(This is something my wife asked that I do for her, so she can at least seem well-informed about world events while hanging out with the bankers for whom she works in human resources. It was intended to be a weekly thing, but I bet this is the first and last week I do it. Like she’s done at every turn during our marriage, she wants to ensure that she does not yield an ounce of control over her life to me, and allowing me to filter daily news for her implies giving up a huge swath of control. So enjoy what will likely be this one and only iteration of The Executive Summary. It wasn’t specifically intended for TCA, so consider its posting here as something extra.)
Mario Draghi, head of the Eurozone Central Bank, or ECB, announced plans this week for a program of quantitative easing to save the Eurozone from deflation. The ECB will purchase $60 billion euros per month of the bonds of its member states, from now through September of 2016 (about 20 months, or 1.2 trillion euros) thereby financing and encouraging deficit spending in the Eurozone, while also diluting the value of the currency. It’s a Keynesian twofer, much in the same way that the US Federal Reserve’s bond buying program worked to foreclose U S deflation and economic contraction in a variety of ways. However, the ECB move will have the effect of diminishing the value of the euro relative to the dollar. As the dollar continues to strengthen, the ECB move will tend to unravel the deflation-fighting accomplishments of the US Federal Reserve. On the day of the announcement, the euro fell by one percent against the dollar, a huge one-day move, implying trillions of dollars/euros of losses and gains.
Dollar Diplomacy and Currency Wars
While nitwit US politicians often believe that a strong dollar is always good for America, it’s not. When the dollar increases in value relative to its trading partners (mainly the British pound, the Chinese yuan, the Japanese yen and the euro, with a few Canadian dollars and Mexican pesos thrown in), exports suffer for the expense of buying dollars, tourism drops, and the overall price level in the US declines (i.e., there is possibly experienced that economic bugbear, deflation). With deflation, demand contracts as people put off buying things to see how low prices will go, which forces prices even lower in a negative feedback loop. All of the US’s main trading partners, with the possible exception of Great Britain, are pursuing a strategy of international currency devaluation, some explicitly (Japan and China), others only tacitly, as an incident of dealing with domestic economic problems. All the world’s central banks want to cheapen their currencies at home, and some seek to do so incidentally abroad, but all have successfully done so relative to the US dollar. Since mid-2014, the US dollar has increased on international foreign exchange markets to a level not seen in a decade. The competitive devaluation currency wars are on. The zero-sum mercantilist strategy of competitive currency devaluation is of, at best, dubious benefit. Japan fired the first shot last year when it aggressively began devaluing its currency, and about all it got them was an artificially inflated stock market, sure to pop soon enough. Switzerland tried unsuccessfully to maintain its franc at an unsupportable low level relative to the euro and failed. It threw up its hands a couple of weeks ago, and set the foreign exchange markets roiling. Economic activity in either case, Japan or Switzerland, hasn’t substantially changed. Competitive devaluation is a fool’s errand. So the world’s central bankers will undoubtedly follow it to its logical end.
Oil and Commodities Prices
Prices for oil seem for now (the last few weeks) to have stabilized at around $50/barrel, a fifty to sixty percent decline over the course of a few months. West Texas Intermediate was $107/barrel in June of 2014. More ominously, virtually all producer price commodities indexes reported on the St. Louis Federal Reserve Economic Data website (FRED) have been declining over the last several months, those which include energy and food commodities more steeply than others. This could be due to the deflationary effect of a higher dollar, or could indicate a broad contraction in demand, indicative of recession or economic contraction of some sort.
The Bank of Canada recently moved to lower its target interest rate by a quarter point, to .75%, to quell economic dislocations anticipated to occur because of lower oil prices.
The ECB’s bond-purchasing strategy hasn’t anything specifically to do with the economic impacts of lower oil prices, but arose because of the threat of deflation, which drastically lower oil prices are sure to exacerbate.
There could be volatility in the oil markets in the coming days, as jockeying for power in the house of Saud has undoubtedly begun in earnest with King Abdullah’s death. Saudi Arabia controls the price of oil, particularly on the down side, by deciding or not to produce. It can’t do as much on the top end to bring prices down—it can only produce so much–but it can always shut the spigots if it decides it wants to push the prices up.
The yield on 10 year US Treasury bonds has declined along with oil prices, bouncing around lately at roughly 1.8%, a level not seen since early 2013, where it had risen after reaching half-century lows in 2012. Accordingly, mortgage rates have also declined. 30 year US mortgage rates are below 4%, a level last seen in mid-2013, when they also were bouncing back a bit from all-time lows reached in late 2012.
