included in the payroll figures (for example, it lasted the entire period under coverage). But one never knows with the BLS. In any case, the official BLS Strike Report officially records it and that forces my hand.

The Strike Report identifies 35K Verizon workers on strike but I estimate the payroll impact to be ~(-20K). To manage the impact, Verizon undertook several steps. First, they hired temps. Second, they backfilled many of the positions with internal workers. Third, some secondary support businesses benefited from the strike (like hotels & restaurants - many temporary workers had to be housed and fed).

How and Why You Should Stop Thinking in Dollars and Start Thinking in Gold

Whether intuitively or analytically, we all know that the dollar is not such a great form of money. That’s putting it lightly though. The dollar is a terrible form of money when you take a closer look. Those who have lived longer on this earth tend to grasp this reality more clearly. Like trying to walk up a downward-moving escalator, the momentum of a falling dollar is always against you. This becomes clearer when engaging in economic planning. Whether it’s starting a business, making an investment, saving for retirement, putting something away for a rainy day, or simply making ends meet on a week to week basis, all of us have to work against a falling dollar (or fill in the blank with your fiat currency of choice.)

If that’s true, why do we keep using it? Granted, you are forced to pay your taxes with dollars. And yes, technically it is illegal to use anything else for “cancelling debts.” But neither of those artificial props actually forces you to think in dollar terms. They certainly have an impact in conditioning you to think in dollars, but as of yet, your mind is still not totally enslaved by the State. You are free to think in terms of a better money. Of course, we think gold is the best money. In fact, here is why you should leave dollar-thinking behind and start thinking in gold terms.

Money is commonly and inadequately defined as the “common medium of exchange.” But where the rubber meets the road, this definition doesn’t tell us anything about whether the common medium of exchange is a good one or bad one. By good or bad we mean whether it helps or harms human flourishing and civilization. Economic planning is necessary for human flourishing and civilization. Planning in a good form of money as opposed to a bad one makes a big difference.

Carl Menger, often dubbed the father of the Austrian School of Economics, preferred to define money in terms of its “saleability” or “marketability” relative to other economic goods. Marketability refers to the relative ease that particular good could be used in a market exchange. There is always a cost to bring and exchange products at market. Therefore, we can say that the most marketable economic good was the one that permitted mutually beneficial exchange at the lowest possible cost. The most marketable good in any economy eventually becomes money.

Even 6-Figure Families Are Often Strapped for Cash, Study Says

Americans don't always do such a great job of saving money, but when we think about those with minimal or nonexistent savings, we often imagine low-income families struggling to make ends meet. It's therefore somewhat shocking to learn that nearly 25% of households earning $100,000 to $150,000 a year claim they couldn't come up with $2,000 in a month's time.

In a study published by The Brookings Institution, participants were asked whether they'd be able to come up with $2,000 within 30 days for an unexpected expense. Across all income levels, over 25% of respondents admitted that they could not come up with that much money, while another 19% claimed they could do so only if they sold off possessions or took out payday loans. In other words, nearly 50% of Americans on the whole are considered, as the study puts it, "financially fragile." And while we might expect lower earners to fall into this category, the fact that so many six-figure families aren't saving means their money management skills just aren't up to par.

A big part of the problem is that higher earners tend to fall into the trap of taking their healthy incomes as an invitation to spend more. Higher earners are more likely to get approved for substantial mortgages and other loans than those who earn less, so many make the mistake of spending first and saving second (or not at all).

The Brookings study authors admit that while the percentage of cash-strapped six-figure families is perhaps higher than it should be, the numbers are less surprising when we consider the high costs of living in desirable neighborhoods, housing prices, and child care expenses.

Chinese pouring over $110 billion into US real estate

Chinese investors have overtaken Canadians to be the biggest foreign buyers of U.S. property. According to a study from the Asia Society, a surge in Chinese buying in residential and commercial real estate took their 5 years investment total to over $110 billion last year.

For many years, Canadians were the top foreign buyers of homes in the U.S. But recently, Chinese buyers have surged passed them. The National Association of Realtors says in the year ending March 2015, buyers from China snapped up $28.6 billion worth of properties in the U.S. Canadians spent $11.2 billion and Indians spent $7.9 billion.

The average Chinese buyer is spending almost double the average of all foreign buyers and more than triple the amount spent by Americans.

The Chinese have also been pouring money into commercial real estate.

Tech giants hold $500 billion in cash

Verizon, unions agree to pay raises, new jobs to end strike

An agreement between Verizon Communications Inc (VZ.N) and unions potentially ending a nearly seven-week strike includes 1,400 new jobs and pay raises topping 10 percent, the company and unions representing about 40,000 workers said on Monday.

The deal, which one analyst called "very rich" for Verizon workers, could be a prelude to the company exiting the wireline telecommunications business, transforming into a wireless internet business.

Verizon, the No. 1 U.S. wireless provider, and the Communications Workers of America (CWA) had reached a tentative deal on Friday. Details for the new four-year contract were disclosed on Monday.

The CWA said Verizon agreed to provide a 10.9 percent raise over four years while Verizon put the increase at 10.5 percent. According to the CWA, both numbers are correct, with the calculation done by the union including compounded interest that workers would receive as subsequent raises are determined from a new base salary.

Janet Yellen admits the fed didn’t see the financial crisis coming

The Federal Reserve missed clues that should have alerted them of the financial crisis, Fed Chair Janet Yellen said on Friday during a speech at Harvard University. “We saw trees, and the house price bubble was a tree,” Yellen admitted. “We really didn’t see that coming.”

The Fed Chairwoman said a sudden explosion in borrowing was a strong sign that the market was about to go sideways. Yellen said former Fed chairman Ben Bernanke did a “magnificent” job in steering policy to heal the economy after the Great Recession.

He was the “right person with the right intellectual background and courage to think outside the box,” Yellen said. Yellen also said a rate hike in the coming months may be appropriate although she gave no definitive answer to the Feds upcoming decision.

Minutes from the FOMC’s April meeting also suggested that the Fed could increase rates at their June meeting. Following suggestions of another rate hike, treasurys fell, and the odds of a rate hike in the Federal Fund Futures market increased.

Higher wages for workers helps everyone

Much of what is known as “economic theory” is gibberish. It is propaganda, implanted into the minds of academics for one reason: to preserve the status quo of always favoring the (very) wealthy over all other members of the population. The facets of economic doctrine which are valid, are valid because they do little more than express principles of simple arithmetic and common sense.

“Supply and demand” is just simple arithmetic and common sense. If supply exceeds demand (i.e. there is a surplus), the price falls. This depresses supply and stimulates demand, until equilibrium is restored. If demand exceeds supply (i.e. there is a deficit), the price rises. This stimulates supply and depresses demand, until equilibrium is restored.

Similarly, the principle of economics known as the Marginal Propensity to Consume, is nothing more than an expression of simple arithmetic and common sense. Put a dollar into the hands of a poor person, and that person will spend the entire dollar, providing maximum stimulus to the economy. That’s not a “theory.” It is an elementary fact.

Put a dollar into the hands of a middle class person (the few who remain ), and that person will spend most of the dollar, and save a small portion of it. Again, this is not a “theory.” It is an elementary fact. Put a dollar into the hands of a wealthy person, and that person will hoard the vast majority of that dollar. The wealthier the person, the greater the percentage that is hoarded.

Tuesday 05.31.2016

NEWS to Disturb the Comfortable...

We don't tell you what to think,

but we give you something to think about.