Slim Pickings, Indeed

July 26, 2014 Barron's

July 26, 2014

By Randall W. Forsyth

The world’s second-richest man thinks you should work less. So who are we to argue?

Carlos Slim, the Mexican billionaire whose net worth of an estimated $79 billion has been neck and neck with Bill Gates’, depending on how the co-founder of Microsoft‘s (ticker: MSFT) stake is valued on any particular day on the Nasdaq, last week called for a “radical overhaul in the way we work” at a business conference in Paraguay. Instead of the usual five-day workweek, better we should put in three 11-hour days a week.

Having four days off a week, Slim says, would leave us refreshed and eager when we return for our three, albeit long, days of toil. Moreover, that kind of schedule would help us to work until we’re 70 or 75, according to the 74-year-old telecom tycoon, who heads Telmex.

To be sure, many readers would love to contemplate the idea of working just five 11-hour days, let alone three, instead of the weekly 60, 70, or more hours that many workaholics put in. Not to take anything away from those Herculean efforts, but Parkinson’s Law famously states that work expands to fill the time allotted. So Slim might have a point.

Given that principle, the somnolent level of trading on Wall Street might readily be accommodated by three somewhat elongated sessions. Indeed, there already are signs that, at least for a slice of New York’s elite, a form of a three-day week has taken hold.

Waits for limousines on Thursday nights can be interminable because, drivers say, that’s become the new Friday, either for partying or getting out of town. Meanwhile, the snarky comment heard on weekends on the South Fork of Long Island is that “only poor people leave the Hamptons on Sunday.”

For the rest of Americans who actually must toil for a living, working three days or less a week increasingly has become the norm — either by choice or necessity. The Bureau of Labor Statistics reported that its June survey of households showed that about one million people got part-time jobs, with 237,000 of them working part-time for economic reasons (that is, they’d really prefer full-time gigs, but took what they could get to pay the bills). But the aggregate increase of full and part-time jobs was only 407,000. That meant the number of full-time jobs plunged by 523,000 last month.

“It’s very risky to draw conclusions from short-term moves in the household survey, which can be very volatile, but you have to wonder if this is an early sign of Obamacare’s effects on the labor market (which have not been previously visible),” wrote our friends at the Liscio Report, who hardly can be accused of being part of that vast right-wing conspiracy.

How much Americans want to work — representing the supply of labor — and how much enterprises, public and private, want to hire them — the demand side of the equation — are the key variables being considered by the Federal Reserve. As its policy-setting Federal Open Market Committee gathers for a two-day meeting on Tuesday, the evidence on those scores is far from conclusive.

One sign of strength has been the steady decline in the number of new claims for unemployment insurance. That number plunged to 284,000 in the latest week, the lowest since before the financial crisis and ensuing recession. But numerous observers noted that the seasonal adjustment factors, which often are dicey, were particularly unreliable, in part because automobile manufacturers no longer shut down completely in summer to retool for the new model year. Nonetheless, jobless claims have hovered around the 300,000 level associated with a healthy labor market. Still, that reflects fewer firings, not hirings.

The 6.1% unemployment rate also suggests a better job market, and is well below the 6.5% at which the FOMC previously had indicated it would begin to think about normalizing monetary policy. But, as Fed Chair Janet Yellen has indicated, the headline jobless rate doesn’t tell the whole story. Wage gains have been grudging, 2.3% year over year, or scarcely more than the rate of inflation. That leaves workers running in place.

What Yellen and most economists are trying to figure out is the degree of slack in the labor market. Marxist theorists put it in different terms — the size of the reserve army of the unemployed, who are ready to step in and work without a raise.

At this week’s FOMC meeting, which winds up on Wednesday without a news conference from Yellen or a new set of economic projections, there is certain to be another $10 billion trimming of the central bank’s monthly bond-buying program, to $25 billion a month. That would be a continuation of the Fed’s taper of its purchases, which the central bank is slated to end in October.

The key question is when the Fed will raise its key short-term interest rate from the 0%-to-0.25% target range that has prevailed since the depths of the financial crisis in December 2008. Sometime in 2015, is most likely, with the timing dependent upon the data. The FOMC will have the Commerce Department’s first stab at estimating second-quarter gross domestic product, out on Wednesday morning, which should show real growth that roughly offset the first quarter’s 2.9% annual rate of contraction; in other words, a wash for the first half.

