Friday, July 02, 2010

This Morning's Jobs Numbers

Earlier this week, the ADP employment report caused distress with a weak 13,000 net private sector jobs created.

As of 7:20AM, as I'm writing this, the Labor Department's 8:30AM jobs report is considered to be the main driver of equity markets. Everyone is curious about how low net private sector job creation will be. Kelly Evans' Wall Street Journal column suggests that the bar is so low, and has been factored into the market, that a slight upward surprise may ignite equities today.

Yesterday, on CNBC, a poll of expected jobs numbers revealed that 84% of respondents thought today's numbers will be weak. Therefore, claimed the co-anchors, the odds of a positive surprise and consequent sharp upward equity market reaction were very good.

If we were discussing betting on a one-off roulette wheel spin, I guess I'd find all of these sentiments and bets, as it were, believable.

However, just this morning on CNBC, economist Bob Barbera, late of ITG, now with a hedge fund whose name I did not catch, recanted his longtime bullish read on employment numbers of the past six months or so.

I can recall, within the past few months, at least one Friday in which job growth beat expectations, but, within a week, equity markets fell.

Take a step back from the hooplah around market reaction in just over an hour, through futures, and then the 9:30AM US market open.

Instead, think about the longer term implications of even 100,000 net private sector jobs created.

Unlike past recoveries, this one hasn't exhibited robust job growth. Earlier this week, on CNBC, Alan Greenspan noted the real meaning of the rise in average hours worked over the past few months.

In a comment eerily reminiscent of Amity Schlaes' book The Forgotten Man, Greenspan explained that companies are working their existing employees longer, rather than hire more of them. Very much like Shlaes described the Great Depression, in which the common wisdom was,

'If you had a job, you were okay. But getting a new one was next to impossible.'

Now, take a look at the context of this aftermath of recession.

First, rather than see the prior recession as, well, a normal phase of an economic cycle, our government has attempted to criminalize it. Whole sectors have been vilified and demonized for contributing to what is, in reality, a naturally-occurring phase in economic cycles.

In reaction, wholesale legislative restructuring of the US finance and health care sectors have been undertaken, as well as a substantial governmental involvement in autos, through its ownership of GM.

Then you have the expiration of the Bush tax cuts next year, combined with significant tax rate increases, and new taxes, under the guise of the health care 'reform' bill.

Art Laffer has come out swinging, as it were, a la Babe Ruth, and called his shot- US economic collapse in 2011. Why?

Because higher taxes means less consumption and investment.

For businesses, higher consumer payroll taxes mean less disposable income available to buy products. Thus, Laffer's contention that economic growth is good in 2010, as US companies shove as much product out the door while consumers can still afford them.

Then there's investment. When tax rates rise, investment incentive in the marginal economic venture drops, cutting off growth. Since so much growth is in new, often smaller-scale business, not existing S&P500 type entities, it's not clear that surveys of hiring intent can even observe this source of missing new jobs.

The global context isn't exciting, either. China recently recast recent economic growth data to portray a slowdown. European government budgets are tightening, so their voters are rioting in the streets- literally.

I'm getting depressed just writing this post.

But, seriously, does any thinking business person with a grasp of macroeconomics and microeconomics, and some sense of economic history, see the current period and next six months as symptomatic of a healthy, growing economy in the US?

Between global sovereign deficits and money creation, over-regulation in response to a recent economic downturn, and higher tax rates, it's really hard to see a short-term basis for robust private sector expansion in the US and/or consumer demand globally.

Thus, regardless of today's employment numbers and their effects on today's closing, pre-holiday S&P500 index level, it's far more likely that it will be an underwhelming piece of data in the broad, longer term mosaic of global economic data past, present and future.

Thursday, July 01, 2010

Greenspan & Kanjorski Interviews on CNBC This Morning

CNBC's morning program from 6-9AM had an hour-long session featuring former Fed chairman Alan Greenspan.

These days, in the wake of the financial crisis which Greenspan's Fed's easy money policies helped create, any appearance by him is essentially an attempt to rehabilitate himself.

This morning was no different.

Among Greenspan's interesting remarks, though, were these.

Only now, after so many years at the helm of the Fed, he declares that the manner of financial sector regulation hasn't worked, and won't worked. I can't recall the exact words he used, but the former Fed chairman said something very close to,

'The best form of regulation is counterparty regulation.'

Meaning that all agency activities pale in comparison to the simple monetary vote by a counterparty to trade with, buy from or sell to a financial entity.

He went on to dismiss, out of hand, the recent FINREG bill as being written by a bunch of inexperienced, junior Congressional staffers with no sense of financial history or understanding of the implications of what they have wrought, stressing massive unintended, unanticipated consequences.

