Some Thoughts About Economic Data and Politics --- Using Last Friday's Jobs Report as an Example

Here's a research article from Brian Wesbury (one of the more objective economists in my view) who comments about some of the negatively espoused by those who want to believe the current Administration has not done/can not do anything right when it comes to the economy (or much else for that matter.)  See the article @ http://www.realclearmarkets.com/blog/nonsense-arguments-about-jobs.pdf.

Nonsense Arguments About Jobs

The better the employment reports get, the more ridiculous the assertions from those who deny the improvement.

Take Friday’s report, which was the best since the economic recovery started. Private payrolls rose 212,000, while the number of hours per worker and earnings per hour went up as well. As a result, total workers’ earnings are more than keeping pace with inflation. Even the unemployment rate went down again and is now at 8.5%, almost a full point below where it was a year ago.

These numbers are pretty good. Nonetheless, anyone who stated the obvious, and pointed out the good news, was berated by media and especially in the blogosphere. Our observation is that most of these arguments against optimism are driven by politics and border on the ridiculous.

One claim is the numbers are being manipulated by the government to help President Obama…if President Bush was in office, unemployment would be 12%.

But if the numbers are being manipulated, they’re doing a pretty poor job. Why not claim a higher growth rate for civilian employment – which usually happens anyhow in normal recoveries – which would let them show some combination of a lower unemployment rate or higher labor force participation rate? And why would they usually have to revise up their payroll numbers after the initial report each month? Wouldn’t they want the good news out as soon as possible? Of course, we point this out knowing full well that the conspiracy crowd already thinks we are part of the conspiracy.

Another argument is that the "real" unemployment rate is 15.2%, not 8.5%. This is a reference to the Labor Department’s U-6 rate, which includes discouraged workers, marginally attached workers, and those working part-time who say they want full-time jobs. But as we have explained many times before, since its inception in 1994, the "real" unemployment rate (U-6) is always, in both good times and bad, higher thanthe regular unemployment rate – by between 65-85%. Right now it’s 79% higher. In other words, the so called real unemployment rate tells us nothing we wouldn’t otherwise know by just looking at the regular unemployment rate.

Others are saying the unemployment rate is down only because people are leaving the labor force. This has resonated lately, because the labor force has contracted by 170,000 in the last two months. But those monthly numbers are volatile and the jobless rate is down 0.9 points from a year ago, during a period when the labor force expanded 780,000, or 0.5%.

One recent claim is that a "real" recovery would have 250,000 jobs per month. This is a made up number which means nothing other than "we aren’t there yet." We all want more growth, not less. But, just because the number of new jobs has not reached a non-scientifically based threshold means nothing. Let’s not make up reasons to be disappointed when the numbers are getting a little bit better every month.

Some pessimists notice that this past month, a job category for couriers & messengers was up 42,000, so that shows some problems when these jobs disappear next month. But the same temporary pop in couriers & messengers happened last December and job creation accelerated this year. Moreover, don’t let that one category deflect attention from the fact that every major category of jobs increased in December, from construction and manufacturing to retail and leisure.

We get it. The job market isn’t perfect. We wish we were back at 5% unemployment right now and there are plenty of reasons to point fingers and argue that things should, and could, be better. We do that plenty. But using each monthly employment report as a pretext to put forward spurious arguments and vent about our national state of affairs, which we all knew about in the days before each report as well, suggests an attempt to politicize the economic data. And as we all know, facts and politics don’t always mix very well.

Happy Holidays to All --- And Best Wishes for a Higher Market in 2012!



Time for All of Us to Hold Congress Responsible!

The Look of a Man Who Just Agreed to Increase the Take-home Pay of 160 Million American Workers --- Where's the Joy?

Hedge Fund Mangers Still Get Rich Even If Their Clients Take a Bath

Seeking Alpha 3:06 PM John Paulson's Advantage Plus Fund is down another 9% in December, claims a Reuters source, bringing its YTD losses to 52%. Paulson's Advantage Fund, meanwhile, is said to be down 36% YTD, and his gold fund 7%. Hedge Fund Research estimates the average hedge fund lost 4.37% from January-November.

Every Time Europe Seems Close to a Solution :-(

Does This Remind You of Anything --- Like Our Do-Nothing Super Committee Members? Or Maybe Our Entire Do-Nothing Congress?

