Friday, November 08, 2013 - Jobs, Jobs, Jobs Friday

Jobs, Jobs, Jobs Friday

by Sinclair Noe

DOW + 167 = 15,761
SPX + 23 = 1770
NAS + 61 = 3919
10 YR YLD + .14 = 2.74%
OIL + .13 = 94.33
GOLD – 19.10 = 1289.50
SILV - .17 = 21.60

Another record high close for the Dow. For the week, the Dow rose 0.9 percent, the S&P 500 was up 0.5 percent while the Nasdaq was down 0.1 percent.

Today was all about jobs. The Bureau of Labor Statistics reported that total nonfarm payroll employment rose by 204,000 in October and the unemployment rate increased from 7.2% to 7.3%. The 204,000 new jobs was much better than the estimates of about 120,000.

Further, the numbers from previous months were revised higher; September was revised from 148,000 new jobs to 163,000 new jobs, and August was revised from 193,000 jobs up to 238,000; for a net gain of 60,000 upwardly revised jobs.

So, why did the unemployment rate move higher? Part of this may have to do with the government shutdown and there might be a reversal in the November numbers. The furloughed government workers, at least some, were likely counted as unemployed with regard to the unemployment rate, but for the total number, that 204,000 number, those furloughed workers were not counted as unemployed.

The problem with the unemployment rate is that the rate can fall even when the labor market conditions get worse. There are two possible reasons why the unemployment rate drops; either more jobless people find work, or more jobless people get discouraged about their prospects and drop out of the labor force. Again, last month's increase in the unemployment rate was probably due to workers furloughed during the shutdown, and might be a one month aberration in the rate. One mystery buried in Friday’s report was a drop of 720,000 in the size of the labor force and the ensuing fall in the labor participation rate to 62.8 percent, a 35-year low. I haven't heard a good explanation for this, other than distorted data as part of the shutdown, but it would explain why the unemployment rate didn't drop further.

The Participation Rate looks at the number of working age people who are looking for work.The Labor Force Participation Rate dropped to 62.8% in October from 63.2% in September; that's a fairly substantial decline; again, this was at least partly related to the shutdown. The participation rate is still well below the normal rate, which is closer to 66% or 67% over the past 20 years.

If someone stops looking for work, they are not counted in the Participation Rate. There are just over 4 million workers who have been unemployed for more than 26 weeks and they still want a job. According to the Bureau of Labor Statistics, there are 2.3 million people among those who have dropped out of the labor force who wanted and are available for work. These individuals are not counted as unemployed because they have not searched for work in the previous four weeks. At a certain point, if the worker becomes discouraged, they become invisible. If all of these workers had been counted as part of the labor force, the unemployment rate in October would have been 8.6 percent instead of 7.2 percent, a major difference.

Meanwhile, the Employment Population Ratio dropped to 58.3% in October from 58.6% in September. The Employment Population Ratio doesn't look at whether a potential worker is discouraged or not; just if the person is of working age and whether they have a job or not. So, while the unemployment rate has dropped from a high of 10% back in October 2009 down to 7.2% in September, the Employment Population Ratio paints a very different picture; the Ratio was at 62.7% in December 2007 and dropped down to 58.3% last month, basically flat for the past couple of years.

Now a Ratio of 58.3% is really pathetic and this would seem to be a loud call for increasing aggregate demand stimulus. This is not happening, or at least we can say Washington isn't listening.

Part of the reason for the low Employment Population Ratio is that the Baby Boom generation is moving into retirement, so there is a demographic shift at play. So, we can look at the ratio excluding the people who are moving into retirement, by focusing only on workers in the 25 to 54 age range. Here the ratio was at 79.7% at the beginning of the economic downturn, dropped to a low of 74.8% in December 2009, and only recovered to 75.4%. So, again, we have another indication of a weak labor market.

There is still another measure to consider, and it looks at the unemployed, the discouraged unemployed, and the under utilized worker (someone working part time who wants to go full time); this is called the U-6 and it stands at 13.8%, up from 13.6% in September. The number of people employed part time for economic reasons increased from 7.9 million in September to just over 8 million in October.

We’re still 1.5 million jobs short of the peak employment level of January 2008. Wages are rising at a slow rate, up about 2.2 percent in the past 12 months, and too many people are unemployed or underemployed.

The private sector has steadily added jobs since early 2010 while the public sector has steadily cut them, which doesn't usually happen in an expansion. Since May 2010, the government sector has cut 1.1 million positions. But the government job-letting is coming to an end. In October, as might be expected, the federal government reduced its payrolls by 12,000. In the past year, the federal government has cut direct employment by 94,000, or 3.3 percent, but state and local government added a combined 4,000 jobs. In the past year, they have added a combined 68,000 positions. Modestly rising activity at the state and local level is counteracting, and almost entirely offsetting, the austerity-inducing actions of the federal government.

As in the past, the October report closely correlated jobs with education. While the unemployment level for workers over 25 with less than a high school degree rose to 10.9 percent in October from 10.3 percent in September, joblessness among college-educated Americans inched up to a modest 3.8 percent from 3.7 percent in the prior month. Similarly, the participation rate for the most educated workers stood at 75 percent, compared with 44.7 percent for the least educated ones.

The next jobs report, covering the month of November, should give us a slightly cleaner picture without distortions from the shutdown. On a seasonal basis, retail companies start hiring for the holiday season in October, and usually pick up hiring in November. Of course, retailers keep moving the shopping season earlier and earlier. Retailers added 44,000 jobs in October, an indication that consumer spending was steady.

Despite the housing turnaround, employment has improved only modestly in that sector. Construction employment rose to 5.8 million in October from 5.6 million a year earlier. But before the recession hit, employment in that sector had climbed as high as 7.7 million. Service industries have driven job growth in the recovery, adding 2.1 million jobs over the past year, 177,000 last month alone. The leisure and hospitality sector (restaurants, bars and hotels) added 53,000 positions last month. Manufacturers added 19,000 jobs, the sector’s best showing since February, helped in part by strong auto sales.

The Federal Reserve has one more jobs report before their scheduled FOMC meeting in December. If the labor market improves from here it would greatly increase the odds of tapering at that meeting. The jobs report won't be the Fed's only consideration. 

