Can't Raise the Bridge? Just Lower the Water..

What's the best way to ensure that we get a gee-whiz-largest-decline-in recent-history number for weekly jobless claims?

First, you go with seasonal adjustments, which make it possible to over-ride any inconvenient trends. Then, you bump up the number from the previous week so it looks like there's some daylight..

The newspapers helpfully report it as a huge decline. Merry Christmas everyone.

Uh course the numbers aren't all that great, when you see them side by side, but hey, it's the buzz phrase that counts.

In related news, I had the least amount of turkey on record in my Christmas ham dinner yesterday.

Chart of the Day #26

We should probably be somewhat relieved that the bucket gets filled at $10 billion less a month; but lest anyone thinks this is a big improvement, take a look at this chart from ZeroHedge.

Market Players are happy to take this as a sign that they can run free and easy in the market for a long while before A: a real taper happens, or B: something unforeseen happens.

Odds and Ends

People often make rational economic decisions, even with large numbers. Take the Powerball lottery for example. The  chances of getting the top prize is understood to be one in 175 million. Many people are willing to play whenever the top prize exceeds that. After all, only when it is over 175 large is it a fair bet; and you are playing then with other people's money -- other people being the ones who played the previous 5 weeks and didn't win. But wait, there's more: the odds are greater than 50-50 that by the time the number rises to 175 million, you will be splitting the pot with someone else. This is because more players dive in.

You see, the Powerball market wants you to believe there is a rational play here, but there really isn't. Game theory aficionados will all see the fallacy of the numbers, and the play is limited to those who are bad at math.

Which brings me to the stock market. There are big numbers there, too, but the same people who rationally play when they believe the odds are in their favor are now jumping into a market after the odds of continued gain have clearly worsened. Like the Powerball game, there is only so much money to go around. Unlike Powerball, the prices of the tickets continues to rise, as the Fed stretches the asset bubble one more step.

Stock prices can continue to rise, in concert with the Federal Reserve moneyprinting. At some point, however, there has to be earnings that stay up with the valuations. This is where the game tops out. Earnings for the nation's corporations in the recent past are due to the fact that they haven't hired anyone or invested any money since 2009 (thanks to the uncertainty of Obamacare). Further growth from here depends on total wages going up. The Fed's strategy for that is to keep the printers going. However, the fiscal policy is to maintain uncertainty, so we sit and wait. Meanwhile, the price of a pound of bacon is $5.00.

One indicator of stock market valuation is Cyclically Averaged Price to Earnings ratio or Shiller P/E after the Yale economist who first reported it.

One figure to keep in mind. The average stock price to earnings ratio over the decades is 16.5. Today it is 25.4. If the earnings begin to fall faster (as I expect they will), we will be back up to 2000 dotcom numbers in a jiffy. Note that Wikipedia defines a jiffy as 3 × 10⁻²⁴ seconds.
When this snaps back, how is everybody who plays going to get their gambling money back? Answer: They're Not.

Chart of the Day #25

Groundhog Day Observance in Washington

There is no way that this winter is *ever* going to end as long as this groundhog keeps seeing his shadow. I don't see any other way out. He's got to be stopped. And I have to stop him. Phil Conners, Groundhog Day, 1993

If you haven't seen the movie, then this is your spoiler. As the plot line develops, we get to the same start of every day (read: debt cycle), and every day it turns out to be the same things, the same people, and the same events. This is why there are 116,000 hits so far on the search string "Groundhog Day in Washington". Might as well add one more.

Did you know that the debt ceiling has been raised 100 times since 1941? The Republicans and Democrats like these little gatherings. It allows them the illusion that they are working (but not in cooperation, mind you) to resolve the financial difficulties of our government.

This time there was a twist. Some Republicans wanted to be on record, once again, in opposing Obamacare; like this needed to be restated somehow. Look, people already know whose program Obamacare is (hint: starts with an "O"). So why did they feel they needed to add this to their little wish list? I can think of two reasons:

One is that they really do fear on behalf of their constituents for the consequences of Obamacare, and this was the last opportunity to save us. I really would like to think this is the case, a possibility that proves that someone is still there in DC who sees what the rest of us do...the looming creation of a bureaucratic and stagnating health care system patterned after the post office and dozens of other bureacracy. 

The other is they are afraid that it might work, and they had to try to kill it. Of course, the "might work" theory was proved wrong on the same day as the shutdown happened, due to the failure of the exchange. 

At the end of the day (or is it the start?) the Republicans tagged Obamacare once again to the Democrats, and then caved. Did they really use this news cycle only to score some cheap political points? It would appear so.

They both wanted exactly the same thing in the end. They wanted to position themselves for re-election. And I say that without even a trace of cynicism. Neither side cares what effect of their latest can kick has on the economy. People are watching closely, because, and this is exasperatingly so: everything the government does now affects us financially. Think about that for a moment. Why does what happens in Washington affect us at all? How is it that billions, now trillions of dollars flow one way or another as a result of what our elected representatives do? Is that natural? Is that right? Most importantly, is it slavery?

