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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: YanivBA who wrote (69485)	9/8/2006 3:08:35 AM
From: mishedlo	Respond to of 110194

Wages Are a Problem -- Just Not for Employers: Caroline Baum By Caroline Baum Sept. 7 (Bloomberg) -- Ever since the Commerce Department unearthed an additional $88 billion of personal income, mostly wages and salaries, in the first half of 2006, there has been a constant undercurrent of concern about that old demon, wage inflation. If more compensation is going to labor, it should mean less for corporations, a compression in profit margins and an impetus to raise prices in an effort to ``push'' the higher costs through to the consumer. At least that's the assumption many folks are operating under. Unfortunately the facts don't support the theory. Pretax corporate profits, adjusted for the value of inventories and depreciation, rose to a record 12.3 percent of gross domestic product in the second quarter. Unless you believe there is some kind of a lagged relationship between the two variables -- today's higher wages squeeze tomorrow's profits -- then the threat of ``cost-push'' inflation from higher wages is another case of tired thinking. ``It's really a coincident concept,'' said Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. ``In order for higher wages to be a problem, they have to be squeezing margins, and we're not seeing it. Instead we're watching the profit share reach a record level.'' It's entirely possible that labor's new-found income will end up being corporations' loss in the kind of antagonistic relationship that would have pleased Karl Marx. It's also possible that the ``statistical discrepancy'' between gross domestic product and gross domestic income -- production should equal the income derived from it -- will shoulder the burden. Surprising Jump There was certainly nothing in the narrow measure of wages in the monthly employment report to suggest a 13.3 percent annualized jump in wages and salaries in the first quarter from the fourth quarter of 2005. When Commerce's Bureau of Economic Analysis reported the revised figures last week, the lumping of the income gains in the first quarter suggested to many economists that the source was bonuses and options. (In the GDP accounts, as in the company source data, options are counted as part of wages and salaries when they are exercised, not when they are granted.) The revisions are based on preliminary, comprehensive data from the Bureau of Labor Statistics. The quarterly census of employment and wages, which is derived from state unemployment insurance to calculate, does not specify the source of the income, according to the BEA. Good Old Laggard Yesterday's revised look at second-quarter labor productivity and costs further fanned the wage-inflation flames. Unit labor costs in the non-farm business sector soared 5 percent in the April-to-June quarter from a year earlier, the biggest increase since the 5 percent jump in the third quarter of 2000, right before the economy tipped into recession. The prior peak in unit labor costs -- up 5.2 percent year- over-year -- occurred in the fourth quarter of 1990, right after the cycle peak. ``Historically, the growth in unit labor costs tends to lag business cycle peaks, with a median lag time of about two quarters,'' wrote Thomas Lam Tai Loong, Treasury economist at United Overseas Bank Group in Singapore, noting the 2001 and 1969-1970 exceptions in a Sept. 1 note to clients. He's not alone in determining that labor costs lag. Business-cycle economists didn't relegate labor costs to the Index of Lagging Economic Indicators because they lead. (The specific measure in the lagging index is unit labor costs in manufacturing.) Upside Down The seven components of the lagging index ``measure the cost of doing business,'' said Ataman Ozyildirim, an economist with the Conference Board's business cycle indicators group. ``They rise and fall later than the measure of current activity.'' Of course, Ozyildirim said, you can turn the lagging index upside down and hope it gives a leading signal! While anecdotal evidence from specific industries and regions of the country isn't the same as quantitative nationwide data, one doesn't hear companies complaining about having to pay up for labor. All they whine about is soaring raw materials costs. It's true that some companies can't seem to find skilled labor. (Hint: Try offering the folks who work at the competition more money to do the same job). And ``salaries offered for positions that are difficult to fill have increased substantially,'' according to the Federal Reserve's Beige Book, a regional survey conducted by the 12 district banks, which was released yesterday as well. Outliving Its Usefulness But wages for new hires aren't going to create the kind of increase witnessed in first- and second-quarter labor costs, which rose an annualized 4.9 percent and 9 percent, respectively. ``Wage pressures were reported in a number of Districts, though they were most often limited to certain sectors and most pronounced for workers with specialized skills,'' the Fed survey found. It's not clear why fears of a 1970s-type wage-price spiral refuse to die and cost-push inflation remains in the lexicon. Empirical research suggests that prices lead wages, not the other way around. A paper the BLS elected to post on its Web site examines the relationship between inflation and various costs of labor compensation. The study, by Anirvan Banerji of the Economic Cycle Research Institute, concludes what others who have looked at the relationship have found: ``Labor cost inflation is a fairly consistent lagging indicator of upturns in general inflation.'' bloomberg.com

To: YanivBA who wrote (69485)	9/8/2006 9:36:45 AM
From: russwinter	Respond to of 110194

most of the pain will be borne by ordinary people, not the lenders, brokers, or financiers who created the problem.> In otherwords they create phony accounts to hide problems, and also pretend various forms of credit insurance protect them. Thing is, when debtors default "somebody" takes a loss. The market treats it as musical chairs, except as soon as the music stops, the lights also go out, and you're left guessing who lost, presumably "nobody". A real Alice in Wonderland through the looking glass mentality.

To: YanivBA who wrote (69485)	9/8/2006 3:29:57 PM
From: ridingycurve	Read Replies (1) \| Respond to of 110194

<<Even the loans that blow up can be hidden with fancy bookkeeping. David Hendler of New York-based CreditSights, a bond research shop, predicts that banks in coming quarters will increasingly move weak loans into so-called held-for-sale accounts. There the loans will sit, sequestered from the rest of the portfolio, until they're sold to collection agencies or to investors.>> Someone help me understand why categorizing such loans as held-for-sale will be beneficial. Credit losses must still be recognized and valuation allowances established. Additionally, held-for-sale loans must be marked-to-market. If credit quality deteriorates, loss recognition could accelerate compared to categorization as held-for-investment. Perhaps GAAP has changed in the past few years and I’m unaware of it, or my memory is failing me.