Toss in yesterday's Commerce Department Report showing the economy grew at a 2.8% pace in the third quarter. Or this morning's Commerce Department report showing personal income increased 0.5% in September from the previous month. It was the second-straight month of growth at that rate, which has been the best pace since February. Despite having more money in their wallets, consumers didn't open them more in September. Consumer spending increased 0.2%, down from the 0.3% rate in August. The personal savings rate rose to 4.9% in September, from 4.7% the previous month. It was the highest rate of the year, though still historically low. The slower growth in consumer spending helped keep inflation in check. The so-called core rate over the previous year held at 1.2% in September, well below the Fed's target of 2%.

And remember the story about the recovery of Fannie Mae and Freddie Mac? They will pay back their bailout money by the end of the year. And then there's the story of Twitter, which is a reminder that there is still a healthy dose of entrepreneurial talent in America. Twitter was founded 7 years ago with nothing and yesterday the market cap topped $32 billion. And remember the major market averages hit record highs this week; and all this happened in the face of the sequester, the shutdown, and general political dysfunction. Imagine what might happen if government got its act together, or at least stopped making it more difficult for businesses to do their thing.

Tuesday, October 2, 2013 - Jobs, Jobs, Jobs

Jobs, Jobs, Jobs

by Sinclair Noe

DOW + 75 = 15,467
SPX + 10 = 1754
NAS + 9 = 3929
10 YR YLD - .10 = 2.51%
OIL – 1.57 = 98.11
GOLD + 24.60 – 1342.20
SILV + .47 = 22.81

The Labor Department reported the economy added 148,000 net new jobs in September. The change in total nonfarm payroll employment for July was revised from +104,000 to +89,000, and the change for August was revised from +169,000 to +193,000. With these revisions, employment gains in July and August combined were 9,000 more than previously reported.

The unemployment rate declined in September to 7.2% from 7.3% in August. This is the lowest level for the unemployment rate since November 2008.

The Labor Force Participation Rate was unchanged in September at 63.2%. This is the percentage of the working age population in the labor force. The participation rate looks at the people who are actually in the labor pool. As the Boomer generation retires, willingly or not, they get out of the labor pool, and this is why we've seen the unemployment rate decline, even though the economy isn't really doing a great job of adding jobs.

There are 4.146 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 4.290 million in August. This is generally trending down, but is still very high.  Long term unemployment remains one of the key labor problems in the US.

Is the Affordable Care Act causing a surge in part-time employment? Apparently not. The number of part time workers increased slightly in September from 7.91 million to 7.93 million, but that’s down from 8.6 million a year ago.  These workers are included in the alternate measure of labor underutilization (U-6) that decreased to 13.6% in September from 13.7% in August. This is the lowest level for U-6 since December 2008.

Last year, restaurants and health care accounted for about a third of all the country’s job growth. Those sectors are looking a bit sluggish in today's report. Health care posted a gain of only 6,800 jobs, compared with a monthly average this year of 22,000. And restaurants actually lost jobs, 7,100 of them, when they had been adding 25,000 a month. The health care sector had been slowing for some time, in keeping with a flattening of health care spending. Less spending on medical care may be good for the economy in the long term, but not so good for job hunter s right now. On the other hand, slowdowns in leisure and hospitality, a sector that includes restaurants and amusement parks, and in specialty construction, which includes home remodeling, point to a pullback in discretionary spending, as did a disappointing back-to-school shopping season. And then tourism took a big hit in the shutdown.

Total nonfarm employment is up 2.225 million from September 2012, and private employment is up 2.290 million. That means that over the past year governments have cut jobs. That trend changed a little in September as state and local governments added 28,000 jobs, and state and local employment is up 82 thousand so far in 2013. This would normally be a source of celebration since state and local austerity has been such a powerful headwind for the economy. But the pickup in government hiring has been more than offset by a slowdown in private job creation, to a monthly average of 129,000 in the last three months from 232,000 last December. Also, many of the government jobs in September are teachers returning from the summer break. Also, federal layoffs are continuing, and this September report was prior to the government shutdown.

The federal government employs exactly 2 percent of the people with jobs in this country, or 2,723,000; and that's before the shutdown. That's just slightly less than the number of federal workers, 2,724,000 in 1966. All these figures, by the way, are for civilian jobs. Members of the armed forces are not counted. If they were included, the contrast would be even sharper. In 1966 the Vietnam War was going on, and around 2.6 million people were on active duty. This year the figure is around 1.4 million.

Some analysts believe it's going to be very hard for anybody to figure out what the underlying strength of the job market is and we probably have to wait until December or January to figure that out; we may not get “clean” data until the Spring. Actually, the numbers we get today are reasonably “clean”; there will be revisions, of course, but the numbers are clean in that they reflect the political dysfunction that is now part of the economy. We don't have the luxury of acting as if the shutdown didn't occur. Someone looking for a job doesn't have the luxury of discounting economic conditions; they just need a job.

Still, there will be confusion, starting with the October Jobs Report, scheduled to be published November 8.The jobs report is based on two different surveys — one of households, and one of employers — and it turns out that furloughed federal government workers will be treated as unemployed in the first survey but employed in the second. In other words, the temporary layoff of federal workers will probably increase the unemployment rate, but not (at least directly) depress the payroll job growth numbers.

The key reason that furloughed federal workers affect the results of one survey but not the other has to do with the different ways the two surveys categorize workers who ultimately receive back pay.

In the survey of households, workers who were furloughed during the entire week of Oct. 6-12 (the week that the survey asks respondents about) and therefore did not work at all will be classified as “unemployed, on temporary layoff.”

That is not true in the establishment survey (which surveys nonfarm payroll employers).  In the establishment survey, people who did not work during the reference week would normally not be counted as employed — unless they receive back pay. If they receive pay for the time they were on furlough, they’re counted as employed, even though they didn’t actually spend any hours working. Congress agreed to retroactive pay for furloughed federal workers for work they missed. That means that federal workers who were not allowed to work during the shutdown will all still be counted as employed.

