The June Non-farm Payrolls Report

The headline jobs number came out worse than expected, and the paint peeled off the US stocks tape from its recent run into the end of the second quarter.

The trend herd had been looking at the bounce off the bottom and before today's number had some hopes that the leveling off or even a surprise to the upside would confirm a bottom in the economy. The sharp downturn threw cold water on those happy thoughts.



The actuals came in about as expected, a little lower perhaps, and as you can see there was a strong downward seasonal adjustment.



The "Birth-Death" model was in line with the usual swag that the BLS performs at this time of year. As you know this number is added to the "actual jobs number" before seasonal adjustment, so at this time of year it helps to inflate the headline number slightly.

With this regular repetition of the number without regard to the underlying economic activity over the years, and its feed into the actuals, one has to wonder why they don't just roll this number into their seasonal adjustments? Do they feel the need to justify their tinkering with actual number beyond some limit? The Birth-Death model is certainly no viable rationale, but it does serve to employ a few analysts, and is likely some pet project of a past BLS director.



And here is the only chart worth watching, the long term trend. There has been no bottom yet reached in the jobs lost. This is not so much a reflection on the stimulus because of the lag, and the obvious data showing that consumers tended to use the stimulus to pay down their immediate debt which is a worthwhile endeavor, but does not give a quick boost to jobs.

The issue might be a bit of a red herring, because the economic stimulus pales by comparison with the enormous amount of stimulus provided to the banking sector, which is stimulating some operators like Goldman Sachs to pay their employees, on average, a record $700,000 in annual pay. Now THAT is stimulus, but perhaps one that is counterproductive.



We are on the record in the opinion that the Obama economic team is ineffective, backward-thinking, compromised, and possibly corrupt. They are serving the corporate banks and not the people. They should be replaced starting with Larry Summers who is a Greenspan and Rubin crony and the core of failure on the team. Tim Geithner should follow to find better employment for his talents, possibly as a salesman of men's suits.

China Takes A Big Step Forward in Monetary Policy

This news was largely overlooked by the worse than expected US payrolls report, which dampened hopes of a quick economic recovery, a sentiment encouraged by some but certainly not realistic to anyone looking closely at the numbers. I think that little propaganda sound byte served primarily to apply some primer for the end of quarter paint job in US equities.

Despite its strength today as stocks fall and the boys cash in after their most recent pump operation, the dollar is going to be taken down a peg, so to speak. It is a long term trend that is still well in place despite this bear market rally.

How much further? The DX index is increasingly unsatisfying as a measure, and the manipulation of the gold and silver price by a handful of banks who are unbelievably short the metals on paper renders them less reliable.

But another 20% decline from here is where our charts would indicate the dollar is headed overall against the DX.

China Allows Yuan Trade Settlement, Offers Tax Breaks
By Bob Chen and David Yong
July 2, 2009 09:44 EDT

July 2 (Bloomberg) -- China will allow companies to use the yuan to settle cross-border trade and let them keep their entitlement to export tax rebates, seeking to reduce the reliance of importers and exporters on the U.S. dollar.

The People’s Bank of China will encourage banks to offer yuan settlement services from today, the bank said in the regulations published on its Web site. Transactions inside China will take place in Shanghai and four cities in southern Guangdong province, including Guangzhou and Shenzhen, while those outside China will occur in Hong Kong, Macau and the Association of Southeast Asian Nations, it said.

“It’s China’s first step to make the yuan global,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s largest foreign-currency trader. “It will protect exporters from swings in exchange rates and boost the yuan’s role in the world currency system.”

China is promoting greater use of the yuan in international trade and finance after Premier Wen Jiabao in March expressed concern that a weakening dollar will cause losses on the country’s holdings of U.S. assets. A Chinese Foreign Ministry official said today he hoped the U.S. currency would remain stable, while reiterating a call for diversification of the international monetary system.

“Companies in China and neighboring countries are facing relatively huge risks of exchange-rate fluctuations because of big swings in the U.S. dollar, the euro and other major settlement currencies,” today’s central bank statement said.

First Settlement

Asean comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Hong Kong Monetary Authority Chief Executive Joseph Yam said on June 29 he hopes the first yuan settlement transactions will start this month after signing an agreement with People’s Bank Governor Zhou Xiaochuan. Companies currently have to convert yuan into dollars or other currencies to settle international trade.

“Hong Kong will be the natural place for arranging these transactions,” Yam said in a statement today. “This is the key to the maintenance of the status of Hong Kong as an international finance centre.”

Tax authorities are working on the proposed rebates for exports settled in yuan, the central bank said. Bank of China Ltd. will be the clearing bank in Hong Kong and Macau.

Stability, Convenience

About 50 percent of Hong Kong’s trade with China may be settled in yuan after the program starts, Stanley Wong, deputy general manager at Industrial & Commercial Bank of China (Asia) Ltd., the Hong Kong unit of China’s biggest bank, said in an interview on May 5. Hong Kong companies want to use yuan in trade because it will probably appreciate against the U.S. dollar more than 3 percent every year, he said.

“We hope companies will like to use yuan because of its stable value and convenience,” People’s Bank of China Deputy Governor Su Ning said in an interview with state-owned China National Radio today.

