Weekly jobs data just keeps getting better

It may be boring, because it's gone on so long, but the news from the labor market just keeps getting better. The trends towards fewer layoffs and fewer people collecting unemployment insurance are still in place after more than 3 years. There were 18% fewer people collecting unemployment insurance last week than there were a year ago, and 11% fewer people were fired last week than were a year ago.

Fewer layoffs and fewer people on the dole don't equate to growth, of course, but they do say a lot about the health of the economy and the incentives that those still unemployed are facing. Businesses are laying off fewer people because business is getting better and it's harder and harder to find ways to cut costs. Fewer people collecting unemployment insurance mean more people are getting hired, and those who aren't have a greater incentive to find and accept a job going forward. With these trends still in place it's hard to see the economy entering another slump, and there's no evidence whatsoever in these numbers of any incipient economic weakness. That's important, because the market today is priced to the expectation that there will be weakness.

In short, markets are worried about what might happen tomorrow because of all the turmoil in Europe, not about what is happening. To date, the economic fundamentals of the U.S. economy continue to slowly improve, and as the above chart suggests, if this improvement continues, the market is going to have to shrug off its Eurozone concerns and get back into rally mode.

Argentina debriefing

On our flight back to the states last week, I picked up a copy of La Nación, one of Argentina's most-respected newspapers. One article jumped out at me: "Buenos Aires, the most expensive and the cheapest city in the world." This is a perfect description, since Argentina is a fascinating study in contrasts, and you can indeed find things there that are incredibly cheap and incredibly expensive, just as you can find the very modern and the very rustic and primitive.

Right next to the the article I was reading was an ad for the Alfa Romeo Giulietta, a 2-door subcompact that is not for sale in the U.S., but that has received good reviews in Europe. Because of tight controls and high tariffs on imported goods, Argentines need a down payment of $20,400 (dollars) plus 36 fixed monthly payments of 3,360 pesos (equivalent to $660 at today's rate). That's the kind of financing you get in Argentina, where in effect you are making a down payment equivalent to half the car's price.

A 15-minute taxi ride in Buenos Aires can cost less than $8. Giving a taxi driver a $1 tip in Tucumán will earn you a big thank-you, and a $4 tip will prompt looks of incredulity, since most taxi rides around the city don't cost much more than that. A giant steak—a bife de chorizo—can be had for $10, and a bottle of good wine averages $10 at most restaurants. Good hotels in Buenos Aires can be found for $100-200 per night; we spent a little over $200/night at the charming Miravida Soho boutique hotel in Palermo. At Don Abel, the hotel we stayed at in Tucumán, we had a comfortable suite for only $100 or so a night, including breakfast. The toll road from Ezeiza airport to downtown Buenos Aires costs only $1.25. The toll road from Tucumán to Salta costs a ridiculous $0.60, which, given the relatively light traffic, might possibly be enough to pay the wages of the toll collectors. In short, anything with pure local content is very cheap.

Don't plan to buy much at the Duty Free in Ezeiza airport. Most prices are off-the-charts expensive. I got the impression that a good portion of the sales they do make are the result of tourists like me spending their leftover pesos in the knowledge that they are worthless once you leave the country. (Reminds me of an old Argentine joke: "Why is the peso like a pair of pajamas? Because you can only use them indoors.") And though you will be tempted by the displays in the boutiques of trendy Palermo Soho, the prices will cool your ardor real fast. Electronics and appliances, most of which are imported, cost upwards of twice what they cost in the U.S. I was told that a person holding a non-Argentine passport could make a living shuttling back and forth between Miami and Buenos Aires, buying iPhones and MacBook Airs and selling them for a 50% profit in Buenos Aires. It's a lot tougher for Argentines to pull this off, because they are thoroughly searched for such items when they return to the country and must pay a steep tax. It's a safe bet that most returning Argentines have purchased new suitcases in the U.S. to hold mountains of new clothes and multiple small electronic items, all purchased for a fraction of what they cost in Argentina. Most sought-after item in Argentina: a new, unblocked iPhone 4S.

Since the government is restricting people's ability to change pesos for dollars, there is a black market in dollars. Despite signs outside showing the official exchange rate, tourists can walk into just about any Casa de Cambio and sell their dollars (clean $100 bills are preferred) for about $5 pesos each, or 10-15% more than you can get at the "official" rate of 4.45, which is what you'll get at a bank. That's a lot better, by the way, than using your ATM card to get peso cash, or using your credit card for routine purchases, since the bank will translate the pesos at the official exchange rate and often add a extra charge for the  trouble. So if you're going to Argentina, you'll want to carry lots of $100 bills with you, and I hasten to add that they are accepted as payment at many restaurants and hotels, but not always at the "black market" rate. Argentines wanting to get large amounts of money out of the country without having to carry wads of $100 bills in their briefcase can do so only via a financial transaction called something like the "blue-chip rate," but they must pay upwards of 5.85 pesos per dollar to do so, which represents a 30% premium. (Bloomberg subscribers can find this by typing .IMPARS G Index) I keep close track of this rate, since the higher it goes the higher the risk of an eventual economic collapse and/or large devaluation of the peso. If you have a friend in Argentina you're going to be visiting, you can facilitate his desire to get money out of the country by offering to bring him, say, a new iPhone (or 2 or 3) in exchange for him giving you pesos to spend when you arrive.