And then there are plenty of people who lost jobs or were furloughed who are not federal employees; private contractors or employees of businesses near government facilities. We don't know how many were furloughed or just fired.

Even before today's report the Fed was not inclined to taper its $85 billion a month of bond purchases, financed by printing money, when it meets again on October 29th and 30th. It could still begin to taper at its December 17-18 meeting, even if the labor market still appears soft, provided officials are relatively confident the outlook, as reflected in other data, is for improvement. But it will be hard to say by December whether that improvement has happened. More likely the next couple of jobs reports could be downright ugly.

Ben Bernanke could yet make the taper his last act as chairman in January, but the odds now favor it being Janet Yellen's first act as chairman, in March. She will not do so lightly; she is, if anything, more intent than Mr Bernanke on applying as much monetary stimulus as possible to get employment up faster. The decision to taper will not be an easy one. The Federal Reserve has lacked a certain clarity in defining the criteria for beginning and ending QE; we don't know the exact reason why QE started when it did, and the target for exit seems to shift like a trial balloon floating over Wall Street; but one thing is clear: they had hoped the labor market would be gaining, not losing, momentum by now. The exit seems no clearer than when this round of QE started a year ago.

We now have jobs data from the first three quarters of the year. Over the most recent quarter, payrolls were up an average of 143,000 per month, down from 182,000 in the second quarter, and 207,000 in the first quarter. Private payrolls expanded by only 129,000 a month on average last quarter, well down from the average monthly gain of 212,000 (itself just a moderate pace of employment growth) in the first quarter of the year.

It’s possible that employers were exercising some caution in hiring decisions based on their suspicions that a government shutdown was imminent. But I doubt it. The pattern of deceleration seems to me a lot more consistent with same weak demand story that’s been plaguing this disappointing recovery for years.  Unemployment is still highly elevated, and job growth is once again decelerating. This may be an economic recovery, but it is weak, sluggish, tepid – call it any name you want; it ain't good.

And the S&P 500 index hit another record high today. Wall Street has been the beneficiary of the Federal Reserves monetary policy of quantitative easing; yes, there has been some trickle down effect from low interest rates, especially in the housing and construction sectors, but anyone who wants to argue that trickle down is the best path to recovery only needs look at the job market to realize that trickle down doesn't. Political dysfunction and an austerian approach to fiscal policy has only led to rising inequality. There's simply no bargaining power for working people to claim their fair share of economic growth.

The S&P 500 broke to new highs on the payroll data. The gains in equities were linked to feelings that the Federal Reserve would have to keep interest rates lower for longer and maintain its pace of asset purchases in its upcoming meetings. If people are expecting a Fed taper in December, they may not find that under the Christmas tree. Instead, it might be January or March, Materials and interest-rate sensitive utility-sector stocks were the best performers of the day. The dollar was down 0.6%, buoying gains in raw materials and precious metals, positively attributing to the gains in these sectors. Apple released a new model of its iPad and iPad mini at an event this afternoon. It also announced that it would no longer charge for operation system upgrades on its Mac models. Netflix fell 17.25% during the day's trading after beating earnings strongly last night. On the conference call, CEO Reed Hastings mentioned that the company's solid reports were being unduly compounded by momentum investors.

The 10-year Treasury yield fell nine basis points to 2.51% as slower growth expectations were priced in. Crude oil continued its decline after breaking below $100 for the first time since July yesterday, falling 1.6%.  

The jobs report wasn't the only economic data postponed because of the government shutdown. The start of the 2014 tax filing season will be delayed by one to two weeks early next year as a result of the government shutdown, the Internal Revenue Service.  The original tax filing start was scheduled for Jan. 21, but the IRS said in a statement that the start date has been pushed back to between Jan. 28 and Feb. 4. The 16-day shutdown came during the peak period for preparing computer filing systems for 2014. The delay marks the second year in a row that the IRS has been forced to start the filing season late. In January of this year, the 2013 tax season was delayed by the Jan. 2 enactment of tax law changes made to resolve the so-called "fiscal cliff."

A bit more on the jobs report, because I tend to get a bit wonkish with jobs reports. To recap: the Labor Department reported today, about 3 weeks late because of the government shutdown, that only 148,000 jobs were created in September; way down from the average of 207,000 new jobs a month in the first quarter of the year.

Many Americans have stopped looking for work. The official unemployment rate of 7.2 percent reflects only those who are still looking, also known as the participation rate. If the same percentage of Americans were in the workforce today as when Barack Obama took office, today's unemployment rate would be 10.8 percent. Meanwhile, 95 percent of the economic gains since the recovery began in 2009 have gone to the top 1 percent. The real median household income continues to drop, and the number of Americans in poverty continues to rise.

The biggest debate in Washington over the next few months, right up to the next deadline on December 15, will be whether to slash the federal budget deficit by cutting future entitlement spending and closing some tax loopholes, or go back to the sequester. So, you will see an effort to reframe the dialogue back to the idea of jobs, jobs, jobs. However, if the next few months are anything like the last few years, it won't matter. Nobody really gets much done on the jobs front; it sounded good around election time and then the topic disappeared. Still, jobs and rising inequality are much more important than any of the political claptrap you'll hear about the budget, and the less you hear about jobs in the next few months will be in direct relation to the increase in political dysfunction oozing out of Washington.

JPMorgans preliminary, tentative $13 billion mortgage settlement with the DOJ could end up costing the bank $9 billion, after taxes, because the majority of the deal is expected to be tax deductible,. The deduction also means the government is getting less than it appears in this deal. Banks can often deduct legal settlements from their taxes, but cannot get tax benefits for penalties for violating laws. So, taxpayers are likely to pay for at least part of the settlement. If we really want to look at addressing the debt, we might look at loopholes like this.

Wednesday, October 16, 2013 - That Was Close

That Was Close

by Sinclair Noe

DOW + 205 = 15,373
SPX + 23 = 1721
NAS + 45 = 3839
10 YR YLD - .05 = 2.67%
OIL + .87 = 102.08
GOLD + 1.70 = 1283.70
SILV + .12 = 21.52

Wait, wait. Stop the countdown. There will be no debt-pocalypse. Not tonight. The politicians have worked out a deal. Whew, that was close. Under the agreement, the government would be funded through Jan. 15, and the debt ceiling would be raised until Feb. 7. So, if you stocked up on canned goods and cigarettes, well, they'll keep a few months and we can do this again to start the new year.

