Great News From McKinsey: Robots Will Take 800 Million Jobs Worldwide By 2030

Stories about robots taking over from humans have become prevalent. Recently we’ve written about a new Manhattan Shake Shack replacing human cashiers with robots, killer robots (a.k.a. lethal autonomous weapons systems), a Californian real estate company replacing commission-based human agents with robots, a cocaine workshop in Brazil with robots packing 150,000 baggies a day and the first robot to be awarded citizenship which hopes for “harmony with humans”. No chance.

In June, we discussed a McKinsey & Co. report which stated that US manufacturing could be poised for a recovery and not because of Trump’s policies. Indeed, McKinsey’s rationale was based on automation weakening the case for labour arbitrage. James Manyika, McKinsey Global Institute director, commented.

“Even if we rebuild factories here and you build plants here, they’re just not going to employ thousands of people -- that just doesn’t happen. Find a factory anywhere in the world built in the last 5 years -- not many people work there.”

Pressing home the bad news for humans everywhere, both in developed and emerging nations. McKinsey has published a new report with truly dire conclusions, as Bloomberg reports.

As many as 800 million workers worldwide may lose their jobs to robots and automation by 2030, equivalent to more than a fifth of today’s global labor force. That’s according to a new report covering 46 nations and more than 800 occupations by the research arm of McKinsey & Co.

The consulting company said Wednesday that both developed and emerging countries will be impacted. Machine operators, fast-food workers and back-office employees are among those who will be most affected if automation spreads quickly through the workplace.

This fits with a Bloomberg chart we’ve used before showing industries most at risk to automation.

There is some "moderately" good news, if the robotic takeover is “less rapid” than McKinsey is currently forecasting.

some 400 million workers could still find themselves displaced by automation and would need to find new jobs over the next 13 years, the McKinsey Global Institute study found.

If you’re one of the 800 million, or maybe 400 million, displaced workers, don’t despair if you like gardening or looking after the elderly. Bloomberg continues.

The good news for those displaced is that there will be jobs for them to transition into, although in many cases they’re going to have to learn new skills to do the work. Those jobs will include health-care providers for aging populations, technology specialists and even gardeners, according to the report.

“We’re all going to have to change and learn how to do new things over time,” Michael Chui, a San Francisco-based partner at the institute, said in an interview.

Somehow, we doubt that the optimistic Mr. Chui is referring to himself, although you never know. We remember working for a high-profile British merchant bank in the 1990s, let’s just call it S.G. Warburg, which, after decades of success had lost its way slightly. The Chairman – often referred to as the “Fat Controller” by his underlings - invited the bank’s leading shareholders to dinner. We’re paraphrasing, but his message was “Don’t worry, we’ve got McKinsey coming in.” Hearing that, the major shareholders decided that the “game was up” and the bank lost its independence afterwards. Meanwhile, after another robot report from McKinsey, we like to find solace in previous predictions of labour market demise.

"We are being afflicted with a new disease of which some readers may not have heard the name, but of which they will hear a great deal in the years to come—namely, technological unemployment" - Keynes, 1930
 
“Labor will become less and less important..More and more workers will be replaced by machines. I do not see that new industries can employ everybody who wants a job” -Leontief, 1952

Nickel Price Surging As Hype Escalates During LME Week

It’s LME Week and there’s cause for celebration in metal markets. European mining stocks rose to a 4-year high as the nickel price surged more than 5% intraday to a two-year high and rose by the daily limit in Shanghai trading today. Metals used in electronic vehicles, like lithium, cobalt, copper and nickel, are hot right now and a focal point of discussion at the LME gatherings. As Metal Bulletin noted, the 2017 event has seen record attendance.

The annual LME Dinner week kicked off in a positive note, with record numbers gathering for the exchange’s keynote metals seminar on Monday October 30. “We have over 900 people over the day here…which is a record attendance,” London Metal Exchange chief executive officer (CEO) Matthew Chamberlain said.

Despite relatively high inventories, big miners and metal traders are becoming increasingly bullish on nickel’s prospects. According to Bloomberg...

Glencore Plc and Trafigura Group Pte are often at loggerheads, but one thing they agree on: the nickel market will be transformed by the rise of electric cars. Nickel sulphate, a key ingredient in lithium-ion batteries, will see demand increase 50 percent to 3 million metric tons by 2030, Saad Rahim, chief economist at Trafigura, said in an interview. While other battery metals like cobalt and lithium have more than doubled since the start of last year, nickel prices have been subdued because of large inventories.

"When you look structurally, we should start to get bullish now,” Rahim said.

 

“Are you going to be able to meet that demand when the time comes, given underinvestment in the supply side?”

Glencore, which was devastated by the downturn in nickel, is also optimistic, as are some of the analysts, as Bloomberg notes...

(Glencore) told analysts recently that nickel production would need to increase 1.2 million tons by 2030, equal to more than half of current global output, to keep up with demand from the battery industry. Prices are currently more than double what it costs Glencore to mine the metal. It’s a surprising mood change for a market with a disastrous reputation. Nickel was long a thorn for Glencore, which was saddled with unprofitable operations following its takeover of Xstrata. It sold an Australian nickel mine, which Xstrata bought in 2007 for $2.4 billion, for just $19 million in 2015.

 

“The nickel industry’s been a bit of a dog since about 2007,” Oliver Ramsbottom, a partner at McKinsey & Co. in Tokyo, said by phone.

 

The battery industry could revive the fortunes of miners more than a decade after nickel collapsed from a peak of $51,600 a ton in 2007

Despite the hype, Bloomberg cautions that there are still naysayers highlighting elevated inventories and the potential for supply to ramp-up faster than currently expected.

Still, some analysts are skeptical that the bullish scenarios will play out. Electric cars are still a niche industry and nickel oversupply remains a threat, with current stockpiles four times bigger than since the start of 2012.

 

Indonesia has authorized its largest producer to export more nickel ore. The Philippines has also discussed ending a ban on open-pit mining, raising concerns that supply will spike.

 

“For years, the market has completely dismissed the idea that something positive could happen in nickel,” Ingrid Sternby, senior research analyst at Blenheim Capital Management LLP, said in an interview in London. “With the recent announcements about Indonesia and the Philippines, it’s easy to see why the market is still scary enough for people not to want to be involved…

 

“You can see the tightness ahead in the nickel market, but my concern is that we’re going to see a lot of value destroyed along the way,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets Ltd.

 

“If the miners really believe in the EV growth story, the thing to do would be to keep the nickel in the ground until the deficit arrives.”

When assessing the prospects for nickel, it is really two separate markets, nickel alloyed with iron and nickel sulphate used in batteries. Bloomberg expects the latter to progressively trade at a premium to the former.

About half of global nickel production is in the form of ferronickel or nickel pig iron, which is nickel alloyed with iron, making it suitable for stainless steel. Battery makers, instead, use nickel sulphate, produced by dissolving pure nickel metal in sulphuric acid. One hope is that the pricing of nickel pig iron and the high-grade nickel sulphate will diverge in the coming years, improving the fortunes of miners that can produce battery-quality material.

