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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: CalculatedRisk who wrote (7102)	5/26/2004 11:11:48 AM
From: mishedlo	Respond to of 116555

MASS LAYOFFS IN APRIL 2004 bls.gov In April 2004, employers took 1,458 mass layoff actions, as measured by new filings for unemployment insurance benefits during the month, according to data from the U.S. Department of Labor's Bureau of Labor Statistics. Each action involved at least 50 persons from a single establishment, and the number of workers involved totaled 157,314. (See table 1.) The number of events was the lowest for any April since 2001, and the number of initial claims was the lowest for April since 2000. From January through April 2004, the total number of events, at 5,747, and of initial claims, at 573,523, were lower than in January-April 2003 (6,466 and 624,833, respectively). Industry Distribution School and employee bus transportation, with 16,589 initial claims, and temporary help services, with 12,254 initial claims, together accounted for over 18 percent of all initial claims in April. The 10 industries reporting the highest number of mass-layoff initial claims accounted for 57,329 initial claims in April, 36 percent of the total. (See table A.) The manufacturing sector had 24 percent of all mass layoff events and 23 percent of all initial claims filed in April--the lowest shares for any April since 1995, when the monthly series began. A year ago, manufacturing reported 32 percent of events and 39 percent of initial claims. Within manufacturing, the number of claimants was highest in food processing (13,582, mainly in frozen fruits and vegetables and in fresh and frozen seafood processing), followed by transportation equipment (4,625, largely automotive-related). (See table 2.) The administrative and waste services sector accounted for 13 percent of events and initial claims filed in April, with layoffs mostly in temporary help services. Ten percent of all layoff events and 13 percent of initial claims filed during the month were in transportation and warehousing, mainly in school and employee bus transportation. Retail trade accounted for 8 per- cent of events and initial claims, largely in general merchandise stores. Construction accounted for 10 percent of events and 8 percent of initial claims during the month, primarily among specialty trade contractors. An additional 6 percent of events and initial claims were in accommodation and food services, mostly among food service contractors. Government establishments accounted for 4 percent of events and 5 percent of initial claims filed during the month. The number of mass-layoff initial claims in government was 7,508. In April 2003, there were 3,851 such claims filed. Compared with April 2003, the largest decreases in initial claims were reported in transportation equipment manufacturing (-10,689), computer and electronic product manufacturing (-3,610), plastic and rubber products manufacturing (-2,853), and machinery manufacturing (-2,710). The largest over-the-year increases in initial claims was reported in transit and ground passenger transportation (+7,015), and food processing (+5,185).

To: CalculatedRisk who wrote (7102)	5/26/2004 11:17:14 AM
From: mishedlo	Respond to of 116555