The government will re-open tomorrow. The government debt will be paid as usual. Life goes on.

Even as the shutdown of the United States government and the threat of a default appear to be coming to an end, the cost of Congress’s gridlock has already run well into the billions. Retail sales that weren't made, canceled vacations to national parks and other destinations, import inspections, export financing, and oil and gas permitting stalled; and the total will continue to grow after the shutdown ends. A full accounting will take months but this will likely have some adverse effect on 4^th quarter GDP.

Plus, tack on higher interest payments on short term debt, which have tripled from just a few weeks ago.  The World Bank has estimated that a similar standoff in 2011 raised borrowing costs in poor countries by about 0.75 percentage point, and that those costs remained elevated for months.

The Senate will take up a separate motion to instruct House and Senate negotiators to reach accord by Dec. 13 on a long-term blueprint for tax and spending policies over the next decade. So, at a time when fiscal dysfunction has done significant damage to the economy, the solution is to develop fiscal policy that will further put the brakes on the economy.

So, when you hear more news on this, you'll undoubtedly hear someone talk about the winners and losers in this political battle, and while there were certainly losers, and they are easy to spot; I still can't spot the winners.

So, it's back to business; we'll have a not quite so dramatic repeat in a few months, although the big losers in the battle will not be so reckless. It would be better to just end this game of debt ceiling.

The following article explains the debt ceiling; here's the link: Congress Shouldn't Raise the 'Debt Limit' -- It Should Repeal It by Scott Lilly.

The problem, however, is that the "debt-limit" resolution purports to be something that it clearly is not -- a tool for shaping and redefining the nation's fiscal policy -- and, in reality, plays a totally nonsensical role. It can't be explained to people in simple terms because it doesn't make any sense.

Back in 1917, President Woodrow Wilson needed a way to finance America's entry into World War I. The government's budgeting process was in shambles. Individual agencies went directly to Congress to seek appropriations without direction or even coordination from the White House. The War Department would put together their request and send it up to the Hill. The Department of the Navy and other departments would do the same.

But in many instances, Congress also had limited control over what the various pieces of the bureaucracy were up to, how they spent their money, or how much they spent. Despite an 1870 law that attempted to prohibit the creation of deficiencies -- obligations to pay tax dollars to individuals or businesses that have not been appropriated -- there was little real restraint on a department secretary who wanted to expand his budget by simply signing a contract to spend that money and then telling Congress that the United States owed the money and the good faith and credit of the American people would be damaged if Congress didn't appropriate the money and pay the bill.

So when President Wilson asked Congress for the authority to issue Liberty bonds -- the forerunner of modern-day Treasury bonds that were used to finance World War I -- many in Congress rightly wondered where the issuance of such debt could lead the country given the lack of any real budget process to make budgetary decisions. The debt limit was probably a useless tool for forcing budget choices even in those primitive days of developing the nation's fiscal policy. It had only one thing going for it -- a name that was hard to vote against.

But just four years later, President Warren G. Harding signed the Budget and Accounting Act of 1921 and instituted the beginning of modern federal budgeting. The act was largely based on the recommendations of a commission established by President William H. Taft a decade earlier, and did a number of important things.

First, the act established the Bureau of the Budget, which reviewed and could revise the budget requests of all departments and agencies of the federal government. The Bureau was obliged to add all of the spending up into one total and propose changes in revenue to ensure that deficits were kept to a minimum.

Second, the act created the General Accounting Office to have professional auditors go over the agencies' books and examine whether expenditures were made in conformance with the laws under which they were authorized. Congress also reorganized itself so that all spending requests were under the jurisdiction of a single committee.

Finally, the legislation established strict procedures by which any employee of the government could sign a contract obligating the federal government to make any kind of payment. Any employee who did so without appropriated dollars to pay the cost of that contract was guilty of a felony and subject to criminal prosecution.

The increased control and accountability provided by the 1921 act went a long way toward addressing the concerns that had sparked the Liberty bond amendment, but Congress continued the process of passing legislation to increase the debt limit as it was needed. However, Congress finally dealt directly and comprehensively with establishing a process to determine all of the issues related to the growth of the public debt in 1974 with the adoption of the Congressional Budget and Impoundment Control Act.

This act, among other things, required each house of Congress to adopt a resolution each year setting forth a blueprint for future spending decisions as well as changes in the level of revenues collected, and expressly requiring a vote on the level of the deficit that would result from the decisions about spending and revenues. This not only gave Congress the opportunity to vote on deficits before they were created, but it also made the "debt ceiling" completely irrelevant except for one purpose: whether or not we should default on paying the bills on purchases we had previously decided to make.

But the House did not move to suspend the legislative charade of deciding whether or not to pay the bills they had already voted to ring up for several years after the congressional budget process was implemented in 1977. There were probably several reasons for that. One was that some members of Congress never seem to tire of hearing themselves drone on about the evils of rising debt. All too often, those members are only covering their tracks for supporting more spending and big tax giveaways. Another group saw the regular process of bargaining with the White House over whether or not to push the country into default as a useful opportunity to get concessions of various types. This was more popular in the House than in the Senate, because the Senate already had a wealth of executive branch appointments on which to bargain over, and what could be demanded and obtained was usually small enough that the White House and congressional leaders were willing to play the game.

But in 1979, former House Speaker Tip O'Neill (D-MA) assigned a rapidly rising young member of the House Democratic caucus -- then-Rep. Dick Gephardt (D-MO) -- to head up the effort of passing the debt limit. 

Gephardt figured out how to translate the obvious solution for dealing with the debt ceiling from the standpoint of logic into a change in the House rules. Under the Gephardt rule, as the change became known, when a budget resolution conference report was adopted, a House Joint Resolution was automatically deemed as passed by the House and sent to the Senate. Put in place in 1979, the new rule was first used in 1980 and remained in place until House Speaker Newt Gingrich (R-GA) jettisoned the procedure in 1995. While Speakers O'Neill, Jim Wright (D-TX), and Tom Foley (D-WA) were willing to let the will of the House on the annual budget resolution represent the will of the House on the debt limit with no further demands on either President Ronald Reagan or George H.W. Bush, Speaker Gingrich saw it as a potential pressure point in his dealings with President Bill Clinton.