Through this particular remark, Greenspan implicitly derided Congress for having no direct role in writing or understanding the overly-complex bill. A bill, Greenspan intoned, would surely be re-written in another year, when the terrible consequences of this one have begun to become apparent.

When asked about the causes of the financial crisis, Greenspan punted and contended that we don't yet know. Of course he'd say this, because he desperately wants to now distance himself from the Fed's role under his chairmanship.

He was emphatic about economists' and regulators' inability to correctly identify and act upon bubbles-in-progress. And provided some convincing examples.

Despite his self-interest, I genuinely believe Greenspan's assertions that current regulatory approaches, no matter how differently dressed up, won't work any better in the future than they did in the past. He clearly recommended less governmental regulation, leaving more responsibility to counterparties, so they would take more seriously their commitment of capital at risk with their trading partners.

Following this rather interesting hour was a condensed period of about 5 minutes of outright lies from Pennsylvania's Democratic Representative Paul Kanjorski. This Congressman is a favorite liberal of the CNBC network, and is generally given a complete pass by the anchors from answering any tough questions, explaining his involvement in a rather serious, large-scale financial scandal, or really ever being accountable for his prior words or actions.

This morning, however, was a bit different. Two anchors assailed Kanjorski for the FINREG bill's complete absence of any mention of Fannie and Freddie.

His retort became a full-blown, purely political diatribe. All lies, by the way.

First, he claimed that Fannie and Freddie were in the bill by implication, because no financial institutions would ever be allowed to claim taxpayer cash, or become "too big to fail."

He then claimed that he had personally worked for nine years on underwriting standards, so he knew all about the mortgage industry, and that the cause of the problems were banks, not Fannie or Freddie.

Joe Kernen managed to ask a hardball question, inquiring how Congress, which had failed in its role, if it is its role, in oversight of the sector, would now, as a body make the correct estimation of when a financial institutions needed to be seized and liquidated.

Kanjorski then evaded this question by replying that the real failures of regulation occurred during 'ten years of Republican control of the White House and Congress,' but then said he didn't really blame them.

According to Kanjorski, the only reason Fannie and Freddie grew out of control was because of George W. Bush and a Republican Congress, who, according to the Democrat, did nothing to stop them. But, then, according to him, the Democratic-controlled Congress did move to put them under Treasury control, which, to him, I guess meant being regulated. Last time I looked, Treasury Secretary Geithner issued both GSEs a midnight, Christmas Eve reprieve to run unlimited losses at taxpayer expense.

It's true that Bush pushed for an 'ownership society,' which was misguided for low-end income families. But both Bush and his predecessor, Clinton, favored low-income home buying policies, leading to the problems we are now addressing.

This isn't true. It's a fact that Bush's administration pushed for tight limits on the two GSEs, but nobody in Congress would budge. This is because the two mortgage giants, as I noted in this post, have become like the old Banks of the United States, using federal money to grease so many Congressional palms, in various ways, that no majority of either party will touch them.

You couldn't have had two more divergent appearances this morning on CNBC's program. Greenspan dispensing some unvarnished, sensible insights, and Kanjorski simply lying about the past and rewriting history to absolve himself and other Congressional members and past presidents of all responsibility for starting the housing-related financial meltdown by letting Fannie and Freddie grow out of control.

Wednesday, June 30, 2010

Malkiel's Advocacy of Global Entitlement Reform As A Counterpoint To Krugman

Early this month, Princeton economics professor and one-time financial markets savant Burton Malkiel wrote an editorial in the Wall Street Journal, Entitlement Reform and the Global Budget Crisis.

In contrast to Paul Krugman's recent cries of despair that anybody should throttle back any governmental spending, Malkiel argued for serious reform of expensive social entitlement programs, such as Social Security, in order to cut government deficits and calm financial markets.

Granted, Malkiel didn't expressly recommend cutting current spending budgets. But his tone and attitude were clearly in favor of a "return to fiscal sanity," as he put it.

More specifically, though Malkiel counseled against growing federal budget deficits and unsustainable spending.

In the final analysis, a dollar spent is a dollar spent, so Malkiel's advice for global social pension reforms would seem to be at odds with Krugman's desire for full-tilt spending by governments around the globe.

Pretty interesting contrast of approaches, isn't it?

Tuesday, June 29, 2010

Krugman's Global Depression Hysteria

I got around to reading liberal economist Paul Krugman's recent NY Times editorial of last Sunday. It's a real scary piece calculated to frighten anyone reading it into believing that only large-scale government spending can possibly save the world.

