The King Report
M. Ramsey King Securities, Inc.
Friday Feb. 4, 2005 –
Issue 3091 "Independent View of the News"
Q4 productivity rose 0.8%, a tad more than half of the expected 1.5%. Unit labor costs increases 2.3%, 2% exp. Y/y productivity growth fell to 2.5%, a sharp drop from the 5.7% peak of Q4 2003.
The sharp decline in productivity suggests that companies no longer can squeeze the workforce to produce profits and/or economic growth is slowing and/or inflation is increasing. Of course as we have been maintaining for the past several years, productivity is grossly overstated because inflation is grossly understated, which overstated GDP.
Higher CPI = lower real GDP = lower productivity = lower corporate profits
This implies that corporations, which have been jettisoning jobs, outsourcing etc, have reached the limits of that exercise. So in order to reload the supply of jobs available that can be cut, outsourced, ‘part-timed’ or ‘independent contracted’ corporations are engaging in merger activity. Soon, these mergers will yield another heaping dose of job cuts, outsourcing, etc.
Somewhat buried in Thursday’s FT (page 4): "BoJ’s bills flop fuels liquidity concerns." For the first time in about 2.5 years, the BoJ failed to attract enough offers to fulfill its Y1 trillion bill-buying operation, even though it was an "all offices" transaction that included regional branches. If the BoJ has to lower its liquidity target, it will be a major turning point in monetary policy. The BoJ is blaming technical issues for the shortfall…The article notes that bank loans continue to fall because Japanese companies are reluctant to borrow or hire workers; and wages are still declining.
If the BoJ becomes encumbered in its liquidity operations in Japan, what would be the consequences of its dollar rigging policies in the US? We can’t fathom anything benign. After all the analysis and financial jabberwocky, the bottom line is the US has been living off the kindness of the stranger AKA the BoJ.
The main factor that kept Thursday’s market from a bigger decline is the perception that today’s Employment Report will show wonderful job growth, which suggests a jiggy economy. Of course The Street has been spewing this hokum for months.
Several research pieces note the gap between core and headline inflation, or the crude and final sales levels, must narrow. The feeling, which is reflected in the Fed’s newfound concern about inflation, is that core inflation will be pushed higher on that front and final sales inflation will be pushed higher as companies pass on cost increases to consumers. That sounds reasonable, but who has been eating the increased costs from the crude and intermediate production levels? After all, corporate profits and cash flow last year were wonderful.
Some economists still assert that ‘slack in the labor force’ will mitigate inflation. How’s that working out in Latam? In the ‘80s and ‘90s US jobs boomed while inflation tanked. In the late ‘70s, inflation and unemployment soared. We thought the Phillips Curve inflation-employment tradeoff was thoroughly debunked during Carter’s reign’ and then again under Reagan. If these economists didn’t experience those periods, what did they study in economics? Apparently IS-LM graphs and Phillips Curve sophistry.
The IMF has cut its forecast for Euro Region GDP growth in 2005 to 1.9%; that’s down from the 2.2% forecast last September…The IMF slashed its G-7 growth forecast to 2.7% (from 2.9%) for 2005…..
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