On a number of occasions, the House had to act on legislation to prevent default despite the Gephardt rule. This was either the result of amendments added in the Senate, or because the budget resolution anticipated growth in the public debt that was slower than the demands on the Treasury turned out to be because the economy grew at a slower pace than the Congressional Budget Office had forecast. But most of the time, the budget resolution provided the basis for House action on the debt limit.

So we are again at the 11th hour with continued uncertainty as to whether the Congress will force the country into default. Consumer confidence has dropped 12 points in the past week, the most since the collapse of the Lehman Brothers investment bank five years ago. House Republican leaders insist that their disagreement over raising the debt limit is a matter of deep philosophical differences with the president over how much the federal government should be borrowing. But if you look at their position in terms of the legislation they have passed -- the so-called Ryan budget resolution, H. Con. Res. 15 -- you find in section 101 on page 6, line 6: "DEBT SUBJECT TO LIMIT.--The appropriate levels of the public debt are as follows: Fiscal year 2014: $17,776,278,000,000." That is exactly $1.077 trillion above the current debt limit that House leaders refuse to raise. It is also $184 billion above the level of debt that the Congressional Budget Office projects the country will have at the end of this fiscal year in October 2014. All but four House Republican leaders who were in the chamber at the time of passage voted for that resolution.

The reason the public debt is rising under the House-passed budget is that the $2.82 trillion in spending contained in the budget resolution passed this spring greatly exceeds the $2.27 trillion in revenues contained in that proposal. Very simply, they have voted to spend the money, but they don't want to pay the bill.

Monday, October 14, 2013 - Canned Goods and Cigarettes

Canned Goods and Cigarettes

by Sinclair Noe

DOW + 64 = 15,301
SPX + 6 = 1710
NAS + 23 = 3815
10 YR YLD + .01 = 2.69%
OIL + .12 = 102.14
GOLD + .10 = 1274.30
SILV - .07 = 21.37

Earlier today President Obama warned that if the standoff is not resolved by Thursday’s deadline to raise the debt ceiling, “we stand a good chance of defaulting.” And then he postponed a scheduled meeting with congressional leaders. That's the good news.

No, seriously, that's the good news; Senate leaders were closing in on a deal to raise the federal debt ceiling and end the 2 week old government shutdown, so the president stepped aside to let the legislators work a deal.

Senate Majority Leader Harry Reid said on the floor that he was “very optimistic” about what he called the “constructive, good-faith negotiations” aimed at avoiding the nation’s first default on its debt. Senate Minority Leader Mitch McConnell said he expected that “we’re going to get a result that will be acceptable to both sides.”

Of course, if they don't reach a deal by tomorrow, you might want to stock up on canned goods and cigarettes; there's a good chance cigarettes will be more valuable than gold in the debt-pocalypse. And the meltdown could start prior to the actual deadline of Thursday; folks will wait it out tomorrow, but before the close of the markets on Wednesday, if there is no deal, it could get ugly. So stock up on the canned goods and cigarettes tomorrow.

If this whole mess seems surreal, it is, but that doesn't mean you know how it works. So, allow me to provide the Readers' Digest version of everything you need to know about the federal deficit.

When the government spends more than it collects in tax revenue it must borrow to finance the difference. The national debt now stands at $16.7 trillion dollars; that's the total amount the federal government has borrowed throughout the years to finance cumulative cash deficits; plus the money it owes to itself, primarily the Social Security Trust Fund. The publicly held debt is owed to a wide variety of investors, including international investors, domestic private investors, the Federal Reserve, and state and local governments. The federal government has carried debt throughout its history. Typically the nation has run up deficits during wars and recessions, but then paid down the deficit when the war ended or the economy recovered. In recent years however, sharp increases in deficits have driven the debt to historic levels even as government spending was poised to explode to care for an aging population.

The debt ceiling sets a legal limit on borrowing by the federal government. Legislation to raise the debt limit usually leads to some partisan political posturing but little real drama. The past few years have been different. The United States hit its 16.7 trillion debt ceiling in mid-May. Treasury Secretary Jack Lew started to borrow from retirement funds from federal workers, a move that has bought a few months before he hits a point where he will be unable to borrow more to continue to pay the nation's bills. If Congress does not vote by Thursday to raise the limit, Secretary Lew says the government will default on its obligations.

House Republicans have demanded a number of concessions in exchange for granting the Treasury an additional year of borrowing authority. Among their concessions demanded for not shutting down the government was the repeal of the Affordable Care Act, also known as Obamacare; they then merged the shutdown concessions into the debt ceiling concessions, only to slowly but surely abandon those concessions as they realized they were running into a brick wall; The next concession to fall was a one year delay in implementation of Obamacare; which they have now abandoned as impossible; then a demand for repeal of the medical device tax which was a part of Obamacare, and nobody quite understands it or care about it unless you happen to sell medical devices. President Obama says he will not negotiate over the debt limit. Congress passed the spending measures that racked up the debt and now they have to pay the bills.

In its effort to extract concessions from Democrats in exchange for opening the government, the GOP has faced a fundamental strategic obstacle: They don't have the votes. A majority of the members of the House have gone on record saying that if they were given the opportunity to vote, they would support what's known as a "clean" continuing resolution to fund the government, in other words a resolution that deals only with the debt ceiling and doesn't have all sorts of concessions tacked on.

But a funny thing happened right as the government was shutting down; on September 30, the House Republicans passed a measure that prevents anyone other than the Speaker of the House from bringing the clean CR to a vote. Which means Speaker John Boehner is the only person who can bring this mess to a vote in the House of Representatives, and Boehner is still holding out for something; nobody knows exactly what, but it might involve cigarettes.