 

The global nickel market is heading for a deficit once above-ground stockpiles of battery-grade metal are consumed, according to Wood Mackenzie. The question for miners is how quickly the premium for top-quality nickel will emerge.

The nickel alloy versus nickel sulphate certainly adds complexity to analysing nickel. However, while the fundamentals for the latter seem very positive, it makes us slightly nervous when record numbers of participants gather at industry jamborees.

Still, politicians and automakers are increasingly counting on a future of electric cars, attracting traders such as Trafigura.

“Will we see a real breakout in next 12 months? That’s hard to see, but beyond that, structurally this looks to be going up,” Rahim said.

 

Would You Pay $2,500 For One Hour With An Equity Analyst? This I-Bank Seems To Think So...

Wall Street equity analysts are paid "yuge" salaries to employee the finance skills they picked up from their business school professors to value various corporate securities and asset-backed securitization structures, among other things.  And while their valuations of those securities have served as a frequent source of comic relief for many of us over the years, no bastardization of basic financial concepts tops recent attempts by the financial elites of the world to place a value on their own services.

As evidence of that fact, we present to you "Exhibit A" from a Bloomberg article published earlier today suggesting that Morgan Stanley, who is still trying to figure out how much their equity research is worth to clients after nearly a year of internal cogitation, is considering asking hedge fund clients for $2,500 for the extreme pleasure of spending just one hour with one of their esteemed research analysts.

Fund managers will have to pay about $2,500 for an hour-long, one-on-one meeting with some of Morgan Stanley’s equity analysts once Europe’s MiFID II financial rules kick in, according to people with knowledge of the plan.

The fee is on top of the annual rate Morgan Stanley plans to charge some clients for basic access to its equity research portal once the regulations come into force in January, the people said, asking not to be named as the negotiations are private. The bank also quoted a small client $25,000 annually for five users for basic equity research access and five total hours of analyst time, another person said.

Of course, any I-banking summer intern could easily spot the outlier in Morgan Stanley"s proposed $2,500 hourly billing rate when matched up against comps from the legal industry.  According to the National Law Journal, even the priciest partners at the best law firms can only command hourly billing rates equal to roughly half of what Morgan Stanley wants.

Meanwhile, the "median" partner at any given law firm only gets paid about one-fifth of Morgan Stanley"s proposal.

As McKinsey & Co. recently pointed out, the end result is that new European regulations designed to separate research and trading revenue for investment banks will likely cost them more than $1 billion as clients become pickier about what they pay for. 

Of course, ultimately the market will set a clearing price for the "value add" of equity analysts...and we"re almost certain it"s going to surprise some folks.

Would You Pay $1,000 For Each Equity Research Piece You Read? Autonomous Research Thinks You Will

Would you pay $1,000 for each piece of equity research you read throughout the day?  How about $5,000 for an industry piece? 

Well, Autonomous Research, which was founded in 2009 by former Merrill Lynch analysts, is really hoping you"ll agree that those are appropriate clearing prices for their daily market wisdom.  According to Bloomberg, as equity research providers in the Europe continue to figure out how exactly to best comply with upcoming MiFID II rules, Autonomous thinks that a piecemeal approach will allow them to reach smaller funds that lack the resources to purchase more expensive annual contracts for bulge bracket research.

Autonomous Research LLP is offering a pay-as-you-go model for its European equity product in the run-up to the MiFID II rules, which are set to shake up the way money managers pay for analyst reports, people with knowledge of the matter said.

The prices for the new service start at $1,000 for a single stock report and climb to $5,000 for high-end industry research, the people said, asking not to be identified because the information is private. Autonomous Research, which specializes in analysis of financial companies, also charges a single user $5,000 for access to its daily round-up of news and analysis, with the price per client falling as more sign up, the people said.

“We have been transparent with our clients on pricing for research since inception eight years ago,” said Chief Financial Officer Jonathan Firkins. “We have a clear and transparent pricing menu which we discuss proactively with existing and prospective clients.”

Of course, as we recently pointed out, bigger firms like Barclays have opted for larger 1x, all-you-can-eat packages priced at the bargain basement rate of just $455,000 per year...it"s hard to imagine how hedgies won"t be knocking down their doors to gain access.

The firm is proposing three levels of service -- bronze, silver and gold -- with the premium package comprising unlimited reports, field trips and “occasional” one-on-one meetings with analysts and corporate executives, according to a pricing document seen by Bloomberg News. At the bottom end of the scale, read-only access to European research will start at 30,000 pounds.

At Barclays, even if clients stump up 350,000 pounds for the gold “trans-Atlantic” package, they could still end up spending more. “Bespoke” analyst work and corporate access is priced separately, according to the document. Field trips, industry events and company management meetings are also at the bank’s discretion, and analyst one-on-ones are “capped,” it shows.

Prices in the document may not apply to all clients, have been in flux and could still be subject to change, a person familiar with the process said, asking not to be identified discussing the matter. A Barclays spokesman declined to comment.

Banks are scrambling as they enter the last six months before the decades-old practice of sending out free analyst reports as a courtesy and marketing strategy comes to an end. The European Union’s MiFID II regulations, enforced from Jan. 3, require money managers to separate the trading commissions they pay from investment-research fees. This means banks in turn have to be more transparent, providing specific charges for their analysts’ time and work in order to comply.

Of course, the logical takeaway from these exorbitant offering prices, if they hold, is that institutional clients will ultimately be forced to consolidate their vendors...translation, so long to the small independent research shops.  Meanwhile, investment banks will be forced to control costs by trying to focus on writing reports that people actually read (vs. the 1% hit rate they have today).  All of which means that those shrinking analysts pools are about to completely collapse.

In fact, as McKinsey recently noted, up to 30% of research analysts could be at risk of losing their cushy banking jobs as result of Europe"s new regulations.

Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.

The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.

“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”

Of course, as we"ve said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."

Barclays Seeks $455,000 For 'Gold' Equity Research Package; Includes 'Field Trips' And 'Occasional' 1x1's

Literally no one knows the true "value" of equity research, not even the investment banks that are selling it.  Up until now, equity research has been treated as a "freebie" given away to institutional clients in return for trading commissions but that is all about to change thanks to the European Union’s MiFID II regulations, which require asset managers to separate trading commissions from investment-research payments.

Unfortunately, at least for the Investment Banks of the world, while the cost of generating equity research may be substantial, it turns out that the true "value", as defined by institutional clients" maximum willingness to pay for reports, may be much less.  Which is shocking given the creativity required to constantly generate new variations of daily reports politely suggesting that you "Buy The Fucking Dip."

Be that as it may, with deadlines right around the corner, 2018 offer prices for equity research in Europe are starting to roll in and we suspect there may be a little sticker shock among institutional clients who are used to having unlimited access to all research in return for placing a few trades each year.  Just a few weeks ago we noted that Credit Agricole offered their "Premium Research Package" for the bargain basement price of 400,000 Euros.  Nomura, on the other hand, played the volume game by giving away their "BTFD" reports for just $134,000 a year.

