Friday, October 7, 2011
- Succinct summation of week’s events (10/07/11)
- Michael Lewis: The United States is Now a Third-World Nation
- The Impact of Phoney Short Squeezes
- Brodsky on Media Coverage of Wall Street Protesters
- 10 Friday Reads
- Regulatory Uncertainty ?
- Payrolls, phew
- NFP Report: Trend vs Single Data Point
- Small Business Employment Report
- China’s Land Sales Skyrocket 6,700-fold in 21 Years
Posted: 07 Oct 2011 01:00 PM PDT
Succinct summation of week’s events:
Posted: 07 Oct 2011 11:00 AM PDT
Posted: 07 Oct 2011 09:57 AM PDT
Stock investors may take days to distinguish real news from noise, according to Federal Reserve Bank of New York.
This is especially true these days, given false announcements of bailouts, Fed interventions and rescues. They tend to cause fake short squeezes that temporarily spike markets, only to see them ultimately head lower.
To get a closer look of noise on markets, the FFRBNY studied how UAL's stock moved in September 2008. At the time, a “six-year-old report on the company's bankruptcy filing appeared online and was treated as a new story.”
David Wilson of Bloomberg has the details:
Given every twitch of the market over tales of EU/ECB action, German banks bailing out Italy, or anything related to Greece, it is interesting to see how traders behave relative to false announcements.
Posted: 07 Oct 2011 08:15 AM PDT
Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.
The protesters on Wall Street shouldn't be patronized. Though they may not be financial sophisticates and they don't know how to articulate a coherent message, they are absolutely – unquestionably – intuitively correct in directing their protest against the banking system.
Conceptually and now practically, a fractionally-reserved lending system combined with an uncollateralized currency allows governments, central banks and private banks to issue infinite credit to themselves. Briefly, credit/debt is "when-issued" money; a dollar of credit today demands the creation of a dollar tomorrow. According to the Fed there is currently about $53 trillion in outstanding dollar-denominated claims and only $2.7 trillion (after QE2) of base money (M0, or bank reserves held at the Fed and currency in circulation). In other words, the entire US monetary system remains levered about 20 to 1. Put another way, there is about $53 trillion in debt and not quite $3 trillion with which to repay it.
Please notice the scale on the left axes of the two graphs below:
We are not all in this together because our monetary system is grossly inequitable. Credit is created from thin air if a borrower can be found. Governments are always willing takers of credit because it allows them to fund legislative priorities. Consumers have also been willing debt assumers because they have been able to use it to improve their near-term standard of living. Meanwhile, private sector debt = bank system assets (two sides of the same coin). Banks have incentive to grow. Therefore, banks have incentive to continually extend credit regardless of borrower creditworthiness. When a bank makes a loan there is no incentive for it to ever be repaid, by creditor or debtor.
Further, term-credit provided to homeowners and other holders of long-term debt obligations is mismatched — funded in the public sector through future tax receipts (further and further into the future), and funded in the private sector through overnight repurchase agreements, commercial paper, checking accounts, demand deposits and passive pension fund bond allocations. So then we have very leveraged economies funded virtually overnight by our central banks. This is the point of criticality on which our real economies rely.
So it's easy to understand how and why our economies have become so leveraged. But why are protesters starting to gather?
A wage earner – whether he or she self-identifies as progressive or conservative – can no longer save his or her wage and hope to keep his or her purchasing power. Why? Because more money has to be created simply to service already outstanding debt. As the Fed has created more money since 2008, (and given the vast majority of it to creditor banks, not debtors), the purchasing power of a wage-earner's dollar has diminished in terms of food, energy and other goods and services that do not require credit for consumption (i.e. nominal prices are rising at the supermarket and gas pump but home prices are falling). This is perfectly logical.
The real economy is now naturally compelled to de-lever. There are only two ways to de-lever: 1) let credit naturally deteriorate, or 2) print money. The numerator (debt) and denominator (base money) must be reduced. Money creation is far more socially and politically expedient because debt deterioration would mean rising unemployment and bankruptcies, not to mention bank asset deterioration. Money printing, on the other hand, promises to ease the burden of repaying private sector debt loads ONLY IF the new money reaches private sector debtors. So far the new money has only gone to the banking system.
There is a far more fundamental aspect to the workings of our monetary system that is also clearly inequitable. Our markets and economy are no longer producing capital (sustainable wealth and resources). Leverage has marginalized real growth. Further asset price increases can only be catalyzed by further credit or money growth – enough to turn de-leveraging into re-leveraging. A growing percentage of people in Europe and the US are discovering that the economy in which they are ostensibly participating has been serving at the pleasure of a very small class of professional leveragers. What protesters seem to intuit is that the banking system has all the power and that it is taking care of its own.