But the Fed has made clear that it’s tracking employment, rather than GDP, and the two have not moved in lock step. So, Friday’s release of July’s jobs data will be the week’s highlight. The consensus guess is for a 225,000 gain in nonfarm payrolls, in line with this year’s trends, but lower than June’s 288,000 jump. The jobless rate is forecast to hold at 6.1%, with average hourly earnings up 0.2%, in line with the pace of the past year.

Yellen & Co. have indicated they are disinclined to tighten until American workers start getting real raises, that is, above the rate of inflation. That would be the sign that the labor market really is healing. In the meantime, the three-day workweek seems to be the lot, rather than the choice, of a lot of folks. Slim pickings, indeed.

The Fed isn’t the only central bank facing a decision. The following week, the European Central Bank must consider what further steps, if any, it will take to spur an economy that’s not only sputtering and verging on deflation, but also facing geopolitical risks.

Two years ago, in one of the great monetary maneuvers of all times, ECB President Mario Draghi declared the bank would do “whatever it takes” to save the euro. As confidence in the common currency gradually revived, yields on bonds of Spain and Italy fell sharply. As their long-term borrowing costs slid from over 7% to under 3% — close to that of the U.S. Treasury — the fiscal noose around these heavily indebted governments was loosened.

“The euro’s strengthening trend of the last two years was driven by a surge of confidence in the European Central Bank as the single-currency area’s lender of last resort, a newfound faith which attracted capital flows,” write analysts at Gavekal-Dragonomics. “Today, however, undervalued assets are harder to come by, while nagging questions about the sustainability of Europe’s recovery have taken hold.”

On the latter score, one impediment has been the strong euro, which has held up despite the weak euro-zone economy and tumbling interest rates. A newer one is the imposition of sanctions on Russia, a key trade partner with Europe.

Germany’s IFO economic-research institute noted that geopolitical conditions are taking a toll, as its indicator of current business activity unexpectedly slumped in July, while the institute’s measure of future conditions slumped for the third straight month. “The IFO results confirm a breakdown under way in the main engine of euro-zone growth, which raises the specter of risk that Russia sanctions may expose weak pockets in the euro-zone recovery,” writes Lena Komileva, who heads the g+economics advisory in London.

As a result, the euro last week fell below $1.35, which Karl Schamotta, director of foreign-exchange strategy and structured products for Cambridge Mercantile Group in Toronto, called a “watershed moment in the currency markets.” But instead of declaring “whatever it takes,” he thinks Draghi will say “please understand the stakes” in calling for a “sniper rifle” approach, rather than the proverbial bazooka.

European equities reacted negatively to signs of weakening growth spreading to the euro zone’s core: Germany. The DAX fell 1.5% on Friday while France’s CAC 40 slid 1.8%. Even before this, there was buckling on the bourses with bond yields in Germany also turning Japanese (for lack of a better term). Only the 0.53% yield on the 10-year Japanese bond is lower than the 1.15% on the 10-year bund in major bond markets. That makes the 2.47% on the 10-year Treasury seem positively high yield.

All of which figures into the calculus of valuations elsewhere. Facebook (FB) soared following strong earnings, lifting its stock market value to over $190 billion, in the same league as IBM (IBM). But Amazon.com (AMZN) plunged 9.7% on Friday, to a market cap of about $150 billion, as the legions of bulls on the online retailer showed signs of impatience with its strategy of selling more and losing more.

The heady optimism to pay up for future growth is evident in the enthusiasm for stocks that emphasize food over fast. El Pollo Loco (LOCO) surged more than 50% after its initial public offering on Friday, to a market value twice as large as its annual revenue (no earnings, natch). In comparison, Chipotle Mexican Grill (CMG) fetches 39 times forecast 2015 earnings.

Amazon’s fans saw it conquering the world, from retailing to video to their own smartphones. How much Jeff Bezos spent, and lost, for shareholders, didn’t matter, until it did. Investors now seem willing to pay any price for fresh chicken and burritos — as long as central-bank money flows freely. LOCO seems an apt ticker symbol.

 

Read full article at: http://online.barrons.com/news/articles/SB50001424053111904780504580043362746332330