Now, we can add Barclays to the list. Coming in at $455,000 per year for their "Gold" package, it"s hard to imagine how hedgies won"t be knocking down their doors to gain access.  Per Bloomberg:

The firm is proposing three levels of service -- bronze, silver and gold -- with the premium package comprising unlimited reports, field trips and “occasional” one-on-one meetings with analysts and corporate executives, according to a pricing document seen by Bloomberg News. At the bottom end of the scale, read-only access to European research will start at 30,000 pounds.

At Barclays, even if clients stump up 350,000 pounds for the gold “trans-Atlantic” package, they could still end up spending more. “Bespoke” analyst work and corporate access is priced separately, according to the document. Field trips, industry events and company management meetings are also at the bank’s discretion, and analyst one-on-ones are “capped,” it shows.

Prices in the document may not apply to all clients, have been in flux and could still be subject to change, a person familiar with the process said, asking not to be identified discussing the matter. A Barclays spokesman declined to comment.

Banks are scrambling as they enter the last six months before the decades-old practice of sending out free analyst reports as a courtesy and marketing strategy comes to an end. The European Union’s MiFID II regulations, enforced from Jan. 3, require money managers to separate the trading commissions they pay from investment-research fees. This means banks in turn have to be more transparent, providing specific charges for their analysts’ time and work in order to comply.

Of course, the logical takeaway from these exorbitant offering prices, if they hold, is that institutional clients will ultimately be forced to consolidate their vendors...translation, so long to the small independent research shops.  Meanwhile, investment banks will be forced to control costs by trying to focus on writing reports that people actually read (vs. the 1% hit rate they have today).  All of which means that those shrinking analysts pools are about to completely collapse.

In fact, as McKinsey recently noted, up to 30% of research analysts could be at risk of losing their cushy banking jobs as result of Europe"s new regulations.

Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.

The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.

“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”

Of course, as we"ve said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."

"Dirty, Difficult, And Dangerous": Why Millennials Won't Work In Oil

Authored by Tsvetana Paraskova via OilPrice.com,

Like many industries today, the oil industry is trying to sell its many job opportunities to the fastest growing portion of the global workforce: Millennials. But unlike any other industry, oil and gas is facing more challenges in persuading the environmentally-conscious Millennials that oil is “cool”.  

During the Super Bowl earlier this year, the American Petroleum Institute (API) launched an ad geared toward Millennials, who now make up the largest generation in the U.S. labor force.   

“This ain’t your daddy’s oil”, the ad says, in what API described as “a modern look at how oil is integrated into products consumers use now and in the future supported by bold visuals.”  

Despite its pitch to speak the Millennials’ language and reach out to the elusive generation, the ad sparked anger with many consumers and viewers.

Millennials continue to have the most negative opinion toward the oil industry compared to all other industries, and they don’t see a career in oil and gas as their top choice of a workplace. The oil industry’s talent scouting and recruiting methods of the past are failing to reach Millennials, who want their work to have a positive impact on society, various studies and polls have found—a rather big ask for the oil industry.

This failure to reach the group that makes up the largest portion of today’s workforce—which now surpasses Generation X—points to a huge problem for the oil sector, as Baby Boomers move into retirement in droves.

Not only are Millennials snubbing oil and gas because of its negative image, they also seek different job perks than previous generations sought, and in this regard, the oil industry will need to do more as it becomes increasingly obvious that Millennials want different things than what oil executives think they want. 

A total of 14 percent of Millennials say they would not want to work in the oil and gas industry because of its negative image—the highest percentage of any industry, McKinsey said in September 2016.

Young people see the industry as dirty, difficult, and dangerous, according to an EY survey published last month. EY’s survey polled Millennials—the 20-to-35-year-olds today—as well as Generation Z coming after them, and found that younger generations “question the longevity of the industry as they view natural gas and oil as their parents’ fuels. Further, they primarily see the industry’s careers as unstable, blue-collar, difficult, dangerous and harmful to society.”

In addition, two out of three teens believe the oil and gas industry causes problems rather than solves them, the survey showed.

So ‘not your daddy’s oil’ is not sinking in with Millennials and Generation Z, and with many of them, it never will, despite the oil lobbies’ marketing efforts to try to make it sound like an attractive career path.

According to executives polled by EY, the top three drivers for young people would be salary (72 percent), opportunity to use the latest technology (43 percent), and a good work-life balance (38 percent). But young people—although they are also prioritizing salary—have other views on what they look for in a job. Salary is still the top priority at 56 percent, but a close second comes good work-life balance (49 percent), with job stability and on-the-job happiness equally important at 37 percent.

Executives are underestimating the importance of work-life balance and stability for Millennials, while overestimating the allure of technology as a factor. It’s not surprising that Millennials are not as attracted to the opportunity to use new tech as oil executives believe they are – Millennials generally don’t see technology as a perk, they take it for granted.

Moreover, Millennials don’t see the oil and gas industry as innovative – a major driver of career choice among this generation. According to a recent report by Accenture, “Despite evidence to the contrary, many Millennials believe the sector is lacking innovation, agility and creativity, as well as opportunities to engage in meaningful work. In fact, only 2 percent of U.S. college graduates consider the oil and gas industry their top choice for employment.”

Accenture is warning that ‘the talent well has run dry’ and said:

“We believe the growing workforce deficit will, in fact, be a greater barrier to oil and gas companies’ upturn success than any deficits that might exist in capital, equipment or supplies.”  

The oil   and gas industry is losing the competition for talent recruitment to industries that are more appealing to Millennials, and U.S. oil and gas firms will face the talent crunch first, according to Accenture.

“Any mature industry has to think about the fact that there’s a new sheriff in town with new values, new spending habits,” Jeff Fromm, an expert in marketing to American Millennials, told Bloomberg.

And if the oil and gas industry wants to get this ‘new sheriff in town’ on board, it needs to profoundly change recruitment strategies and talent sourcing. But with the negative image that is probably set to become even more negative—despite oil organizations’ marketing efforts—oil and gas has a huge workforce problem looming.

Why Wage Growth Will Remain Elusive

Authored by Lance Roberts of Real Investment Advice,

Just recently, Bloomberg ran a fascinating article discussing a new study from the McKinsey Institute.

“American manufacturing could be poised to rebound as technological disruption shakes up global production chains, but that will offer little relief to displaced factory workers, according to new research by the McKinsey Global Institute.

Now, McKinsey sees conditions changing in a way that could favor U.S. producers: automation is weakening the case for labor arbitrage as wages rise in emerging market economies and developing market residents are coalescing into a new consumer class, among other factors.

While the U.S. could seize on those manufacturing growth opportunities, especially if the government and companies invest to make production more competitive, there are catches. Importantly, production might bounce back without bringing a lot of jobs in tow.