Now, you might think there is no rational reason to shut down the government to preclude what is essentially a Republican-designed health law, first pitched by Newt Gingrich in response to HillaryCare, the original version of ObamaCare was actually created by the Heritage Foundation, and then implemented by a Republican governor in Massachusetts, only to be abandoned in pursuit of a White House run, which ironically resulted in a less than winning 47% of the vote. The conservative health care plan that would create the conditions for finally attaining universal health coverage in the United States, a goal that all the other advanced nations have achieved decades ago. In particular, the alternative to “Obamacare” proposed by the GOP is nonexistent, and basically means leaving millions of Americans without proper medical care.

On top of that, the shutdown, together with the previous sequestration, and the overall contractionary fiscal stance, will most likely make the very slow recovery even slower, maintaining an unnecessarily large portion of the labor force unemployed.

The debt ceiling, which we are still approaching, even if at a slower pace because of the shutdown, will make matters even worse. How much worse? Nobody knows; somewhere between bad and debt-pocalypse.

And then this afternoon, came word of progress, maybe, sort of. Wall Street traders were optimistic that a deal might be reached; there was a quick round of buying that pushed the major indices into positive territory. We may get a deal, maybe not, but again, if nothing is worked out by tomorrow afternoon, it's probably a good idea to load up on canned goods and cigarettes, and maybe some single malt Scotch.

Three Americans were awarded the Nobel prize in economics Monday for work that helped answer this crucial question: What determines the prices of an asset, whether a stock, bond or a house?

The winners of the $1.23 million prize were Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale. Their work has led to everything from low-fee index mutual funds to a deeper understanding of why home prices can become irrationally high, as they did in the last decade.

Fama and Shiller are considered direct opposites in their views of how markets sort out the prices of financial assets. Fama is a father of the "efficient markets hypothesis," the idea that because markets are very good at incorporating all known information about the value of an asset, it can be a fool's errand to try to predict in what direction the price of a stock or bond will go. Shiller is a leading proponent of the idea that markets, driven as they are by human psychology, can create large and sustained mispricings, such as in the late 1990s when excessive optimism drove the stock market into bubble territory. He is a student of "behavioral economics," the study of how quirks in human psychology can create results that traditional economic theory would not predict.

Fama's "efficient markets hypothesis" holds that investors can do just as well or better by investing in stock index funds as they can by trying to time the market and pick individual stocks. Anything they think they know about the future prospect of a company, in other words, is almost certainly already reflected in its share price.

Shiller challenges some key aspects of the efficient markets hypothesis. In a 1981 paper, for example, he demonstrated that stock prices are much more volatile than the underlying trends in the dividends they pay would suggest. He went on to show that periods when stock prices are high relative to corporate earnings tend to be followed by periods of below-par returns, and vice versa.

Hansen built on Shiller's work in important ways by using new statistical methods to test what exactly was driving all that stock price volatility. Hansen's work established more strongly the idea that the mispricings Shiller identified had to do with fluctuations in how much appetite for risk people had. When times are good more investors are willing to pay high prices for assets, and when times are bad, investors become more cautious. Today Shiller said the Federal Reserve's economic stimulus and growing market speculation were creating a “bubbly” property boom.

So, it just seems like a prudent thing to load up on canned goods and cigarettes and Scotch. Better safe than sorry.

Tuesday, October 08, 2013 - Low Probability High Consequence

10082013 Script

Low Probability High Consequence

by Sinclair Noe

DOW – 159 = 14,776
SPX – 20 = 1655
NAS – 75 = 3694
10 YR YLD un = 2.63%
OIL + .53 = 103.56
GOLD – 3.50 – 1319.90
SILV - .06 = 22.39

The Dow Industrials are down for 11 of the past 14 sessions, posting a loss of nearly 900 points. It's not exactly a crash; Wall Street is still expecting a resolution to the debt ceiling and the shutdown. The debt ceiling will likely be resolved with some short-term band-aid, but there is a chance that the idiots will mess it up and there will be a default. There is a low probability of default but a high consequence; that's a nasty mix and the reason I don't play Russian Roulette.

Most financial markets are only slowly getting worried about the possibility of a debt default, but in one tiny corner of the bond market things are starting to look a little panicky.

Today, investors dumped one-month Treasury bills due for payment after October 17, the date the Treasury Department has warned it will no longer have the cash to pay all of its obligations unless Congress raises its borrowing limit, known as the debt ceiling. Every day that passes after that date raises the risk the government will default on some of its debt. These short-term bills will probably be the first to go unpaid. Interest rates and bond prices move in opposite directions; so as prices dropped today, rates spiked, which means the government is paying more to borrow for one month than it does to pay for one year, a freak occurrence. Yep, everything is going exactly according to plan.

President Obama held a news conference today, calling on Republicans to both fund and reopen the government and to raise the nation’s borrowing limit as the federal shutdown entered a second week. President Obama phoned Speaker Boehner earlier this morning to urge him to allow a House vote on a budget bill without conditions, as Mr. Boehner called on the president to come to the negotiating table to resolve a spending standoff that has shuttered the government for eight days.

So far this whole shutdown hasn't been working out. What has been accomplished? Damage the livelihood of millions of Americans? Check. Government secretaries, food-truck operators, cleaners who work in motels near national parks: They’re all hurting. Waste billions of taxpayer dollars? Check. It costs a lot to shut agencies, Web sites and parks, and it will cost a lot to reopen them. Meanwhile, the House has voted to pay the salaries, eventually, of hundreds of thousands of employees whom it has ordered not to work.

And the lack of accomplishment just reinforces intransigence. In private, it appears Speaker Boehner has told his allies that he won’t bring up a clean CR, and he’s hopeful that as the deadline nears, President Obama will deal. It'd be nice to read that in private, there was some more conciliatory language, but at the moment, all of the private rhetoric is about hardening people's positions and convincing the team that the other side will cave.

In 1860, Abraham Lincoln had some choice words for Southerners who charged that he, not they, would be to blame for secession if Lincoln refused to compromise on the extension of slavery. Lincoln said: “A highwayman holds a pistol to my ear, and mutters through his teeth, ‘Stand and deliver, or I shall kill you, and then you will be a murderer!’ ”

So, while there may be a low probability of default, you still have to consider who's got a finger on the trigger. The debt ceiling is considered leverage, not a bullet to the skull.