Asia Pacific: The Calm Before the Storm Andy Xie (Hong Kong) morganstanley.com The period of the Fed raising interest rates usually precedes emerging-market crises. In the current cycle, the Fed has kept interest rates lower and longer than in any previous cycle. The capital flow into emerging markets is comparable to the highs in the previous cycles. It would take a miracle for the global economy to land without any crises, in my view. I believe the market continues to underestimate the impact of the Fed rate hikes to come. When the Fed is raising interest rates, the Fed funds rate usually peaks at or above the level of the 10Y treasury yield. The market typically continues to look for excuses that this time would be different and, therefore, isn't prepared for the shock. The Fed and the Emerging Market Crises The Fed interest-rate cycles correlate with emerging-market crises. Is it correlation or causality? I believe in the later. When the Fed cuts interest rates, ceteris paribus, it decreases the cost of capital and, hence, causes more capital to flow into emerging markets. The inflow boosts economic performance in the emerging economies, which increases optimism and triggers more capital inflow. Because the financial system in emerging economies doesn't price risks well (e.g., little long-term financing), the positive economic impact of capital inflow is exaggerated and, hence, the optimism of foreign investors that drives the capital inflow is also exaggerated. This is a bubble phenomenon. When the Fed reverses its policy, the bubble bursts. Latin America was the focus of this dynamic in 1980s. The Fed cycles caused economic upheavals in the region and eventually discredited the region so much that its relationship with the Fed cycle diminished almost to nothing. The NAFTA regenerated market enthusiasm for Mexico. But it was destroyed soon afterward by another financial crisis when the Fed increased interest rate in 1994. Because Latin America is cut off from global capital and is not at the forefront of manufacturing competitiveness, its economic development is increasingly driven by agriculture and natural resources. The focus of global capital shifted to Southeast Asia in 1990s. When the Fed kept the interest rate low in early 1990s to deal with the S&L crisis, it triggered a massive boom in Southeast Asia. When the Fed normalized the Fed funds rate in 1994, the boom was kept going by running up bad debts and overbuilding properties. The resulting current-account deficit eventually triggered a confidence crisis among foreign investors. The withdrawal of foreign capital in 1997 and 1998 led to the Asian Financial Crisis. Global capital targeted China, India and Japan in this cycle (see “Hunker Down,” May 17, 2004). Their combined forex reserves have increased to $1.43 trillion now from $540 billion in August 2002 when the S&P 500 peaked. The biggest difference this time is that the local businesses have not taken on currency risks. Instead, international portfolio investors and individual currency speculators are still holding the currency risk. Of course, there could be currency risk held by local businesses that the market couldn't see. The market was surprised before. In Latin America, the governments took the risks by borrowing dollars from American banks or selling dollar-denominated bonds to American bond funds. In Southeast Asia, local businesses and banks borrowed dollars from European and Japanese banks, because they believed that the local currencies would appreciate against the dollar. If the currency risk is indeed held by international investors, the systemic risk should be much lower in this cycle than before. But, a significant withdrawal of foreign capital from emerging markets is inevitable, in my view. That would trigger credit tightening among the economies that have benefited most from the capital inflow in the past two years. Is There Vaccination Against the Fed? Every time that the Fed rate hikes cause an emerging market crisis, policymakers in emerging economies search for ways to decouple from the Fed in their monetary policies but always fail. In my view, emerging economies could not have really independent monetary policies. The effectiveness of monetary policy is in controlling domestic demand. When the world is divided between a rich and a poor economy, the income generation of the poor economy always depends on trading with the wealthy one. Thus, during a growth period, the poor economy always depends on the monetary policy of the rich one. What emerging economies can and should do is to minimize the bubble when the Fed is stimulating the US economy. The distortion that matters most is risk pricing. Short-term bank loans dominate emerging-market financing. Often, politicians or controlling bank shareholders allocate capital for their personal interests. Thus, such a system would quickly translate capital inflow into demand (e.g., consumption in Latin America and investment in East Asia). The resulting prosperity validates the optimism of foreign investors and triggers more capital inflow. It typically turns into a big bubble characterized by rapid debt growth and a deteriorating current-account balance. When the Fed reverses its interest-rate policy, emerging markets do not have a credible instrument like the US Treasury to tie down foreign capital and must go through rapid adjustment to pay the excesses built up during the period of low US interest rates. To minimize the bubble, emerging economies must develop a credit culture that increases the risk premium for investment when the Fed keeps the interest rate low. A bond market is a necessary condition. A flexible exchange rate is helpful only when there is a robust credit culture. Otherwise, a flexible exchange rate would exacerbate the problem by giving currency speculators a chance but would not improve risk pricing. Developing a credit culture requires the rule of law. It would take generations for many emerging economies to be governed by the rule of law. The vaccination against the Fed is probably too expensive for emerging economies. Global financial markets will likely go through boom-burst cycles along with the Fed policy changes for a long time to come. The Fed Myopia Costs the US Too The Fed focuses on the US economy in setting its policy. This is shortsighted, in my view. This myopia costs the US and the global economy. Because the Fed doesn't pay sufficient attention to the global consequences of its monetary policy, its policy amplifies global economic cycles that also increase the volatility of the US economy, impairing the Fed goal to smooth the US economic cycle. The problems in the global economy today originated from the Fed policy in early 1990s to pump enough liquidity during the S&L crisis. The Fed cut interest rate by 500 bps in 24 months between 1990 and 1993 to stabilize the US financial system. It was in theory the right thing to do for the US economy. However, its byproducts still resonate in the global economy today. It caused the Southeast Asian capex bubble and the 1997–98 financial crises. The story didn't end there. The capital that came out of the emerging markets in 1997 and 1998 went into the US, triggering the NASDAQ bubble and widening the US current-account deficit. The US current-account deficit increased from $117 billion in 1997 before the Asian crises to $411 billion in 2000 — the year that NASDAQ peaked. The Fed then cut interest rate aggressively to cushion the blow from the tech burst. It prevented the current-account adjustment that should have come and also removed the incentives from other economies to improve their domestic demand. This story is still playing out. We are about to enter a new chapter with the Fed raising the interest rate again. In a global economy with multiple linkages, the Fed policy has long-term consequences that would bounce back to hit the US economy years later. The Fed is still trapped in its myopic view and determines its policy by watching the US cyclical data only. Unless the Fed changes its stance and takes a general equilibrium approach to its policy, it would continue to create instability in the world. This paradigm, I am afraid, will end up with a catastrophic global crisis.

To: CalculatedRisk who wrote (7102)	5/26/2004 11:21:27 AM
From: mishedlo	Respond to of 116555

gasoline inventories cbs.marketwatch.com{FDCFA9B9-71B4-4016-9408-8BF6BE732B96}&siteid=mktw SAN FRANCISCO (CBS.MW) -- The American Petroleum Institute said gasoline inventories for the week ended May 21 rose by 1.65 million barrels to total 197.9 million. Crude stocks were up 764,000 barrels at 299.9 million barrels last week, the API said. The Energy Department had said that crude stocks were unchanged and gasoline stocks were down 700,000 barrels. Distillate inventories stood at 105.5 million barrels, down 666,000 barrels, according to the API.