Even Greece and Italy Have Been Able to Reach Some Compromise

Here we are 10 days from the deadline for the Congressional Super Committee to reach some compromise with respect to a budget deficit/debt reduction package --- and it looks very much at the moment as though the Super Committee Stupor Committee will fail miserably at its assigned task.

Fortunately, I think the equity and debt markets have already priced in failure.  Therefore, when November 23rd comes and goes without a wimper from the Super Committee, I'm not looking for any significant downturn in the markets.  (This, even if there is another downgrade of US sovereign debt -- after all, where are investors going to find a safer haven than the US at the moment?)  On the other hand, if the Committee actually put a meaningful proposal on the table for the entire Congress to vote on (up or down) by December 23rd, the markets could move higher.

In the meantime, I'm maintaining investment positions pretty much where they are today --- 70% debt/equity investments and 30% cash.

Are You Kidding Me? - Why Do We Pay Any Attention to Standard & Poors?

France lashes out at S&P's 'shocking' error

PARIS (AP) — France reacted with outrage after the Standard & Poor's ratings agency accidentally sent out a message saying it was downgrading the country's prized "AAA" credit rating during a tumultuous week in Europe's protracted debt crisis.

The error stood for an hour and a half Thursday before it was retracted by the agency — spooking markets by foreshadowing the event that could sound the death knell for the 17-nation eurozone.

The accident came just as Greece and Italy both were in the process of getting new interim governments led by financial experts to guide them out of the continent's debt crisis. Most European markets were still open at the time, and U.S. financial markets were in full swing.

Despite Standard & Poor's statement saying the original message had gone out to some subscribers because of a technical error and its reaffirmation that France's credit rating remained "AAA" — the highest level — and stable, some damage could not be undone.

The yield, or interest rate that France pays to borrow money for 10 years, has risen 0.32 percentage points since Thursday morning, hitting 3.48 percent Friday afternoon, the highest rate since May.

In the midst of a crisis where fear drives the markets as much as fact, the error has at the very least reminded investors of France's difficulties. And often the suggestion of something amiss is nearly as bad as having something amiss.

French Finance Minister Francois Baroin did his best to quell fears, calling the error a "rather shocking rumor of information that has no foundation."

"We won't let any negative message go," he said in Lyon in comments published Friday on the La Tribune newspaper website.

The French market regulator immediately opened an investigation into the mistake at Baroin's behest, and the minister also called for a European probe.

While the error may have increased the pressure on French bond yields, they were already rising — because, like many countries, France is struggling with slow growth and high debt piled up during the boom years.

The rise of such yields is at the heart of Europe's debt crisis: The increase of those interest rates in Ireland, Portugal and Greece — because investors considered them increasingly bad risks — eventually forced each of those countries to seek massive international bailouts.

Now Italy is coming under the same pressure. That poses a bigger problem because its economy and debts dwarf the others — Italy's economic output is 17 percent of the eurozone's compared to a combined 6 percent for the other three nations. Europe doesn't have enough money to fully bail Italy out.

But a French debt downgrade would be a problem on another order of magnitude. France and Germany's "AAA" credit ratings are the bedrock of Europe's bailout fund. Because the debt of those two countries is considered so safe, the fund pays very favorable interest rates on the bonds it issues.

Some analysts said the accident may have tipped the actual thinking at the ratings agency.

"I can't remember a situation where an agency released a rating movement in error and no doubt there will be many people who believe that there is no smoke without fire and that this cannot have happened unless S&P were preparing the ground for a downgrade," Gary Jenkins, an analyst with Evolution Securities, said Friday.

He hastened to add: "I have no idea if this is the case or if it was just a genuine error."

S&P, however, does not even have France on surveillance — the step that typically comes before a rating is downgraded. Moody's, on the other hand, says it is studying whether to put France's rating on notice.

A downgrade of French debt would also pose a domestic problem: President Nicolas Sarkozy, who is expected to face a re-election battle next spring, has staked his credibility on balancing France's budget by 2016.

Along the way, Sarkozy has laid out yearly targets for reducing France's deficit — each one tied to a growth projection. But those forecasts have repeatedly proved too rosy and his conservative government has already twice this year been forced to introduce extra cuts to stay on target.

It's clear the last thing Sarkozy wants to see is for French borrowing costs to rise as his government fights to clean up its deficits and keep the eurozone united.

On Thursday, the European Commission said it considered France's growth forecast for 2013 too high — and Baroin shot back that Paris has already set aside a reserve fund for that eventuality.