And even if there is a stop-gap resolution to the debt ceiling and the shutdown, we still have other issues to deal with. The international Monetary Fund today issued a warning to central banks to move with extreme caution as they wind down emergency stimulus, warning that a botched exits risk setting off an asset crash in emerging markets and worldwide contagion.

The report said a witches’ brew of sliding currencies and excess credit could spin out of control. “Thin markets could amplify price movements and kick off sale spirals. Contagion effects could both amplify and broaden asset price movements and capital outflows as investors flock out of emerging market economies.”

Oh yeah, the taper!

The Supreme Court is in session again. I'm not sure how that works in a government shutdown. Maybe they pay the stenographer with an IOU, or a gift card to Wal-Mart. Today they heard arguments in a very important case,  McCutcheon v. Federal Election Commission, a case that maybe you could call Citizens United 2.0. 

 Here's the background. During the 2012 election season, Shaun McCutcheon, an electrical engineer who lives in Alabama, started making donations to all the candidates he supported. He made many donations, always staying under the donation limit of $2,500. Eventually, though, McCutcheon went over a different limit: the cap on the overall amount of money a single donor can dole out. Political donors can give no more than $123,200 during the two-year election cycle—$48,600 to federal candidates and $74,600 to political parties and related committees. McCutcheon believed the aggregate limit was unreasonable and unconstitutional, and so, with the backing of the Republican National Committee, a coplaintiff in his case, he sued his way to the Supreme Court.

At stake in McCutcheon is whether it's constitutional for the government to cap overall donations made by a single political donor. McCutcheon, his lawyers, and their conservative allies say the limit curbs First Amendment rights and does little to guard against corruption or the appearance of corruption, the court's justification for placing limits on political giving and spending. On the other side, campaign finance watchdogs and their lawyers say ending the aggregate limit would create a system in which wealthy donors could cut multimillion-dollar checks to candidates and parties, making Republicans and Democrats alike even more beholden to wealthy contributors.

The Supreme Court's landmark 1976 case Buckley v. Valeo upheld the overall contribution limit, at the time set at $25,000 for every two-year cycle. The court held that limiting the amount of contributions imposed only a marginal restriction on speech since the important thing was the act of contributing, not the amount). And the court said the government's interest in preventing corruption and the appearance of corruption justified that marginal restriction.

Fast forward to Citizens United, which overturned a couple of previous decisions that argued that some donation limits are constitutional. What happens if the overall cap is eliminated? A single donor could give nearly $3.7 million by maxing out his or her donations to every candidate of a preferred party, plus the state committee, the national party and its affiliated committees. With the overall limit scrapped party operatives could create mega-fundraising committees that can solicit seven-figure checks and then spread the money far and wide within their party at the federal and state level.

But wait, there's more! The Supreme Court has agreed to let a lawyer for the Kentucky Republican Seantor Mitch McConnell argue before the court. McConnell, the Senate minority leader is a vehement foe of campaign finance regulations; he led the fight to overturn the 2002 McCain-Feingold law with his suit, McConnell v. FEC, which he lost, and he has repeatedly filibustered Senate bills to beef up disclosure of dark money spending in our elections.

This time, McConnell wants to go even farther than McCutcheon;today the attorney for McConnell argued that the court should revisit the underlying legal principle that justifies whether there should be any limits on contributions to candidates. The aggregate contribution limits, he said, force candidates and political parties to compete for an "artificially limited pool of money." That seems a strange argument in light of Citizens United which allows an individual, like Mr. McCutcheon, to say whatever he wants and spend as much as he wants on independent, campaign related messages.

The FEC will have a tough row to hoe before the Roberts Court. The FEC seems to be arguing against an overall cap, but if an individual can give a few thousand to 23 different candidates, why not give the same amount to a 24^th candidate? Based upon today's arguments, that is probably what will decide the issue, but it misses the point. This is not a case about freedom of speech. One thing the Court has not truly explained is how spending a boatload of money is considered free speech. Of course, one should be free to speak about the government and politics, but I don't think that should include the ability to buy politicians and then bribe them to look after one's special interests.

James Madison wrote that government should be dependent on the great body of the people and not an inconsiderable proportion, or a favored class of it. There was a time, in the late 19th Century I believe, when business moguls actually put bags of cash on the desks of politicians to buy favors. Money has always been involved in this country's electoral politics, but many of the most blatently corrupt practices were reigned in during the 20th Century. Now, we seem to have returned to the age of the robber barons and to politicians who are for sale to the highest bidder. At every level, bottom to top, campaign contributions are a bribe. And what the Supreme Court is deciding is the difference between a democracy and an oligarchy; unfortunately that is not what they will consider, and that is part of the shame.

The justices will issue their opinion in McCutcheon before the end of June.

Thursday, October 03, 2013 - Don't Underestimate the Idiocy

Don't Underestimate the Idiocy

by Sinclair Noe

DOW – 136 = 14,996
SPX – 15 = 1678
NAS – 40 = 3774
10 YR YLD - .02 = 2.61%
OIL – 1.22 = 102.88
GOLD + .40 = 1317.70
SILV - .04 = 21.80

Well, we won't be able to sift through the jobs report tomorrow, due to the government shutdown. There are lots of things that won't happen tomorrow, but next week, the International Monetary Fund and the World Bank will meet in Washington. Ahead of the meeting, Christing Lagarde, the IMF Director delivered an assessment of the global economy. It's subdued. Lagarde says “In many of the advanced economies, however, we are finally seeing signs of hope. Growth is looking up, financial stability is returning, and fiscal accounts are looking healthier.”

The impact of a slowdown on US Federal Reserve asset purchases had been expected to dominate this year’s annual meetings but the Fed’s decision to hold off on tapering has removed that focus. And attention will now turn to the spectacle of a government shutdown and impending debt ceiling default. Lagarde called the debt ceiling “mission critical”, because “the normalization of monetary policy affects so many markets and people across the globe, the US has a special responsibility: to implement it in an orderly way, linking it to the pace of recovery and employment; to communicate it clearly; and to conduct a dialogue with others.”

Late yesterday, President Obama was interviewed by CNBC and he warned that investors should be worried, saying “This time's different. I think they should be concerned.”

