More Than 3 Million Job Openings in March

By Kathleen Madigan

U.S. demand for labor increased in March, with 3.1 million job openings on the last business day of the month, up from 3 million in February, the Bureau of Labor Statistics reported.

It’s the first time since November 2008 that job openings have been at or above three million for two consecutive months. The number of workers hired was little changed at four million while total separations was about flat at 3.8 million.

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China growth could slow to 8 percent: Goldman's O'Neill says

by Reuters

China's economic growth could slow to 8 percent, Goldman Sach's Jim O'Neill said on Thursday, as economic data and a drop in commodity prices point to Beijing ending its monetary tightening policy sometime this year.

The slowdown to around 8 percent would likely occur in the second half of this year, adding that given the data out this week, it could occur as early as the second-quarter, O'Neill, Chairman of Goldman Sachs Asset Management told a small media gathering in Hong Kong.

"It is my judgment that the Chinese economy is probably slowing down more than people realize," he said, adding that as a result, he was not surprised that commodity prices are coming under pressure.

As evidence, he cited the Goldman Sachs China Activity Index, the firm's propriperary indicator of GDP, which shows that the momentum of Chinese growth has slowed, and that slowdown was supported by economic data reported this week.

"And I suspect that China is going to slow down to around 8 pct GDP growth. If I'm right, that means sometime in the 2nd half this year, Chinese inflation will not be a problem, and will come back down to around 4 percent," he said. "And the PBOC will be able to stop tightening monetary policy and we can all live happily ever after."

China's industrial output growth eased much more than expected in April to suggest the world's second-biggest economy is cooling, even as the inflation rate came in a shade lower than the 32-month-high reached in March.

"It's not surprising at all that commodities prices are coming under pressure," he said. "The surprise is that they rose so much earlier in the year."

A stop to tightening, he suspected would result in a China stock rally.

BRIIC? BRICK??

As he has done before, O'Neill outlined a set of slides that shows how it is no longer appropriate label BRIC nations as "emerging markets." Those economies are what he calls "growth economies" now, while setting aside 11 nations he refers to as proper "emerging economies."

A lot of speculation has gone into what country could be added to the now famous BRIC acronym, an acronym O'Neill says he dreamed up and ever since it "has literally changed my life."

Several times during the roundtable, O'Neill, wearing a gray suit and drinking a Diet Coke to fight jet lag, referred to himself jokingly as "Mr. Bric."

"To be a BRIC, you've got to be at least 3 percent of (world) GDP, with potential of being 5 percent. It's very hard to see any country in that category, Indonesia and Mexico would have to do some spectacular things to get there. Indonesia would have to grow by idiotic amounts to get even close."

O'Neill added that being bigger than Turkey does not qualify Indonesia as a BRIC, and that Russia is still three times the size of the Southeast Asian nation.

"Why on earth do people call Korea an emerging market?" he asked.

O'Neill closed the session with his thoughts on Russia.

"I get an email every day on how I should drop Russia from the BRICs. And it's like a reverse indicator. Russia is cheap," he said. "Tactically, I find Russia to be the most interesting of the growth markets."

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IMF warns on eastern Europe budgets

By Michael Winfrey

(Reuters) - Growth in eastern Europe should accelerate only slightly this year as domestic demand recovers, but trouble in the euro zone periphery, wide budget deficits and inflation pressures still pose risks, the IMF said on Thursday.

In its regional economic outlook for Europe, the International Monetary Fund said it saw the region expanding 4.3 percent in 2011 and 2012, from 4.2 percent in 2010.

But it added that a high level of non-performing loans continued to weigh on banking sectors and high commodity prices could spur inflation.

It saw full-year inflation of 7.3 percent in 2011, slowing to 6.2 percent next year, and urged the region's central banks to remain vigilant.

"Monetary policymakers will need to stay on high alert," the Fund said. "Even countries with well-anchored inflation expectations may find it hard to avoid second-round effects if first-round effects are large or persistent, as global commodity prices rise disproportionately over the medium term."