By SARAH DiLORENZO, AP Business Writer

Copyright © 2011 The Associated Press. All rights reserved.

This Roller Coaster - Made in Italy

Now that the Greek problem is moving to the back burner (for the moment), we have the Italians trying to sink the global economy. Will the US Congressional Super Committee be next?

The Greek Problem

So Much For Jobs Creation!

The European Mess: How We Got Here

November 2, 2011

By Peter Wallison

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The financial crisis in Europe seems very complex, but we understand that how it comes out will have important and perhaps painful consequences for Americans as well as Europeans. At its center is the fear that if Greece defaults on its debts that could endanger the health of European banks, and that in turn may cause a financial crisis not unlike what followed the collapse of Lehman Brothers in 2008. How did we get into this fix, so soon after 2008?

Last week, EU leaders agreed on a rescue plan for Greece that involves investors (primarily banks) writing off 50% of the value of their loans. Is this another case of the banks doing something dumb, or is there more to the story of these investments in Greece?

As a guide for the perplexed, here are some Qs and As that might shed some light on why we are where we are:

What's the underlying cause of this crisis? High debt-to-GDP ratios among the Europe's southern tier countries, resulting in an increase in the risk - and a decline in the value - of their outstanding debt.

What's the effect? The banks - primarily European - that hold this debt have been seriously weakened by the reduced value of these assets. If Greece actually defaults, the debt could become almost worthless.

Why did the banks buy this debt? Bank regulators from around the world encouraged it.
What? How did they do that? The current bank capital rules (known as the Basel rules after the Swiss city in which the regulators meet) give banks a strong incentive to hold sovereign debt.

What kind of incentive? The Basel capital rules make sovereign debt cheaper for banks to hold than other kinds of debt.

Can you give me an example? Sure. Bank capital is basically equity, common shares or their equivalent. It's the first to suffer losses so it's very risky and thus very expensive.

So? Under the Basel rules, banks must allocate at least 8% of their capital to support their loans to corporations, and less than half that for the mortgages they hold. It's called risk-weighting of assets.

OK. How much capital must they hold against sovereign debt? None

You mean the debt of all European countries has a risk weighting of zero? Yes
Even Greece? Yes

Why would the Basel rules treat the debt of all governments the same? Because the rules are made by bank regulators from around the world, all of which are agencies of governments. Governments like banks to buy their debt.

Could it be that the Basel rules would not have been adopted if the debt of all the participating governments had not been given the same zero risk-weighting? Yes

Does this mean that the Basel rules may have caused the financial crisis in Europe? Yes

Isn't this a severe indictment of the Basel rules? Of course.

What would we do without these rules? The market would decide which government's debt represents zero risk.

What's wrong with that? Nothing

Then why were the Basel rules developed in the first place? Regulators were worried that governments might decide to lower the capital standards of the banks chartered in their countries, giving them advantages against banks in other countries and making them riskier.

What were they afraid of? A race to the bottom. Basel is an attempt to assure standardized capital requirements for all internationally active banks.

But didn't governments, through zero risk-weighting of sovereign debt, just give themselves the advantages they were afraid might be given to the banks? Yes

And isn't that the cause of this impending crisis? Yes

So how do we get out of this? Ask your favorite bank regulator.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. He was general counsel of the Treasury and White House counsel in the Reagan administration and a member of the Financial Crisis Inquiry Commission.

Insanity or Convenient Illusion or Something Else?

Euro-Zone’s Leveraged Solution to Leverage

Posted At : October 24, 2011 5:10 AM | Posted By : Satyajit Das
 

If as Albert Einstein observed insanity is “doing the same thing over and over again and expecting different results”, then the latest proposals for resolving the Euro-zone debt crisis requires psychiatric rather than financial assessment.

The sketchy plan entails Greece restructuring its debt with writedowns around 50% and recapitalisation of the affected banks. The European Financial Stability Funds (“EFSF”) would increase its size to a proposed Euro 2-3 billion from its current Euro 440 billion. This would enable the fund to inject capital into banks and also support Spain and Italy’s financing needs to reduce further contagion risks.

One proposal under consideration entails the EFSF using leverage to increase its size and enhance its ability to intervene effectively. Attributed to US Treasury Secretary Tim Geithner, the proposal is similar to the 2007 Master Liquidity Enhancement Conduit (“MLEC”) super conduit which was ultimately abandoned.