The yuan has strengthened 21 percent against the U.S. currency since a dollar peg was scrapped in 2005. China has limited the yuan’s advance in the past year as a stronger currency makes its goods less competitive overseas at a time when economic growth this year could slow to 7.2 percent from 9 percent in 2008, according to World Bank forecasts.

Currency Swaps

The People’s Bank of China has agreed to provide a total of 650 billion yuan ($95 billion) to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea through so-called currency- swaps to expand the yuan’s usage. China and Brazil in May began studying a proposal to move away from the dollar for trade settlement and use yuan and reais instead.

Malaysia’s government has been calling for reduced dependence on the dollar for “some years” and now that China is supporting yuan settlement it is worth considering, said Tan King Tai, an executive director at Pensonic Holdings Bhd., a manufacturer of household electrical appliances in the northern Malaysian state of Penang that sources parts from China.

“The dollar has become quite volatile and speculative in some ways,” he said. “If the yuan can be stable, it will help companies with their financial budgeting.”

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

The Banking Bubble Began in 1986, Was Like 'the South Sea Bubble' Says Bank of England Official

In retrospect it should become increasingly clear to most that the Federal Reserve and its associated money center banks were responsible for systematically undermining all regulatory restraint and sound judgement for the sake of their private profits, without regard to the resultant destruction visited upon the public and the larger global economy.

To suggest that the regulatory process should now be concentrated in the hands of the Federal Reserve, still opaque and arrogant, is disgraceful and disqualifies the public officials from service who promote such a travesty of common sense and prudence.

Guardian
Banking system like South Sea bubble, says senior Bank of England official
by Ashley Seager
1 July 2009 13.26 BST

'Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison,' says executive director for financial stability, Andy Haldane

A senior Bank of England official today compared the banking system over the last 20 years to the South Sea bubble of the early 18th century and said bankers had merely "resorted to the roulette wheel" to keep up with each other.

The Bank's executive director for financial stability, Andy Haldane, said in a speech in Chicago that having been stable over much of the 20th century, returns in the banking system relative to the wider stockmarket shot up after 1986 until 2006.

"Banking became the goose laying the golden eggs. There is no period in recent UK financial history which bears comparison," he said.

He said bankers and policymakers became seduced by the excess returns available: "Banks appeared to have discovered a money machine, albeit one whose workings were sometimes impossible to understand.

"One of the South Sea stocks was memorably 'a company for carrying out an undertaking of great advantage, but nobody to know what it is'. Banking became the 21st-century equivalent."

He said banking returns over the period were magnified by leverage as banks borrowed excessively, he said.

During the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this crossfire, higher leverage became banks' only means of keeping up with the Jones's. Management resorted to the roulette wheel."

He noted that the 80% slump in bank shares since the credit crunch hit meant that returns from the sector were now back in line with their longer-run average (see graphic above). The market capitalisation of global banks has fallen by $3tn (£1.8bn) since the crisis began, he said.

"We should aspire to a financial system where there is greater market and regulatory scrutiny of future such money machines. In achieving this, there is a role for some body – a systemic overseer – which is able to detect incipient bubbles and fads and, as importantly, act to correct them. This role is about removing the punchbowl from future financial sector parties." (We had a group that were responsible for doing this. They were called The Federal Reserve under Alan Greenspan. And Greenspan became the whoremaster of ceremonies for perversion of finance in the bubble economy. - Jesse)

He said that in future there would have to be a greater distinction between management skill, which improves return on assets, and luck, when return on equity can be magnified by leverage.

"Good luck and good management need to be better distinguished. Put differently, returns to investors and managers need to be more accurately risk-adjusted if the right balance between risk and return is to be struck for individual firms and for the financial system as a whole."

A second lesson, he added, was that there would have to be much stricter system-wide limits on leverage, particularly among big banks whose stability is crucial to the whole financial system. (Perhaps some prohibition of the types of activity that banks can engage in like Glass - Steagall? Oh yes, we had that as well and the banks repealed it with the help of the Federal Reserve. Perhaps we should have regulatory reform and place all the oversight responsibility with one group. Like the Federal Reserve? - Jesse)

"For a number of diseases, 20% of the population account for around 80% of the disease spread. The present financial epidemic has broadly mirrored those dynamics," he said, adding that the failure of a core set of large, interconnected institutions such as Fannie Mae, Freddie Mac, Bear Stearns, Lehman Brothers and AIG contributed disproportionately to the spread of financial panic. (In this case there are a few Typhoid Mary's with names like JP Morgan and Goldman Sachs and Morgan Stanley, and they are still hard at work - Jesse)

"Epidemiology provides a second key lesson for financial policymakers – the importance of targeted vaccination of these 'super-spreaders' of financial contagion. Historically, financial regulation has tended not to heed that message." (Vaccination is one approach. Wall Street and the City of London really need a dilation & curretage - Jesse)

He welcomed a recent move by US authorities to bring the trading of credit derivatives, which were at the heart of the crisis, on to exchanges so they could be better understood and controlled. "This is a bold measure and one which deserves international support."

Haldane's speech was part of a growing debate among global policymakers to try to build a better system of regulation and control of the financial system to prevent such crises as the current one from occurring again.