The IMF said strong economic ties to the euro zone exposed it to risks of the potentially escalating debt crisis in the single currency area's weaker members, as western banks could cut their lending exposure to emerging Europe if they were to take a significant hit.

It said that although the region had so far been shielded from contagion, authorities should tackle wide fiscal gaps.

"Consolidation needs to rebuild fiscal buffers. This will improve key fiscal indicators and thus diminish the risk of financial tensions in the euro area spilling eastward," it said.

"It will also help contain inflationary pressures and support the monetary tightening that is already underway in several countries."

GROWTH PICKING UP, MOSTLY

Fiscal deficits in the region -- where nine countries have active or precautionary deals with the IMF -- should decline from 4.5 percent of gross domestic product in 2010 to 2.5 percent in 2011 and 2012, mainly due to Russia, the Fund said.

But it said public debt as a percentage of GDP would grow in two thirds of the countries and high fiscal deficits showed vulnerabilities in Latvia, Lithuania, Poland and Romania. It also said the region's fiscal position no longer compared favorably with emerging markets in Asia and Latin America.

It remained optimistic on the recovery, predicting the former Soviet CIS countries would lead the region's recovery with growth of 4.5 percent or higher this year.

It expects Belarus to lead the region with 6.8 percent growth in 2011. Russia was seen growing 4.8 percent this year, slightly faster than its southern peer Turkey at 4.6 percent.

Among the European Union's newest members, Poland was seen flat at 3.8 percent this year before slowing slightly in 2012. Hungary was seen growing 2.8 percent each year, but Romania was expected to accelerate its pace to 4.4 percent next year.

"Domestic demand will become the main pillar of growth as it catches up to recover in those countries where it had languished," the Fund said. It added bank lending still lagged.

"The worst of the credit crunch is over, but real credit still contracts in just under half of the region's economies." (Editing by Susan Fenton)

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It’s 2007/08 All over Again!

by Claus Vogt

Today looks eerily similar to what was going on in 2007 and early 2008. Then, as now, the vast majority of my macro-economic and stock market indicators issued massive warning signs. And then, as now, the stock market ignored them for a seemingly endless time.

The big difference: Then it was the beginning of the housing slump that massively disturbed me. Now it’s the beginning of the international government debt and funding crisis that makes me increasingly bearish.

If you recall, the housing and mortgage credit crisis did not befall the world out of the blue. There had been many warning signs. And some of the best market analysts clearly pointed them out. Plus it was a relatively slow development that took many months until it finally culminated during the autumn of 2008.

Then It Was the Fed’s Bernanke,
Now It’s the ECB’s Stark

I remember when Ben Bernanke spoke out in 2007, at the beginning of the housing crisis. “Containment” was his buzz word. And he assured us that neither the housing market nor the economy was in danger. He even gave an estimate of “up to $100 million” in mortgage-related bad debts. 

In an interview at the time I strongly rebutted Bernanke’s soothing remarks and added that he was probably off by at least one zero.

Now we have another central bank bureaucrat uttering soothing words: Jürgen Stark, Chief Economist of the European Central Bank (ECB). He said,

“The discussion about restructurings in the Eurozone is based on the totally false assumption that one or another EU member state is insolvent.”

Well, as we all know there are three EU member states — Greece, Ireland, and Portugal — that have already needed an illegal bailout by other EU members. If that’s not insolvent, what is? 

These countries don’t have a liquidity problem, they have solvency problem … a severe one at that! And solvency problems don’t get cured by injecting additional credit. 

According to Stark, a single euro member country default could trigger a banking crisis worse than the one that followed the September 2008 Lehman Brothers collapse. And I certainly agree with him on this point.

But he doesn’t expect any defaults! That’s where we disagree …

I think that European government defaults are just a matter of time. And the market is massively supporting this view. 

In fact, yields on 2-year Greek bonds are well above 20 percent — a strong market signal that default is unavoidable.