‘Even if we rebuild factories here and you build plants here, they’re just not going to employ thousands of people — that just doesn’t happen,’ said report co-author and McKinsey Global Institute Director James Manyika. ‘Find a factory anywhere in the world built in the last 5 years — not many people work there.’”

McKinsey is absolutely correct. While the President recently started a discussion on “Buy American,” most of the root belief in the efficacy of tax cuts, tax reform, and nationalism is rooted in the history of “Reagan-omics.”

The thing most overlooked by the majority of economists, politicians, and commentators, is the stark difference in the underlying economic and monetary fundamentals which provided the massive tailwind Reagan’s policies that simply don’t exist currently. As my partner, Michael Lebowitz, illustrated previously:

“Many investors are suddenly comparing Trump’s economic policy proposals to those of Ronald Reagan. For those that deem that bullish, we remind you that the economic environment and potential growth of 1982 was vastly different than it is today.  Consider the following table:’”

The issue of working harder, and earning less, continues to plague the economic minds driving both monetary and fiscal policy. Since the turn of the century, there has been a steady erosion of the growth rate in compensation as advancements in technology has limited the ability for workers to demand higher wages.

Whether it has been McDonald’s installing kiosks to replace cashiers or manufacturing companies automating assembly line jobs, the decision simply comes down to which is more cost-effective to increase bottom-line profitability. The answer is always – automation. This is shown in the chart below from McKinsey which shows which industries are the most susceptible to automation.

This continuing drive for profitability by reducing the cost of labor through increased productivity also explains the other conundrum of the “hidden unemployment.”

Businesses remain keenly focused on the bottom line, particularly as payroll and benefit costs continue to climb each year, as aggregate end demand drags. However, if businesses can increase productivity without increasing employment those net gains flow directly to the bottom line. This attitude, of course, not only stifles the need for employment but also lowers wage requirements as the available labor pool competes for fewer jobs.

Skills Lacking

Bloomberg ran a second article recently discussing the second problem which is further suppressing wage growth – a lack of requisite skill sets. To wit:

“A growing number of companies are finding it difficult to recruit skilled workers, which threatens to curtail profits and growth, according to a quarterly survey conducted by the Washington-based National Association for Business Economics.

The results of NABE’s July Business Conditions Survey published on Monday showed that 34 percent of respondents have had trouble hiring skilled employees over the last three months, up from 27 percent in January. The Washington-based association polled 101 panelists, who are economists from companies and industry associations.

In response, companies are sponsoring foreign workers, expanding their search and hiring more independent contractors, according to the survey. They’re also boosting automation, stepping up internal training and in some cases improving pay, Jankowski said.

Perhaps at least partially as a result, more than a third of respondents cited labor costs as having the largest negative impact on their profits so far this year.”

In a nutshell, there is the entirety of the problem and the reason why wage growth remains nascent. Mike Shedlock summed up what is going on, stating:

• It’s not just salaries. Obamacare and benefits are hurting many companies.


• Cheap money from the Fed keeps zombie companies alive.


• Cheap money from the Fed induced (and still does) over-expansion fast of food restaurants and retail stores of all sorts.


• Workers really are not worth benefit costs plus an extra 3% so companies seek to automate.


• Are McDonald’s workers worth $15? Please be serious.


• Amazon and online shopping are weakening retail profits.

Increasing productivity, lowering costs and increasing profit margins. In a slow growth economy, this has become the clarion call to corporate CEO’s. This is why, as shown on Tuesday, that while earnings per share have exploded, actual revenue growth remains feeble.

Working more and earning less. That is struggle faced by the average American today as each dollar buys less than it did before. Statistically, the economy may be recovering. However, for the average American it is a far more depressing reality. Capacity utilization still remains far weaker than at the peak of the last economic cycle and employment relative to the total working age population remains mired at lows. These components all feed back into the mental and financial state of the consumer which, in turn, impacts businesses future investment and hiring decisions – or lack thereof.

The real story here is that there is little hope for an already struggling middle class to gain any ground in an economic climate that continues to stack the cards against them.

But who knows, maybe someone will develop an “app” for that.

Ray Dalio: The Central Bank Era Is Ending "So Let's All Thank Them"

For some inexplicable reason, Ray Dalio still thinks the the world not only underwent a deleveraging, but that it was "beautiful." Not only did McKinsey prove that to be completely false two years ago, but for good measure the IIF confirmed as much last week, when it revealed that global debt has hit a record $217 trillion, or 327% of GDP...

... while Citi"s Matt King showed that with no demand for credit in the private sector, central banks had no choice but to inject trillions to keep risk prices from collapsing.

And now, replacing one delusion with another, the Bridgewater head has penned an article in which he notes that as the "punch bowl" era is ending - an era which made Dalio"s hedge fund the biggest in the world, and richer beyond his wildest dreams - he would like to take the opportunity to "thanks the central bankers" who have "inexplicably" been "more maligned than appreciated" even though their aggressive policies have, and here is delusion #1 again, "successfully brought about beautiful deleveragings."

"In my opinion, at this point of transition, we should savor this accomplishment and thank the policy makers who fought to bring about these policies. They had to fight hard to do it and have been more maligned than appreciated. Let’s thank them."

They fought hard to print $20 trillion in new money? Now that is truly news to us.

That said, we can see why Dalio would want to thank "them": he wouldn"t be where he is, and his fund would certainly not exist today, if it weren"t for said central bankers who came to rescue the insolvent US financial system by sacrificing the middle class and burying generations under unrepayable debt. Still, some who may skip thanking the central bankers are hundreds of millions of elderly Americans and people worldwide also wouldn"t be forced to work one or more jobs well into their retirement years because monetary policies lowered the return on their savings to zero (or negative in Europe), as these same "underappreciated" central bankers created three consecutive bubbles, and the only reason the world is in its current abysmal socio-political and economic shape is due to the cumulative effect of their disastrous policies which meant creating ever greater asset and debt bubbles to mask the effects of the previous bubble, resulting in unprecedented wealth and income inequality, and which have culminated - most recently - with Brexit and Trump.

Thanks guys.

In fact, the only thing of substance in Dalio"s note is the realization that the era of musical chairs is almost over: "our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves."

Dalio leaves off by, what else, echoing Yellen: "no big debt bubble bursting any time soon" (wait, wasn"t he just thanking them moments ago for fixing things?) although mercifully he doesn"t say "in our lifetimes", however he at least realizes that a "big squeeze" is coming. We hope, for Bridgewater"s sake, that Dalio knows how to navigate capital markets as skillfully when there are no central banks to hold his hand and punch his trade tickets.

His full LinkedIn letter below:

Central Banks’ Reversals Signal the End of One Era and the Beginning of Another

For the last nine years, central banks drove interest rates to nil and pumped money into the system creating favorable carries and abundant cash. These actions pushed up asset prices, drove nominal interest rates below nominal growth rates, pushed real interest rates on cash negative, and drove real bond yields down to near zero percent, which created beautiful deleveragings, brought about balance sheet repairs, and led to more conventional economic conditions in which credit growth and economic growth are growing in relatively good balance with debt growth. That era is ending.