In prior posts I've mentioned the disturbing parallels between the policies of President Kirchner and President Obama. Once again I'll add that every time I described the key features of Obama's policies to an Argentine friend, the immediate response was wide-eyed amazement: "that's exactly what Kirchner is doing!" Radical left-wing political tactics; strong support of unions; industrial policy which favors some industries at the expense of others; nationalization of key industries (e.g., GM and YPF); contempt for capitalists/banks; pitting rich against poor, or, more generally, acquiring political power via divide and conquer strategies; political cronyism to reward friends, collaborators, and contributors; higher taxes on the rich; massive income redistribution; and socialized medicine, to name a few. In the U.S. it's called Chicago-style politics, and in Argentina it's called peronism.

Kirchner's economic policies are doomed to fail, it's just a question of when. The government is fudging the inflation statistics and restricting access to dollars, and that just feeds the fires of capital flight and an eventual currency devaluation. Import restrictions are going to choke off economic growth. Price caps and controls on energy are going to result in energy shortages. The nationalization of YPF and probably other industries is going to result in sharply lower foreign direct investment, which in turn will aggravate the shortage of dollars. Corruption at all levels of government is undermining popular support for the regime. It will end in tears and a big devaluation.

When I went there I expected to see more signs of stress, but I was wrong. Things aren't too bad, but they are slowly getting worse. There might be another year or so to go before things start to really collapse. In the meantime, there's plenty to enjoy in Argentina, since living standards are rising and the economy is growing (but nowhere near as fast as the government claims). The mood of the people is generally good, things are peaceful, the planes fly on time, and we didn't see a single protest/strike/shutdown such as we have seen on previous trips.

What gold, commodities and the dollar tell us about monetary policy

This chart illustrates the strong tendency of Federal Reserve monetary policy to follow the ups and downs in the economy. Capacity Utilization (blue line) is a proxy for the strength of the economy, and the real Fed funds rate (red line) is a good measure of how tight or loose monetary policy is. The stronger the economy, the more the Fed is prone to tighten monetary policy by increasing the real Fed funds rate, and the weaker the economy, the lower the real funds rate.

Capacity utilization has literally soared in the current recovery, as the manufacturing sector has enjoyed a V-shaped recovery with no end yet in sight, but the Fed continues to keep monetary policy very accommodative. Ordinarily this would be highly disturbing, since it would point to accelerating inflation pressures. But this time around things are very different, given the troubles in Europe which have greatly increased the world's demand for dollar liquidity. The Fed understandably wants to be sure there is no shortage of safe-haven dollars in the banking system to satisfy the world's apparently insatiable demand for them. If the Fed were only concerned about the US economy, they would not be keeping interest rates so low for so long, because the great majority of economic indicators—industrial production and residential construction numbers released today being the two most recent examples—point to continued US economic growth.

The behavior of gold, commodities and the dollar in the past year or so also supports the Fed's decision to keep policy very accommodative. The CRB Spot Commodity index is off 17% from last year's high, and gold has dropped 19% from last September's high, and the dollar is up some 13% from last year's low against other major currencies. All three of these key indicators of monetary conditions are consistent with strong demand for dollar liquidity—and some would even say these moves are symptomatic of a relative shortage of dollars. I'm not prepared to accept that dollars are in short supply, however, since these same charts show that gold and commodity prices are still very high from an historical perspective, and the dollar is still very weak. Instead, I would argue that on the margin there has been an increase in dollar demand relative to supply, but that dollars are still relatively abundant from a broader perspective.

In other words, I don't see any emerging deflationary pressures resulting from the recent weakness in gold and commodities and the strength of the dollar, but rather an easing of inflationary pressures. That is confirmed by the relatively tame readings we saw in yesterday's CPI release, as illustrated in the above chart. So far, so good.

The big thing to watch for is an easing of the tensions in Europe, since this has the potential to dramatically change the world's demand for dollars, and that in turn could result in monetary policy becoming once again inflationary—unless the Fed takes decisive steps to mop up any excess dollar liquidity by either draining reserves or increasing the interest rate it pays on reserves.

UPDATE: I should add the obvious, which is that the first chart suggests that the real Fed funds rate should be approximately 2% by now, if everything else were normal. To get there, given that the core PCE deflator is currently 2% and assuming that the Eurozone situation were to normalize by the end of this year, the Fed would need to raise the funds rate to somewhere in the neighborhood of 4%, and that could be done over the course of a year or two. That would undoubtedly be tough on the T-note and T-bond markets, but not insurmountable, particularly since the steepness of the yield curve implies that some degree of tightening is quite likely. The pain of raising rates is probably exaggerated: For one, a healthier Europe would almost surely be a boost to the US economy, and a stronger economy would boost tax revenues. If spending growth can be held in check, a stronger economy would all by itself bring the deficit down to manageable levels (3-4% of GDP) within a few years. In fact, we're already halfway there: the deficit as a % of GDP is down from a high of 10.4% to the current 7.4%. In other words, as the market loses its desire for Treasuries, the government's need to sell Treasuries would be declining at the same time. The solution to all this is not impossible by any means.