Now, let’s take a look at the … 

Six Theoretical Escape Hatches

In theory, there are six ways to resolve the global debt trap — six escape hatches:

1. An economic growth miracle
2. Major interest rate cuts
3. Bailouts by other governments
4. Money printing
5. Austerity
6. Outright default

In case of Greece, Portugal, Ireland and other European countries sitting in a debt trap: Options one, two, three and four aren’t available. 

Growth miracles are the result of free market policies not in sight anywhere in Europe. Interest rates are already as low as they can get. 

Bailouts have already been tried. Now it’s getting clearer that they weren’t enough, and the willingness of donor countries to do more is fading. 

And due to the common currency, the ECB is the only one that can print money. That is as long as the troubled members want to keep their euro membership.

This leaves them with escape hatches 5 and 6: Austerity and default. They are trying the former to a minor degree. But because of the huge debt load it’s not enough to solve the problem.  

What’s more, austerity is very unpopular … 

Resistance among citizens is snowballing. And sooner or later populists will ride on this wave and opt for outright default — the only other way out.

The situation in the U.S. isn’t much better. The country is also trapped. But …

The U.S. Has More
Options Left

First of all, the U.S. has a printing press as Mr. Bernanke so famously said ten years ago. Therefore inflation is feasible. 

Second, the U.S. has much more fat available to cut. Hence severe austerity policies could still lead the way out of this mess. 

Third, the U.S. is much more flexible, politically and as a society. A return to real market-oriented policies is still conceivable, accepting short-term hardship to foment a growth miracle later.

Mr. Stark has a point when he says that an EU government default would trigger another major banking crisis. But he is either naïve or whistling in the dark with his statement that a default would not occur. 

It will, and probably soon. Therefore a bet against the banking sector might be a good idea since we’re talking about another global banking crisis due to the direct involvement of U.S. banks and the strong interconnection of the global financial system. 

Interestingly, as you can see in the chart below the banking sector continues to show conspicuous relative weakness — another reminder of the 2007/08 episode. 

To take advantage of that weakness, you might consider ProShares UltraShort Financials (SKF), an inverse ETF that tracks the financial sector. If you pick it up at current levels, $58-$59, set your stop loss at $54.50. 

What’s more, austerity is very unpopular …

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What’s more, austerity is very unpopular …

What’s more, austerity is very unpopular …

GOLD STUCK IN CONSOLIDATION

By Jordan Roy-Byrne

Though Gold and Silver were able to make new highs in recent months, the gold stocks (as evidenced by GDX (large caps) and GDXJ (larger juniors) never did. We wrote of their relative weakness and how it was a warning sign for the sector. The shares failed to breakout and have fallen back into their consolidations at a time when the sector tends to consolidate and correct.

Below we show GDX and GDXJ. For each chart we show the 300-day MA and support and resistance points.

We also have a chart from sentimentrader.com, which tracks the assets in Rydex’ Precious Metals Fund. It is a sentiment indicator.

Note that both the assets in the fund (nominally) and assets relative to other sectors are way below their highs. In fact, they are closer to their lows.

The financial media, day trading types and retail crowd have now forgotten about the sector. Should you? Absolutely not. This is when the real professionals make money and when the average Joe’s struggle.

The typical trader and investor loves to buy strength. There is nothing wrong with that. However, gold stocks are a different animal. There are numerous false breakouts and false breakdowns. For example, GDXJ gave us a false breakout last month. In 2010, GDXJ had a false breakout in May. The best strategy for a volatile sector in a bull market is to use the volatility to your advantage.

Let’s use GDXJ as an example. The market is at $37 with support at $33-$34 and resistance at $39-$40. If you have some patience, you can can buy at $34-$35 and wait for a potential breakout. If the market breaks below $33, you can sell. However, if you wait for a break of $39-$40, then you are already missing out on some upside. Need we mention that a buy at $34-$35 carries less risk because it executes at technical support and likely when sentiment is not positive.

Apply this to your favorite large and junior gold stocks. Identify points of support. If the precious metals follow their typical seasonal pattern, odds are you will have a few chances to nab your favorites at a time when others are panicking and you see articles about a crash or an end to the bull market or, excuse me, the “gold trade.”