The EFSF would apparently bear the first 20% of losses on sovereign bonds and perhaps its investment in banks. This resembles the equity tranche in a CDO (Collateralised Debt Obligations), which assumes the risk of the initial losses on loans or bond portfolios. Assuming the EFSF contributes Euro 400 billion, the total bailout resources would be around Euro 2,000 billion. Higher leverage, a lower first loss piece, say 10%, would increase available funds to Euro 4 trillion. The European Central Bank (“ECB”) would supply the “protected” debt component to leverage the EFSF’s contribution, bearing losses only above the first loss piece size.

The proposal has a number of problems.

The EFSF does not have Euro 440 billion. After existing commitments to Greece, Ireland and Portugal, its theoretical resources are at best around Euro 250 billion, assuming that the increase to Euro 440 billion is ratified by European parliaments.

The EFSF must borrow money from the markets, relying on its own CDO like structure, backed by a cash first loss cushion and guarantees from Euro-zone countries. In fact, some investors actually value and analyse EFSF bonds as a type of highly rated CDO security known as a super senior tranche. This means that the new arrangement has features of a CDO of a CDO (CDO2), a highly leveraged security which proved toxic in 2007/ 2008.

The ECB, the provider of protected debt, has capital of about Euro 5 billion (to be raised to Euro 10 billion), supporting around Euro 140 billion in bonds issued by beleaguered Euro-zone nations, purchased as part of market operations to reduce their borrowing cost. The ECB has also lent substantial sums (market estimates suggest more than Euro 400 billion) to European banks without access to money markets at acceptable cost, secured over similar bonds. While the Euro-zone central banking system has capital of around Euro 80 billion that could be available to support the ECB’s operations, this adds to the incremental leverage of the arrangements.

The 20% first loss position may be too low. Unlike typical diversified CDO portfolios, the highly concentrated nature of the underlying investments (distressed sovereign debt and equity in distressed banks exposed to the very same sovereigns) and the high default correlation (reflecting the interrelated nature of the exposures) means potential losses could be much higher. Actual losses in sovereign debt restructuring are also variable and could be as high as 75% of the face value of bonds. 

The circular nature of the scheme is surreal. Highly leveraged vehicles, in part backed by weakened nations like Spain and Italy, are to undertake the “rescue” of the same countries and their banks. Levering the EFSF merely highlights circularity in the entire European strategy of bailouts, drawing attention to the correlated default risks between the guarantor pool and the asset portfolio of the bailout fund. This is akin to an entity selling insurance against its own default. This only works if all commitments are fully backed by real cash and savings, which of course nobody actually has, requiring resort to familiar “confidence tricks”.

The proposal assumes that it will not need to be used, avoiding exposing its technical shortcomings. The EFSF too was never meant to be used, relying on the “shock and awe” of the proposal, especially its size and government backing, to resolve the crisis.

The proposal is driven, in reality, by political imperatives - avoiding seeking national parliamentary approval at a time when sentiment is against further bailouts and lack of support for an increase in the size and scope of the EFSF.

It is also designed to reduce the increasing risk to the credit ratings of France and Germany. This last factor is increasingly important given concerns raised by rating agencies about the quantum of contingent liabilities being assumed by these countries. For example, after the increase in the size of the EFSF to Euro 440 billion, Germany’s commitment to the EFSF is over Euro 200 billion.

The scheme may also facilitate the ECB covertly monetising debt, “printing money”; to generate the protected debt to leverage the structure and also to cover the losses on its own exposures to distressed sovereign debt. It is simply another means of allowing the imply another way of requesting that the ECB to expands its balance sheet to absorb increased credit risk.

It now looks like the proposal to leverage the EFSF via the ECB are unlikely to be pursued - but as this is Europe nothing should be discounted. Instead, different forms of leverage are under consideration - EFSF to enter into credit default swaps to protect holders of bonds issued by weak European sovereign borrowers; EFSF to guarantee the first 10% or 20% or 40% of losses to bondholders; EFSF to act as bond re-insurer.

Unfortunately, all these new schemes like previous proposals are unlikely to succeed. The unpalatable fact remains that Europe may not have the capacity to rescue everybody that now seems to need rescuing without imperilling the financial health and ratings of stronger countries such as France and Germany.

As Sigmund Freud’s observed: “Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.”

We Can Hope, Can't We?