After briefly climbing for a couple of months in late 2014, the civilian labor force participation rate in the US recently began again to decline. It now stands at 62.7%, the same level as in February of 1978. The total number of employed, standing now slightly above 140 million, finally exceeded pre-recession levels in May of 2014 (at about 138 million), and has continued climbing since bottoming out in December of 2009 at 129.5 million. Labor force participation rates have fallen while total employment has increased because the total population continues to grow at a rate slightly exceeding the growth in employed persons. The US population is growing just barely over half a percent per year, about 2 million people each year; until very recently, job growth was not keeping pace. The unemployment rate, indicating the proportion of the population who want full-time jobs but can’t find them, declined to 5.6% in December, 2014, from an October, 2009 high of 10%. On a cheerful note, the number of financial services workers peaked at about 8.3 million just before the financial crisis, then declined to about 7.6 million by late 2010, and has to date only bounced back to about 8 million. Like my good buddy JDB says, the world needs less bankers and more people who care.
Bank of America’s profit declined 14% in the 4Q 2014. Citigroup’s profit fell from $2.5 billion in 4Q 2013 to $350 million in 4Q 2014. Wells Fargo, as usual, was the industry bright spot, posting profit gains of 2% from the fourth quarter a year ago, to a $5.7 billion quarterly profit. JP Morgan Chase recorded a 7.5% decline in profit in the quarter on revenue of $23.6 billion. Regions Financial reported 4Q profits of $195 million on revenue of $1.27 billion, compared to 4Q last year’s $219 million profit on revenue of $1.36 billion.
For regional banks more similar to aptly-named Regions Financial, North Carolina’s BB & T posted profits of $557 million on quarterly revenue of $2.38 billion, a slight increase in profits and a four percent decrease in revenue from 4Q 2013. Comerica, in Dallas, earned eighty cents per share, three cents more than the year earlier quarter, on revenue of $640 million, a nine percent increase. Pittsburgh-based PNC earned $1.84 per share, a decline of three cents per share, on revenue of $4 billion, minimally down from a year earlier.
All banks reported tighter net interest margins, as declining interest rates (accompanying declining oil and commodities prices) tightened the interest spread like a coy young woman on her first date.
In late breaking news, American Express has announced it will lay off 4,000 workers this year, or about 6% of its work force. It is doing so in spite of having exceeded top line revenue and bottom line profit by a large margin in 4Q 2014 relative to a the 4Q a year ago ($8.55b 4Q revenue last year to $9.1b 4Q this year; from $1.39b in profit 4Q last year to $1.45b 4Q this year). Some companies apparently believe that the best thing to do when times are good is to get rid of a few people. It seems the more that can be fired, the bigger and bigger the slices of the pie are for those who remain.
News from the Social Cesspool
Jay Leno weighed in on the accusations of sexual assault being leveled at Bill Cosby by what amounts now to a bevy of women, saying that it takes two witnesses to verify the probity of a woman’s testimony in Saudi Arabia, where here in America it seems to take dozens. Of course, Leno and Cosby were and are competitors for the comic entertainment dollar and attention, so Leno has an obvious interest in seeing Cosby get skewered by public opinion. But Leno’s right—that many women didn’t just make all this stuff up. Bill Cosby is yet another famous figure from Pennsylvania to see his reputation destroyed by sexual perversities. Joe Paterno was another, though in his case the perversions weren’t his own. It must be something in the water.
James Rhein, 48, a New York resident, took the notion of relational vengeance to a new level when he bulldozed his soon-to-be-ex-wife’s house to the ground while she was away running errands. Or, that’s what the headlines seem to imply. In actuality, the house was being renovated by the couple, and Mr. Rhein had broached the idea of just tearing it down and starting over with his wife, Diane Andryshak, before he did it. But the headline made good click bait.
Both Bill Belichik and Tom Brady are claiming they had no idea (!) that the footballs the Patriots used in the AFC Championship game had been deflated (thus, presumably, making them easier to grasp in the cold rain that was falling that day). Who cares? The league will probably fine the Patriots and penalize them a draft pick or two, and be done with it. Which is fair. Even if the balls were deflated, it can’t be imagined that deflated footballs are why the Patriots utterly annihilated the Colts. And now that we know what scummy little cheaters the Patriots (I wonder, did they adopt their mascot as a cover, wrapping their team in the flag so they could more easily get away with cheating?) are, there isn’t any way they could get away with it again. Right? It doesn’t matter. The Seahawks are going to do to Tom Brady what they did to Peyton Manning in last year’s Super Bowl, leaving him wondering, like they did Peyton, if it ain’t time to retire.
Scientists moved the Doomsday Clock two minutes closer to midnight, stating that nuclear weapons proliferation and climate change mean the world is only three minutes from catastrophe, instead of the more gracious five minutes we had before. There is undoubtedly some genetic basis for mankind’s obsession with catastrophic events that might threaten the totality of his existence, perhaps some sort of hypertrophied extension of the fear of death with which all men are consumed. But really. Three minutes instead of five? I think I’ll keep on buying green bananas.
And one final note, A Winston-Salem mom declared a strike against her two teenaged daughters, seeking better treatment. She’s walking a picket line around her house, hoping to embarrass them into doing their chores and showing a bit of respect. She doesn’t seem to understand that her teenager’s behavior is caused by the very attitude that led her to think a strike would help it improve. She is not a parent, but is a footstool for her kids. And that’s her fault, not theirs.