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THE DESTABILIZING FORCE OF MISGUIDED MARKET INTERVENTION

by Cullen Roche

In his Financial Instability Hypothesis, Hyman Minsky described how a process of Ponzi finance can result in increased financial instability:

“over a protracted period of good times, capitalist economies tend to move from a financial structuredominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently,units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.”

The recent downturn in commodities is interesting for several reasons. None more so than the fact that investors are now beginning to notice that the price increases have been driven in large part by speculation generated by QE2. Regular readers are well aware of this fact, however, much of the investment world has been basing their commodity thesis on booming global economies, myths of money printing, misguided fears of hyperinflation and not the primary driver – financialization.

As the Bank Of Japan recently pointed out, there has been a substantial speculative premium in many commodities. In many ways this is reminiscent of 2008 when the Fed was seen as creating inflation, however, what lurked beneath the surface was disastrous deflation. While this environment isn’t nearly as susceptible to collapse, we are still at risk of a major dislocation due to the Fed’s severely misguided policy of QE2 and the market’s dramatic misinterpretation of it.

Financialization of markets

FT Alphaville has done a fantastic job in recent weeks and months covering some of the dislocations and connecting the dots. In a recent story they cited the continuing use of copper as a financial tool:

Veteran copper market watcher Simon Hunt of Simon Hunt Strategic Services believes the dynamics are the result of a longstanding misunderstanding by the industry of the difference demand and consumption. Consumption, being the actual indicator of real demand.
As he noted in a research report earlier this week:

In other words, copper price movements have been quite unrelated to actual business. Demand, in most analysts’ calculations, is confused with consumption. It is the aspect of demand that is material acquired by financial institutions, which has been the principal driver of price. Last week‟s correction was part of the game being played out. At between $9000 and $10,000 there was difficulty in finding new investment buyers; lower prices are needed for the game to continue.

And if that is true, there could be yet another — potentially more sizeable — correction yet.

This is just one obvious effect of this sort of mass financialization of our economies. Other obvious examples include the Chinese farmers who are hoarding cotton due to Fed money printing fears. Other examples, such as the continuing surge in oil prices despite tepid fundamentals, are less obvious. And every once in a while, we can see the financialization impact with our own two eyes as we were able to just a few weeks ago when the Fed announced their continued easy policy stance and every commodity went racing higher in a speculative frenzy in a matter of minutes.

Why is this problematic? 

The risk the Fed creates, when they intervene in markets in this manner, is that they generate the risk of a major dislocation in the markets that feeds over into the real economy. When you create an implicit guarantee and speculators take you at your word they are more likely to generate a destabilizing pricing environment. This was recently seen in silver prices where the inflation bandwagon has run full speed off the tracks and now real silver producers are being forced to deal in a market that is entirely unstable and unpredictable.

When the Fed intervened via QE2 they were not really altering the economy in any meaningful way. This asset swap did not change net financial assets. It did not create more money. It did not result in any stimulus. All it really did was bolster asset prices via the psychological routes. In essence, the Fed was trying to create nominal wealth with the hope that this would translate into real wealth. This can all be proven now by looking at lending data, falling GDP, the stagnant money supply, and exploding margin debt at the NYSE. So, the Fed goes into the market and tells everyone to buy risk assets. Don’t fight the Fed, right? And they didn’t. But focusing on nominal wealth creates the risk that the cart will come before the horse, ie, prices will substantially outpace fundamentals and create a destabilizing market environment.

How does this play out? 