If only Krugman were more accepting of the facts of the world's first major Keynesian intervention in America in the 1930s. That is, the fact of the failure of FDR's massive borrowing and spending economic regime.

I've read Amity Schlaes' excellent work on the subject, The Forgotten Man. Not only does Schlaes use economic data to refute the commonly-held belief, obviously shared by Krugman, that FDR's massive spending did little, if anything, to facilitate new job growth. She also describes perhaps better than anyone else has how massive government spending, borrowing and money printing naturally accompanies a loss of individual freedoms and a gradual growth in power of the state. Power which never completely recedes.

But, back to Krugman. He contends,

"And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels."

Perhaps if this were 1930s, governments could fool capital markets. But, since this is 80 years later, and deficits have not really declined in that time, investors realize that governments don't really ever stop excessive spending. And programs, once in place, don't end.

Krugman seems to live in a fantasy world of theoretical economics, rather than the real one which, in Adam Smith's time, was more correctly named political economics.

Krugman never addresses what would occur if government simply cut taxes and let people choose to spend or invest. It's not as if money the government spends doesn't ever exist otherwise. Sure, some of the borrowing wouldn't. Certainly the purely printed money doesn't, although some would argue it doesn't truly exist, in that that manner of its creation reduces the value of existing money, thus making the sum remain equal in value.

But, more importantly, Krugman's assumption, going in, is that only government can remedy shortfalls of demand. And that economic cycles are to tamed, not accepted.

Well, we've been trying that recipe, with the exception of the Reagan years, for essentially the 80 years since FDR's massive, ineffective economic tonics.

Krugman ends with a notional nod to global investors,

"It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again."

It's hard to understand the analytical basis for Krugman's contention in that first paragraph. It's as if he chooses to credit private sector markets when it suits him, i.e., that they appreciate long term fiscal rectitude, but currently punish 'bad policy.'

Could it be, instead, that investors are punishing the obvious fiscal messes that governments around the globe have created? Too much hard-to-service debt, the money from which went to pure consumption by early retirees, universal health care consumers, and so on?

Perhaps that, rather than discount Greece, Greece is the example investors now fear being a global reality?

Let's face it- Krugman simply refuses to acknowledge reality. Spending with borrowed and printed money by governments worldwide, not for lasting investments in infrastructure, but for social welfare consumptions, have hit a wall of unwilling investors. Debts are coming due without matching appetites, at acceptable interest rates, to simply roll those debts over.

The good news is that, ultimately, markets discipline governments. Regardless of Krugman's ignorance of that fact. And we are now seeing that dynamic in play in capital markets' responses to sovereign monetary and fiscal policies.

Monday, June 28, 2010

US Hypocrisy In Toronto

Remember back nine years ago, in the wake of the 9/11 attacks on the United States, when then-Fed chairman Alan Greenspan began to hold rates down to assist US economic recovery?

Only shortly after the bursting of the late-1990s technology sector bubble, Greenspan began pumping liquidity into the US economy again.

The result, as we came to realize by mid-2007, was a housing finance disaster of epic proportions. Too much borrowing and securitizing of loans to unfit, un- or marginally-qualified buyers.

In short, for the past decade, the US's economic troubles have largely been due to borrowing and spending money which did not really exist. It was borrowed or printed, rather than saved in advance.
Now we turn to the recent Toronto G-20 summit. Having infected the world's economies with debt instruments of questionable quality, the US is now lecturing the other nations to join it in another borrowing, printing and spending spree.

Our delegation pressed more cautious European leaders to throw caution to the wind and enact even more stimulus programs in their own economies.

I purposely didn't watch any summit-closing grandstanding speeches, but I'm fairly optimistic that the European leaders held firm. Perhaps the US Congress' defeat of the latest Democratic stimulus bill added stiffening to their collective spines.

Judging from the joint statement's alleged compromise on making growth a primary concern, but extracting a promise on deficit reduction over the next few years, I'd say the Europeans managed to subdue our own out of control federal representatives to the meeting.

How long must the US economy endure more silly, impractical, expensive and pointless Keynesian spending? When will the US government finally realize that the only lasting, valuable spending in an economy is by the private sector, which creates private sector jobs.

All federal spending must borrow or tax, now or later, thus diminishing private capital and savings. Government spending is always politically motivated, not economically driven.

It makes no sense to believe that excessive government spending will create lasting employment or economic activity. If that were so, endless deficits would be a good thing. But they aren't.

Perhaps now that the Toronto summit is finished, and no major economic events are scheduled before the US November Congressional elections, excessive spending will abate, and, then, if there is a change in party leadership in at least one House of Congress, be stopped for the next two years.

We can only hope.