Central bankers have clearly and understandably told us that henceforth those flows from their punch bowls will be tapered rather than increased—i.e., that the directions of policy are reversing so we are at a) the end of that nine-year era of continuous pressings down on interest rates and pushing out of money that created the liquidity-fueled moves in the economies and markets, and b) the beginning of the late-cycle phase of the business/short-term debt cycle, in which central bankers try to tighten at paces that are exactly right in order to keep growth and inflation neither too hot nor too cold, until they don’t get it right and we have our next downturn. Recognizing that, our responsibility now is to keep dancing but closer to the exit and with a sharp eye on the tea leaves.

Wonderful Monetary Policies

Generally speaking (depending on the country), it is appropriate for central banks to lessen the aggressiveness of their unconventional policies because these policies have successfully brought about beautiful deleveragings. In my opinion, at this point of transition, we should savor this accomplishment and thank the policy makers who fought to bring about these policies. They had to fight hard to do it and have been more maligned than appreciated. Let’s thank them.

As you know, looking ahead, we don’t project a big debt bubble bursting any time soon (because of the balance sheet repairs that have taken place), though we do see an increasingly intensifying “Big Squeeze” (see the Big Picture).

PS: We look forward to Dalio"s letter when the current tightening episode ends in a global recession and the biggest crash yet, and wonder if he will still be in the same grateful mood.

Factories May Be Coming Back To The U.S., But The Jobs Aren't: McKinsey

Trump effectively owes his election to the promise of bringing factories and manufacturing jobs back to the United States.  His relentless, targeted attacks against the "Big 3" U.S. auto manufacturers for outsourcing jobs to Mexico was undoubtedly a key reason that he was able to shock the world and win Michigan, Wisconsin, Ohio and Pennsylvania...an accomplishment which has eluded Republicans since Ronald Reagan.

Unfortunately, while factories may once again be making a comeback in the United States, after chasing low wages all around the globe for decades, they"re unlikely to bring the jobs with them.  As a new study from McKinsey highlights, if a new factory opens up in the United States you can bet it"s only because most of the jobs that used to be performed by humans have since been automated.  Per Bloomberg:

American manufacturing could be poised to rebound as technological disruption shakes up global production chains, but that will offer little relief to displaced factory workers, according to new research by the McKinsey Global Institute.

Now, McKinsey sees conditions changing in a way that could favor U.S. producers: automation is weakening the case for labor arbitrage as wages rise in emerging market economies and developing market residents are coalescing into a new consumer class, among other factors.

While the U.S. could seize on those manufacturing growth opportunities, especially if the government and companies invest to make production more competitive, there are catches. Importantly, production might bounce back without bringing a lot of jobs in tow.

“Even if we rebuild factories here and you build plants here, they’re just not going to employ thousands of people -- that just doesn’t happen,” said report co-author and McKinsey Global Institute Director James Manyika. “Find a factory anywhere in the world built in the last 5 years -- not many people work there.”

Not surprisingly, the biggest beneficiary of the decimation of the America"s manufacturing base has been China...which also means they have the most to lose as those jobs get automated.

Looking at the likelihood of automation by industry, McKinsey finds that factory employment ranks near the top of the list -- behind accommodation and food services and just ahead of agriculture. Investment in re-training could help employees who are displaced, Manyika said, but it won’t happen overnight.

"It’s a bit of a heavy lift -- in the skilling, the investment in the right places, the right skills -- it’s not going to happen by itself."

Of course, this wouldn"t be the first time that economists had prematurely predicted the demise of labor markets due to technological advances:

"We are being afflicted with a new disease of which some readers may not have heard the name, but of which they will hear a great deal in the years to come—namely, technological unemployment" - Keynes, 1930

“Labor will become less and less important. . . More and more workers will be replaced by machines. I do not see that new industries can employ everybody who wants a job” - Leontief, 1952

"Technology Is Replacing Brains As Well As Brawn" - Challenging The 'Official' Automation Narrative (& Social Order)

Academics and economists have repeatedly underestimated the impact that immigration and automation would have on the labor market. As data on productivity gains and labor-force participation clearly show, the notion that innovation ultimately creates jobs by allowing workers to focus on higher-level problems is an illusion. If it were true, then why aren’t we already seeing more of the 20 million prime-age men who have inexplicably dropped out of the labor force welcomed back in?

As we"ve noted time and time again, after decimating American manufacturing jobs in the 1990s, automation is now coming for service-industry workers like those in the retail and food-service industries. Earlier this week, we shared an analysis from Cowen that showed new kiosks being adopted by McDonald’s will result in the destruction of 2,500 jobs at its US eateries. And now, Bloomberg has published a “quick take” questioning this “official” narrative and pointing out the very real carnage that service sector workers are already facing. In it, the reporters noted how economists have repeatedly misjudged how our capacity to innovate would impact the labor market. For example, 13 years ago, two leading economists published a paper arguing that artificial intelligence would never allow a driverless car to safely execute a left turn because there are too many variables at work. Six years after that, Google proved it could make cars fully autonomous, threatening the livelihood of millions of taxi and truck drivers. And now Google, Uber, Tesla and the big car manufacturers are all exploring and testing this technology. Ford has said it plans to introduce a fully autonomous car by 2021.

“Throughout much of the developed world, gainful employment is seen as almost a fundamental right. But what if, in the not-too-distant future, there won’t be enough jobs to go around? That’s what some economists think will happen as robots and artificial intelligence increasingly become capable of performing human tasks. Of course, past technological upheavals created more jobs than they destroyed. But some labor experts argue that this time could be different: Technology is replacing human brains as well as brawn.

When politicians talk about jobs, they tend to focus on iconic, goods-producing industries, such as mining, steel production and auto making, that have traditionally been the hardest hit by global competition and technological progress. Lately, though, the loss of manufacturing jobs in the U.S. pales in comparison to the much larger losses in parts of the services sector.

Overall, services accounted for three-fourths of the job losses among more than 350 sectors of the private economy in the last year. That’s a big shift from previous decades, when goods-producing categories tended to suffer the most losses.”

Bloomberg used the retail industry as an example, noting that as customers increasingly purchased goods via the internet, department stores, which employ 25 times more workers than coal mining companies, are shedding workers at an accelerating rate. In the retail industry more broadly, average employment in the first four months of 2017 was down 26,800 from the same period a year earlier, against just 2,800 job losses in coal.

In retail and beyond, the modern services industry - which accounts for more than 70% of the US"s economic output - is facing unprecedented challenges. Here’s a breakdown of some of the research cited in Bloomberg"s analysis.

• The true extent of job losses could be much more severe than most workers expect. As Bloomberg notes, researchers at the University of Oxford estimate that nearly half of all US jobs may be at risk in the coming decades, with lower-paid occupations among the most vulnerable.