We can visualize this economic journey by envisioning a car on a moderately hilly road. This is comparable to the natural course of the business cycle. There will be ebbs and flows, ups and downs. Markets are irrational as they are. But if a powerful entity is able to intervene in this course of events it’s not unreasonable to expect that the cycle could experience increased volatility as its forces take an unnatural form by distorting the underlying economic reality. In an attempt to generate stability the entity could theoretically create increasing instability. In the case of the Federal Reserve and QE2 this involves focusing on nominal prices as opposed to policy implementation that benefits the real economy. By creating a price increase in nominal terms we risk exaggeration in the pricing mechanism. As we experienced in 2008 that can be devastating as prices surge and then collapse and fear captures the real economy in the aftermath. The following figure shows how such environments might be altered over time to experience increased volatility and business cycle disruption:

What has occurred in recent months is exactly what Dr. Bernanke desired. If we change the perspective on our car on the road we can better visualize how this environment plays out. As our car picks up speed it continues down the road with increasing velocity. Slowly, but surely the participants decide the car can handle more participants and increased velocity that will generate increased pleasure (market gains due to increased speculative behavior). Eventually, the car enters a tight turn (or a bump in the economy). If the speed is greater than that of the natural forces exerted against the car (price disequilibrium resulting in severe instability) then the car will leave the road and enter a period of instability as it veers into uncommon grounds.

This is exactly what occurs when markets enter a period of disequilibrium. In my piece on the silver bubble a few weeks ago I described the four primary components of this disequilibrium:

• Strong fundamental underpinnings. Bubbles do not merely appear out of nowhere. Bubbles grow over a period of time based on strong fundamental underpinnings. There is always a very good economic reasoning behind bubbles. This feeds into the rationalization of its existence and justifies a “it’s different this time” mentality that later occurs.

• Ponzi builds. A naturally occurring ponzi process begins. As a recency bias builds (the tendency to overweight recent events and ignore historical facts) the system begins to exhibit herding behavior as more and more investors get in on “the only game in town”. This becomes amplified by the media, those with a vested interest in this particular market, those who “throw in the towel” after wrongly betting against the trend, etc.

• Illusion of stability within disequilibrium. The illusion of control increases as investors become increasingly confident in the market. They increase their bets, increase price targets, etc. Investors begin to convince themselves that it is “different this time”. All of this is occurring as the system grows increasingly unstable. I like to think of it like a spinning top. When you initially throw a top into a tight spin there is a distinct order in its movements. They are predictable and stable. But as the top loses momentum it begins to spin uncontrollably. The system becomes unstable, unpredictable and ultimately breaks down. Bubbles work within the same sort of illusion. What appears like a stable and self sustaining system is in fact increasingly unstable and entering an inevitable disequilibrium that breaks down.

• Systemic collapse. All bubbles collapse. It is never “different this time”. As this prior herding effect begins to breakdown there is a flood for the exits as the herd reverses its controlled march into a panicked stampede. The gig is up. Collapse ensues.

In the case of our car, it involves a moderate velocity which is slowly increased as the riders become increasingly confident in the car’s performance and increased pleasure being generated from the ride. As the car enters its first portion of the turn (or bump in the economy) it is tested, but maintains stability. This stability actually increases the instability as the ponzi builds and the riders become even more confident in the car’s performance. In the case of the Fed, the riders need only a small vote of confidence to put the pedal to the metal. This leads to stage three in the disequilibrium where everyone now believes it is different this time. There is no chance the car can slide off the road or threaten its riders. And of course, that exact event occurs and the system is thrown into chaos.

In asset markets like silver the car gained so much momentum that it actually created a destabilizing force. In the ensuing collapse we run the risk that the real economy is impacted through the fear and uncertainty that is involved in the ensuing market collapse. The collapse in silver prices could materially impact the way real producers and consumers utilize the metal. And that collapse can be directly attributed to the various destabilizing forces that helped it to build the momentum that led to the surge in prices and ultimately a period of instability.

This is the risk the Fed has created multiple times over the course of the last 20 years and it is the same risk I believe they have created today. Will it result in a full blown commodity collapse and a highly destabilized global economic event? I don’t know and neither does anyone else. But as a risk manager I have to accept the fact that the risk now appears elevated. But perhaps more importantly, the Central Bank of the United States should recognize the destabilizing nature of its misguided policies. In the future, it would be my hope that the Fed focus more on the real economy and a bit less on nominal prices. Putting the cart before the horse can be highly destabilizing and can result in increased systemic instability. As we sit with 9% unemployment well into an economic “recovery” we should all be aware of how damaging that instability can be….

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