For those of you who self-identify as progressives, you should re-think your defense of the current system. Money printing is a terribly regressive tax on the working and middle classes. Those with higher incomes and access to credit remain able to maintain their demand for inelastic goods and services, as well as maintain their ability to service debts, while lower wage earners, those with less access to credit, and those losing jobs as the real economy shrinks, are suffering. For those of you who self-identify as "free-market conservatives", you should also re-think your support of the current system. "Free markets" are compelled to de-leverage presently, not to re-leverage. A more laissez faire regulatory environment and lower taxes do not address the fundamental problem, which is an abundance of credit that re-distributes wealth from the factors of production to the leveragers.
So…this humble fund manager doesn't get the displayed ignorance of the financial press when it comes to linking the incentives of various constituencies – banks, policy makers, employers, investors, Occupy Wall Street, the Tea Party and, it must be acknowledged, the established media itself. Judging purely as an outsider and at the risk of oversimplifying, it seems that Wall Street, Washington, investors and established media are on one side while the real economy and "fringe movements" are on the other. What the establishment doesn't seem to get is that the "fringe" is a burgeoning growth industry with moral clarity on its side. So, it seems to me the kids downtown are credible and the "vocal fringe" is actually representing a disenfranchised majority that is quickly growing disenchanted with "reasonable centrism".
Don't trust me. Find the smartest non-partisan academic historians, sociologists, economists and philosophers in your rolodex and ask them to help connect the dots. Then ask bank economists, market strategists, partisan think-tanks, policy makers and financiers. I think it's wise to bet with the findings of the former group because the self-selected latter group's can't, by definition, see change.
Posted: 07 Oct 2011 07:15 AM PDT
Here are some reads to end your week:
What are you reading?
Posted: 07 Oct 2011 05:30 AM PDT
Posted: 07 Oct 2011 05:24 AM PDT
The US economy added (until revised) 103k jobs, well above expectations of 60k, led by the private sector which added 137k jobs vs the estimate of 90k. Also, Aug was revised up by 57k and July by 42k. While the household survey added 398k, the gain of 423k in the labor force led to an unchanged unemployment rate of 9.1%. The all in rate though rose to 16.5% from 16.2%, the highest since Nov ’10. Manufacturing lost jobs for a 2nd straight month but construction jobs grew by 26k (?). The financial sector lost 8k jobs but was offset by gains in business services, retail, info, and education/health. The Federal government, ex post office, added jobs and state governments did too but local government job cuts happened again. Also positively, avg weekly hours ticked up .1 and avg hourly earnings rose .2%. Negatively, the avg duration of unemployment rose to a new high of 40.5 weeks. Bottom line, 119k jobs per month have been created in 2011 on average, well below the 150-200k jobs that is needed to firmly lower the unemployment rate and eat into all the jobs lost in this recession but certainly for today, the better number eased major concerns about where this economy is headed, at least for now.
Posted: 07 Oct 2011 04:30 AM PDT
Despite the events of the past few days, the never ending stream of data, useless and informative alike, continues unabated.
My longstanding view is that most of the data in these series is not statistically meaningful. The collection process is imperfect; the models used to analyze this data are rather flawed. And the very human tendency to over-emphasize the most recent piece of data tends to increase the total amount of volatility, be it in equity prices or belief systems.
What does matter is the overall vector of a given economic sector. Vectors include the rate of acceleration or deceleration, persistency, direction etc. Think overall “trend” and changes thereto. For employment, this means: Are we seeing an increase in the factors that lead to hiring? What is the ratio between hires at big firms vs small firms? Are Wages increasing, staying flat, or decreasing; Temp workers getting hired, total hours worked etc. What are the likely data and modeling errors? Collectively, those factors all add up to an issue of the employment situation roughly improving, maintaining a stability, or getting worse.
Hence, each data point should be looked at in terms of whether it is continuing the overall trend, or suggesting a reversal in trend. Everything else is noise.
Consider the transition over the past five years — 2006-2011. In 2007, the entire new job creation pool was a result of Birth/Death adjustments. That was a warning sign about a major change in trend. In 2008, we saw monthly job losses of half to three quarters of a million per month. That reversed after the market collapse and massive liquidity/bailouts of 2009. In 2010, job creation barely kept up with population growth. By the time we hit 2011, even that modest job creation began faltering.
For this month, the projected gain in U.S. payrolls in September is small: The median forecast of 91 economists surveyed by Bloomberg News was that NFP Employment likely climbed by 55,000 workers after no change in August. Jobless rate is expected to remain unchanged at 9.1%.
Of course, economists have been proven themselves inadequate at making forecasts, which is yet another reason to look at the data, and remain focused on the overall trend.
Posted: 07 Oct 2011 03:49 AM PDT
Yes, I know, everyone is sick of infographics — but its NFP Friday, and so I thought this was worth the effort:
Posted: 07 Oct 2011 02:46 AM PDT
Hat tip MacroMan
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