• In the U.K., the Bank of England estimates that about 15 million mostly service jobs—half the country’s total—could succumb to automation and widen the gap between rich and poor.


• A McKinsey Global Institute study of the labor force in 46 countries found that less than 5 percent of occupations could be fully automated using today"s technology, but almost a third of tasks involved in 60 percent of occupations could be.

But if robots are truly taking over, mainstream academics would ask, then why haven’t we seen the attendent rise in productivity that one would expect from the increase in labor power?

While it"s true that, in the past, innovation has led to job creation, it"s foolish to believe that this trend will continue uninterrupted, especially as machines learn to perform increasingly high-level functions. As we’ve noted in the past, most of the new jobs that have been created are in low-wage, moderate-skill positions that cannot move the productivity needle much, causing the creation of new full-time jobs to stagnate.

But even if the academics are right and new high-skill jobs emerge to replace the ones that are being automated away, huge disruptions would still await. Large portions of the global workforce would still need retraining. And if work becomes a luxury, widespread joblessness and greater inequality could make it increasingly more difficult for the government to maintain social order.

* * *

To close out, here is a snapshot of the math that Cowen analyst Andrew Charles used to calculate the impact of McDonald’s “Big Mac ATMs” on the company’s minimum-wage workforce.

“MCD is cultivating a digital platform through mobile ordering and Experience of the Future (EOTF), an in-store technological overhaul most conspicuous through kiosk ordering and table delivery. Our analysis suggests efforts should bear fruit in 2018 with a combined 130 bps contribution to U.S. comps. We believe mobile ordering better supplements the drive-thru business where 70%+ of U.S. sales are transacted. In our view, MCD"s differentiation lies in the operational enhancements of mobile ordering that includes curbside pick-up of orders in order to not disrupt the drive-thru.”

We are most excited for mobile ordering, Experience of the Future and the launch of fresh beef to help drive U.S. same store sales in 2018. We provide analysis for the latter three, which cumulatively we expect to contribute roughly 150 bps to U.S. same store sales in 2018, respectively. This gives us confidence to raise our 2018 U.S. same store sales forecast from 2% to 3%, in excess of Consensus Metrix’s 2.5%.
 
Experience of the Future Features Lower ROI Than Mobile Order, But Offers Greater Potential Longer Term
 
We are constructive on the use of guest facing technology for the restaurant industry. MCD’s longer-term U.S. story revolves around Experience of the Future (EOTF), a holistic operational and technological overhaul to the store base. MCD’s March 2017 investor meeting centered around the initiative with interactive displays. Perhaps the most conspicuous piece of Experience of the Future lies in digital kiosk ordering, which have seen success in International Lead Markets. Additionally, food ordered via the kiosk is delivered to the customer’s table. We believe EOTF better enhances the instore experience, which represents roughly 30% of domestic sales compared to mobile ordering, which allows customers to avoid leaving their cars.

Our ROI math suggests EOTF leads to a 9% cash/cash return in Year 1 in the 55% of domestic stores that do not require a store remodel, and 5% in the 45% of stores that require a remodel, which is a predecessor to implementing EOTF. Our math is premised on total costs of $150,000 for the Experience of the Future enhancement, and $700,000 of all-in costs when including EOTF as well as a store remodel. MCD has offered to pay 55% of the cost for Experience of the Future, in excess of the 40% the company contributed to the store remodel initiative beginning in 2010, for restaurants that commit to the program by the end of 2017.
 
McDonald’s targets a high-teens return on incrementally invested capital (ROIIC, or Mcspeak for evaluating ROI), improving to the mid-20% range beginning in 2019. We believe EOTF’s ROI is captured over time as the sales lift does not dissolve as in the case of a traditional restaurant remodel. Rather, the lift should sustain as we expect consumers to increasingly embrace technological change. This is evidenced across concepts, such as Panera’s experience with 2.0, as well as McDonald’s own experience in Canada, where kiosks saw 12-13% sales mix in Year 1 and 27% in Year 2. We also note kiosk ordering will also likely lead to labor savings over time which should help boost ROIIC, but is unlikely for the foreseeable future.
 

In 2017, MCD expects to end the year with EOTF offered in 2,500 domestic locations from 500 at 2016-end. MCD targets much of domestic locations to feature EOTF by 2020, but has not given intermediary targets. The amount of stores adding EOTF depends on franchise reception to the initiative but we see positive indicators given our checks as well as the company’s disclosure that 90% of franchisees approved of the initiative after taking the same interactive tour that was given at the March 2017 investor day.
 
We estimate 3,000 locations to add EOTF in 2018, which should lead to a 70 bps contribution to U.S. same store sales assuming an even cadence of restaurants adding the initiative over the course of the year. Further we assume the mix of stores adding EOTF in 2018 reflects the mix of overall stores needed to add EOTF, or 55% of stores that already have a remodel while 45% require a store remodel. McDonald’s  has previously announced plans to remodel 650 restaurants in 2017, which we expect will also add EOTF.

How Can A Human Justify Asking To Be Paid $15 To Work?

Authored by Mike Shedlock via MishTalk.com,

McDonald’s announced it will replace cashiers in 2,500 stores with self-service kiosks.

The story buzzed across the internet but Business Insider reported McDonald’s shoots down fears it is planning to replace cashiers with kiosks.

Official Denial

“McDonald’s has repeatedly said that adding kiosks won’t result in mass layoffs, but will instead move some cashiers to other parts of the restaurant where it’s adding new jobs, such as table service. The burger chain reiterated that position again on Friday.”

Is McDonald’s denial believable? What would you expect the company to say?

McDonald’s has to deny the story or it might have a hiring problem, a morale problem, and other problems.

“Our CEO, Steve Easterbrook, has said on many occasions that self-order kiosks in McDonald’s restaurants are not a labor replacement,” a spokeswoman told Business Insider. “They provide an opportunity to transition back-of-the-house positions to more customer service roles such as concierges and table service where they are able to truly engage with guests and enhance the dining experience.”

Move cashiers to table service? Really?

Yeah, right.

An interesting political rule from the British sitcom “Yes, Minister” is to “never believe anything until it’s officially denied”.

Will Humans Be Necessary?

When someone can be replaced by a robot, how can the push for $15 be justified?

Psychology Today asks Will Humans Be Necessary?

Will automation kill as many jobs as is feared? A widely cited Oxford University study predicts that 47% of  jobs could be automated in the next decade of two. Price Waterhouse pegs the U.S. risk at 38%. McKinsey estimates that 45% of what people are paid for could be automated using existing technology!

No less than Tesla’s Elon Musk, Bill Gates, and Stephen Hawking fear the loss of jobs will cause world cataclysm.

Lower-level jobs at risk

Let’s start with jobs likely to be eliminated, starting with the present and with those lower-level jobs.

Already, don’t you prefer a ATM to a teller, self-checkout to the supermarket checker, drive-through tolls rather than stop for the toll-taker, automated airline check-in rather than waiting for a clerk, shopping on Amazon rather than fighting traffic, parking, and the check-out experience with a live clerk, assuming the store has what you want in your size? Indeed, malls are closing while online retailers led by Amazon are growing.