It was a pretty clear message to political opponents that even their Wall Street benefactors are growing weary of this mess, saying “I think Wall Street can have an influence. CEOs around the country can have an influence. This is going to have a profound impact on our economy, their bottom line, employees and shareholders unless we start seeing a different attitude around that faction of Congress.”

Today, the Treasury Department released a report warning of catastrophic damiage if Congress fails to raise the debt ceiling. The report states: "A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

The Treasury report mentioned that even the prospect of default can cause economic problems, including lower consumer confidence, stock market volatility and higher interest rates on business loans and mortgages. An actual default could have consequences for years to come. The US has never defaulted on its debt, but the cost of insuring one-year Treasury bonds against default has quintupled in the past 10 days.

So, the president says there is cause for concern; the Treasury warns of a catastrophe; and the IMF says the debt ceiling is mission critical, and Wall Street slips a little, but apparently they haven't yet figured out how to turn this into a full fledged panic. There is an air of complacency that might linger until the last minute. Warren Buffett says, “We will go right up to the point of extreme idiocy, but we won’t cross it.” Maybe, but I think Warren underestimates the idiots.

If the debt-limit isn’t lifted, the Treasury will face the prospect of violating one of three laws: The World War I-era statute that created the debt limit, the ban on direct lending to the Treasury from the Federal Reserve, or the 14th Amendment declaring that the legitimacy of U.S. debt must go unquestioned.

There may be some ways to circumvent default, but those options are all “iffy”, at best. The most widely discussed strategy would be for President Obama to invoke authority under the 14th Amendment and essentially order the federal government to keep borrowing, an option that was endorsed by former President Bill Clinton during an earlier debt standoff in 2011. Other potential October surprises range from the logistically forbidding, like prioritizing payments, issuing i.o.u.’s or selling off gold and other assets, to more fanciful ideas, like minting a trillion-dollar platinum coin.

President Obama will not invoke a constitutional amendment to unilaterally increase the nation’s debt limit if  an  impasse with House Republicans causes that ceiling to be breached in two weeks. White House press secretary, Jay Carney, said: “We do not believe that the 14th amendment provides that authority to the president.” The president, he added, “completely” agrees with his advisers’ legal reasoning. More specifically, this removes the idea of an impeachable offense. Of course, that doesn't mean the debt-ceiling will be lifted; again, we should not underestimate the idiots.

But it all goes back to the complacency of Wall Street, which hasn't hit panic stage but has been drifting lower. The Dow Industrials have quietly dropped 9 of the last 11 sessions, shedding 720 points along the way, to close under 15,000. Wall Street is concerned but not yet convinced of a catastrophic default, but also cognizant that the possibility of default forces the Federal Reserve to avoid the taper.

Earnings estimates have been slow in coming down. And the stock market, supposedly forward looking and focused on corporate revenues and earnings, has been completely blind to them. Fundamentals no longer matter. All that matters is the Fed. A shift that has become the Fed’s most glorious accomplishment. And the Fed continues to feed Wall Street with $85 billion a month. Step right up and gorge.

Yet in this infinite QE environment where there is no gravity for stocks and even junk bonds, the smart money is selling hand over fist, unloading whatever they can, however they can. Record junk bond issuance is just one aspect. Another aspect: IPOs. They have gone haywire.There were 23 IPOs in May, 20 in June, 17 in July, 19 in August, and 21 in September. But last week alone, there were 12 IPOs – more than two per day. And today, with all the dire warnings, Twitter announced its IPO. Generally, IPOs are scheduled apart to avoid overloading the market. But now the smart money is scrambling to issue paper while it still can and stuff it into the portfolios of retail investors at current “out of whack” valuations, stocks and bonds alike, before the Fed turns off its crazy money spigot, and before investors will finally open their eyes to the grim earnings reality.

Meanwhile, junk bond issuance hit a record high in September, at more than $47 billion. Year to date, issuance amounted to $255 billion, blowing away last year’s volume for this period of $243 billion. The year 2012, already in a bubble, set an all-time record with $346 billion. This year, if the Fed keeps the money flowing and forgets about that taper business, junk bond issuance will beat that record handily.

Junk-bond funds got clobbered in July and August as retail investors briefly opened their eyes and realized what they had on their hands and fled, and they went looking for yield elsewhere, but there was still no yield in reasonable places, and so they held their noses and picked up these reeking junk-bond funds again. Cash inflow doubled over the last week to $3.1 billion, the most in ten weeks.

These retail investors were fired up by the Fed’s refusal to taper even a little bit, giving rise to the hope that it might actually never taper, that this is truly QE to Infinity, Wall Street’s dream come true. 

The theory is that the Fed is mortally afraid that any taper would pop the asset bubble it has inflated over the last five years. Toss in the threat of a debt default and the Fed must have felt like a porcupine in a room full of balloons. Functionally, the Fed believes that the only cure for a burst bubble is a bigger bubble, so this comes as no surprise. They appear to be willfully blind that, in an era of plutocratic concentration of wealth, the old supply-side nostrums don’t work.

What else? Well, you'll remember that in 2012, a coalition of 49 states and the US reached a settlement with five of the country’s largest mortgage servicers, Wells Fargo, Bank of America, JPMorgan, Citi, and Ally in an effort to stop abuses such as “robosigning” of documents used in foreclosure proceedings and to lower barriers to modifications of loans. 

Now hold onto you hat; the banks are still behaving badly. Wells Fargo was sued by New York state over claims the bank failed to uphold terms of a $25 billion mortgage-servicing settlement aimed at helping distressed homeowners avoid foreclosure. Wells and BofA were accused by New York Attorney General Eric Schneiderman of violating the provisions of the national accord by continuing to impose unnecessary delays on borrowers seeking to modify the terms of their loans. BofA has agreed to mend its evil ways, but Wells Fargo just couldn't get their act together.

Wells Fargo is one of the most difficult banks for distressed homeowners to deal with, Schneiderman said at the press conference. The bank sends “incomprehensible communications” to borrowers; he even read a letter from the bank to a homeowner; it was pure goobledygook. After months of discussions with both banks, Wells Fargo “refused to acknowledge there’s a problem.”