As minimum wage and mandated benefits rise, fast-food restaurants especially are accelerating use of, for example, order-taking kiosks, which McDonald’s is rolling out in 2,500 stores, robotic burger flippers and fry cooks, even pizza, ramen and sushi makers. Even that fail-safe job, barista, is at-risk, Bosch now makes an automated barista. Mid-range restaurants such as Olive Garden, Outback, and Applebee are replacing waiters with tabletop tablets. Will you really miss having your conversation interrupted by a waiter hawking hors de oeuvres and expecting a 15+% tip? If you owned a fast-food franchise, mighn’t you be looking to replace people with automated solutions? Can it really be long until there are completely automated fast-food and even mid-range restaurants?

Robots are already being used as security guards. There are humanoid robots that can move heavy boxes, walk in uneven snow, and get up, not annoyed when thrown to the ground. (And won’t sue for failure to supervise or an OSHA violation.)

Instead of hiring architects for tens of thousands of dollars, many people are opting to spend just a few hundred bucks to instantly get any of thousands of often award-winning house plans which, if needed, can be inexpensively customized to suit. Far fewer architects needed.

BlackRock, the world’s largest fund company has replaced seven of its 53 analysts with AI-driven stock-picking.

The remaining jobs

In such a world, how can a human justify asking to be paid to work?

Four scenarios

The range of scenarios would seem circumscribed by these. How likely do you think each of these are?

• Continue on the current path: The world continues to slowly make progress, e.g., birth rates declining in developing nations, slowed global warming, more education and health care. Those positives would be mitigated by declining jobs, more concentration of wealth.


•  World socialism.


• Mass population reduction, for example, by nuclear war, pandemic, or, per  Clive Cussler, highly communicable biovirus simultaneously put into the water supply of a half-dozen cruise ships?


• A world run by machines and the few people they deem worthy.

Here is a debate between an optimistic and a pessimist on the future of the world.

The truth may well be something we can’t even envision. After all, he who lives by the crystal ball usually eats broken glass.

Note that Psychology Today author Marty Nemko did not ask about $15. He wonders if pay for some jobs is worth anything at all.

McKinsey: Banks Will Have To Slash 30% Of Analyst Jobs To Comply With New Research Rules

As the global equity research market continues to wrestle with how they will comply with the European Union"s MiFID II regulations, McKinsey & Co. has just penned a new study effectively saying they"ll have no choice but to fire a ton of equity research analysts who write a bunch of stuff that no one ever reads...which seems like a reasonable guess.  Per Bloomberg:

Europe’s impending ban on free research will cost hundreds of analysts their jobs with banks set to cut about $1.2 billion of investment on the area, according to a report by McKinsey & Co.

The consultancy estimates the $4 billion that the top-10 sell-side banks currently spend on research annually is likely to fall by 30 percent as clients become pickier about what they pay for, McKinsey Partner Roger Rudisuli said in an interview. Investment banks’ cash equity research headcount has fallen 12 percent to 3,900 since 2011 compared with as much as 40 percent in sales and trading, leaving the area facing “big cuts” to catch up, he said.

“Two to three global banking players will preserve their status in the new era, winning the execution arms race and dominating trading in equities around the globe,” McKinsey said in a report Wednesday, which Rudisuli helped write. “Over the coming five years, banks will need to make hard choices and play to their strengths. Not only will the top ranks be thinned out, there will be shakeouts in regional markets.”

For those who have managed to avoid this particular distraction, the global equity research industry is in the midst of a major disruption which has been brought on by the European Union’s MiFID II regulations, enforced from Jan. 3, which aim to tackle conflicts of interest by requiring asset managers to separate the trading commissions they pay from investment-research fees.

Of course, the biggest problem with such a regulation continues to be that literally no one knows the true "value" of equity research, not even the investment banks that are selling it.

Firms are also debating how to price analyst reports, with some firms modeling packages on cable TV subscriptions, running from basic to “all-in” offers, according to the report. Deutsche Bank AG has pitched clients a metered, “pay as you go” approach whereas JPMorgan Chase & Co. has quoted customers a $50,000 flat fee for basis access to fixed-income analysis, people familiar with the matter have said.

“Banks are scrambling to get these pricing infrastructures in place, as well as how they do tracking and invoicing,” Rudisuli said. “They are all rushing to the finish line to be ready in January.”

And perhaps that has something to do with the fact that, as we"ve said before, institutional clients couldn"t care less about the 300 research reports they receive daily (all of which can be boiled down to one simple thesis: Buy The Fucking Dip), but rather only about gaining access to corporate management teams so they can get "color" on upcoming earnings reports.

Another change Rudisuli foresees for the industry is the start of bidding wars for the most valuable commodity banks can offer investors: time with corporate leaders and their star analysts.

“Banks will experiment at first, but over time we could see things like auctions could take a more prominent role; at the end of the day there are only five seats in these meetings,” he said. “The challenge there will be that the people willing to pay the most will be hedge funds, but the preference for corporates will be to meet with only long-only investors.”

Of course, as we"ve said before, almost any amount of money seems, at least to us, to be too much to have the same people give you the same advice over and over again, namely "buy more stocks, faster."  There, we just summarized 90% of all equity research that will ever be written for the rest of history in 4 simple words and completely free of charge.  You"re welcome.

April Was Cruel… To The US Treasury

Submitted by Nicholas Colas of Convergex

April Was Cruel… To the US Tre

Our monthly review of tax data from the US Treasury’s Daily Statement shows three important points.  First, overall employment and wage trends in the US are still on a solid footing.  Individual tax/withholding payments from salaried/hourly workers rose 4.5% year over year in April and are up 3.7% on a three month rolling average basis.  Second, April tax season was a bit of a bust for Treasury, with receipts down 5.7% from last year and at the lowest levels in 5 years. We attribute that to the delayed realization of capital gains in 2016, with asset owners deferring sales ahead of anticipated tax changes this year. That also explains a bit of the slow US equity trading volume and low volatility of 2017 – those asset owners still don’t know what the new tax code may bring and may be continuing to defer sales.  Lastly, “Gig economy” tax receipts (not withheld, but paid directly by the worker) show this post-Financial Crisis labor market phenomenon is on the wane, down 5.5% in Q1 2017 after a 4.8% decline in Q4 2016.

April is to the US Treasury what Christmas is to retailers: the busiest and most profitable time of the year.  In 2016, for example, the Treasury’s Internal Revenue Service took in $193 billion in payments from individuals as a result of the usual April deadline for filing personal taxes.  By comparison the IRS took in only $15 billion in the month before and $12 billion the month after from taxpayers sending their remittances to the US government.

Last month, however, was not so good to the US Treasury. “Individual Income and Employment Taxes, Not Withheld” (the Treasury line item for receipts outside the customary withholding process) were down 5.7% year over year to $182 billion. Moreover, this is the lowest April haul since 2012. The April tax receipts of 2013 to 2016 ran between $193 billion (2014) to $219 billion (2015). This year’s receipt totals are far from those.

That should seem strange to you.  After all, virtually all asset prices have risen in the past 5 years.  Stocks, bonds, real estate… Everything is higher.  And when individuals sell those assets, they need to pay the capital gains tax as part of their annual April true-up with the US Government.

My explanation: asset owners are deferring sales while they wait for the details of Washington’s new tax plans. Why sell an asset (unless you have to) if you think the tax code might change in your favor?  Better to wait – especially if asset prices are in an uptrend – and see what develops.

I have been writing a lot about US equity market volatility this week, and it strikes me that this phenomenon might have a role in creating the current low-vol environment.  Since the details of the President’s proposals to change the tax code are still not public, asset owners may be continuing to defer sales in the hopes of better tax treatment down the road.  It is a sort of “Sellers’ strike”, where individuals with capital gains in equities are waiting for a new (and hopefully more capital-friendly) tax code before selling stock.

On the plus side of things, the same report we use for the tax receipt analysis (Treasury’s Daily Statement, https://www.fms.treas.gov/dts/index.html) shows that the US labor market is still humming along.  Looking at “Withheld Income and Employment Taxes” – the amounts deducted from employee paychecks every cycle – we see that April receipts were up 4.5% from last year and +3.7% on a three month rolling average.

Withheld tax receipts are a function of the number of people employed and wage levels, so a positive comparison shows underlying strength in the labor market.  Yes, there is a mix issue here.  The top 10% of wage earners may be taking most of the wage gains and therefore paying those to Treasury in their regular withholding.  Even still, the annual increases in withholding to Treasury have been remarkably stable (see attached charts in the PDF link above) at +4-10% since 2013, mirroring the growth in overall US employment.

Even as the overall US labor market has improved over the last year, one group seems to be left behind: those individuals who work in the “Gig economy”.  These workers pay Social Security/Medicare taxes just like those “Employed” by companies, but their remittances to Treasury tell a different story from the withholding data we described in the prior point.

For the first quarter of 2017, tax payments by self-employed/contract workers to Treasury were down 5.5%.  In Q4 2016, they were down 4.8%. Compare that to the growth in withholding/tax payments for payroll workers, and you see the problem.  One group is seeing growth in total wages (people employed times wages earned); the other is not.

Now, it could be that as the US economy has strengthened in the last year those previously in the “Gig” workforce have transitioned to traditional employment.  A few points here:

• The Bureau of Labor Statistics has not done a study on “Gig economy” workers since 2005, so they are not much help in understanding the possible migration of workers between formal and “Gig” employment. Their work at that time showed “Contingent workers” represented 2-4% of the US labor force.  In addition, about 7% were “independent contractors”.  The BLS plans to update their findings with a study to take place this month.  Read the BLS piece here: https://www.bls.gov/careeroutlook/2016/article/what-is-the-gig-economy.h...


• If workers are transitioning from “Gig” to traditional employment, they may still do occasional outside work as a means to augment their income and preserve their options; this trend should be visible in the BLS data. In fact, the number of Americans who report holding multiple jobs has started to rise in the last year. As of March 2017, 5.3% of the US workforce has more than one job, up from 5.0% a year ago. That is the highest reading since before the Financial Crisis.


• Interest in typical “Gig Economy” jobs seems to be on the wane. Looking at the data from Google Trends, US searches for “Gig jobs”, “Uber driver”, “Delivery driver”, “Freelance work”, and “Online job” are all either flat or slightly down over the past year.


• The one area of incremental interest: searches for “Work from home” were up 50% in 2016 from 2015.


• McKinsey did an excellent study, published in October 2016, about the Gig economy in the US and Europe if that is a topic of interest for you: http://www.mckinsey.com/global-themes/employment-and-growth/independent-work-choice-necessity-and-the-gig-economy.

In summary, the tax data we’ve reviewed sheds some useful light on a few critical capital markets questions.  First, the US labor market is still strong. It is proving strong enough, in fact, to pull “Gig” workers back into the salaried labor force. Second, lower April tax payments highlight the possibility that asset owners are reluctant to sell appreciated assets such as stocks until they know the details of any revision to the tax code.  This will likely continue until either equities become more volatile or changes in the tax code are clearly on their way to becoming law.

While the tax data we’ve reviewed here is not typically part of the econometric toolbox used to analyze the US economy, it does provide an independent take on key issues. Who says there’s nothing good about taxes?

You're Now Twice As Likely To Achieve The 'American Dream' In Canada

Authored by Mike Krieger via Liberty Blitzkrieg blog,

On the positive front, America is really good at dropping bombs on foreigners.

MarketWatch reports:

The American dream — the idea that anyone can own their own home and do better than the previous generation with the right amount of hard work — has been fading for years, with rising house prices and stagnant wages. Now, people who want to achieve it may be better off seeking it in Canada, the U.K. or Denmark according to a new study published by the Federal Reserve Bank of St. Louis.

At least the Fed is admitting its total failure.

The study, authored by Raj Chetty, professor of economics at Stanford University, defined the concept as the ability for children born in the bottom fifth of income distribution to reach the top fifth. In the U.S. the likelihood of that is 7.5%, whereas in Canada children born in that group are twice as likely to rise to the top — at 13.5%. In the U.K. the likelihood of achieving that move from the bottom fifth to the top fifth is 9% and in Denmark it is 11.7%.

Indeed, the rich do appear to be leaving the middle class behind. Most U.S. middle-income households (81%) had flat or falling income between 2004 and 2014, according to a U.S. Congressional Budget Office data analyzed by the McKinsey Global Institute, a global management company.

“Most people growing up in advanced economies since World War II have been able to assume they will be better off than their parents,” the report said. “Yet this overwhelmingly positive income trend has ended.”

This is primarily a function of our economy being dominated by rent-seeking parasites, who add no value to society but still somehow earn the most money. Until we shift to an economy that rewards creativity, production and innovation, the U.S. will never truly recover. Unfortunately, the Trump administration is not headed in that direction, as I outlined in my post earlier today: Donald Trump Works For Wall Street, Not Russia.

Meanwhile, Bloomberg News just published an article celebrating the reduced standards of living many Americans are facing as a result of decades of flat-to-declining wages, combined with soaring home prices in a piece titled, Now You Can Live in a Remodeled Shipping Container:

Startup Boxouse sells “portable, affordable, beautiful smart homes” made from shipping containers (the “deluxe” edition costs $49,000 and includes shipping). Chief Executive Officer Luke Iseman, a Wharton graduate who previously ran Y Combinator’s hardware program, concedes that “container houses aren’t perfect” but says they can help ease housing shortages. He shares one with co-founder Heather Stewart that’s set up in an Oakland warehouse. They’re partly financing the business by renting out two others on Airbnb.

Thanks for playin’ America.