That is the problem. In my opinion, The government should have little, perhaps no impact on an economy. John Tamny writes today, summing up why I will never watch another debt ceiling Groundhog Day cycle, at least while either Republicans or Democrats are in charge.

Considering the possibility of ‘default' whereby the feds would cease paying bills, it's already been well covered by the commentariat that this wasn't going to happen. Indeed, it's shooting fish in the barrel to point out that a self-interested political class would never knowingly do that which would be inimical to its own interests. Political types in D.C. love to borrow cheaply, this is true no matter party affiliation, so there was no way a default was ever going to happen. They'd sooner cut programs altogether, and as they should, than potentially imperil their ability to borrow.

The Victim in Chief

There's no one who wants this over more than I do. I would like my life back.   - BP CEO Tony Hayward, May 31, 2010

There are a whole bunch of things that I'd like to see pass through Congress that the House Republicans haven't passed yet. - Barack Obama, October 1, 2013

The public didn't like the BP CEO's characterizing himself as a victim. Why, then, does the press give Obama a pass every time he acts like one of the victims instead of the guy who is supposed to lead us through it? As president of the United States, his role is to work with the Congress and other policy makers, and find a successful solution to the country's problems. Instead, there's no room for negotiation with this guy.

It's no wonder the government is this dysfunctional if the president can't sit at the same table as the lawmakers. Fine, I am okay with Obama's dereliction of duty; because his involvement adds heat, not light.. However, when he acts like an aggrieved heckler with a microphone, it hardly advances the dialog.

We have Tony Hayward running this country, and this time the people are cheering him on

Do Nothing, Even if it's Wrong?

The degree in which a measure is necessary, can never be a test of the legal right to adopt it; that must be a matter of opinion, and can only be a test of expediency. The relation between the measure and the end; between the nature of the mean employed toward the execution of a power, and the object of that power must be the criterion of constitutionality, not the more or less of necessity or utility. ... - Alexander Hamilton, 1791


This week, as we all saw, the Federal Reserve's Open Market Committee (FOMC) narrowly avoided a unfettered opportunity to do the right thing. Instead of taking the action to slow the purchase of treasury bills (an activity which Bernanke himself referred to as 'easing up on the accelerator'), it's full speed ahead into 2014.

This is an admission that the economy is not recovering. This is a fact we all knew, but does not constitute a reason to "distaperfy" (the Fed inspires a lot of new words these days). The conclusion that should have been made from observation of facts available to all of us is that this extraordinary distortion of the bond market is not helping the economy.

It is as if the committee is watching the speedometer, forgetting that they were just supposed to go to the corner store for a gallon of milk. Sometime before the end of the year, they will leave the solar system. Everybody else knows the speedometer they are reading no longer has a relevance to this economy. So, why do they continue to press on? Surely it is harder to do nothing.

One clue is that it actually turns out to be a profit center for the Treasury. Warren Buffet calls it the greatest hedge fund in history. Since the Fed "owns" all of the bonds, it is returning all the profits back to the US Treasury.  Heck, 80-90 billion dollars a year come right back into the till. Not only is the government financing their debt, they are actually getting it all virtually for free. What a system!

A taper of any kind will be a signal that the game is up; that the government will have to start paying for its debt. This is a serious problem right now, because (1) interest rates were creeping up with the hint of a taper, (2) we are already at the debt ceiling. So, the FOMC is essentially hedging for the US Treasury; and somehow feels it needs to continue to provide cover for this scam.

The weaker data will continue to trickle in, and the Fed will use it to further monetize the debt, but when the game does end, it will do so not based on what the government thinks, but based on what the market thinks. Right now, the market doesn't know what to think. If interest rates stay below 2%, stocks continue to look cheap; but when the corporations are done buying their own shares for lack of anything better to do, the earnings will take over. With the economy still in a down mode, lower productivity produces lower incomes, and that leads to lower consumption.

Lower consumption leads lower earnings, and then the stocks will start to look expensive. Meanwhile, if the Fed continues to soak up 1/3 of the bonds, it means that the smart money could start leaving the US. That's going to leave a mark, exacerbating the problem now with a declining dollar. It would be a different matter if we were positioned to leverage exports. Unfortunately, we are not. We import a lot, and it will all be more expensive. That will look an awful lot like inflation when it comes.

The fed has this inflation wish going on. Bernanke is decidedly fearful of deflation, so he has jammed the gas pedal to the floorboard. Deflation is probably what the doctor ordered; but even if you don't agree, inflation is hardly a desireable result. Thinking they were facing a damned if you do, damned if you don't moment, the Fed has probably damned us to a raging inflation before the next bubble pops..

Chart of the Day #24

Update: Giving this chart "double power"
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Wish I could give this chart "double power".

Many of our nation's economic policies (both fiscal and monetary) are predicated on some assumed growth rate. The growth rate, if properly calculated, allows us to plan, to set future spending, and to prepare the right sized infrastructure for the resulting economic times.

You don't hear the number out loud very often. It does vary a little, depending on who is doing the calculating. Most politicians say they can keep us growing at 4-5%. If you set it too high, you run into gross overspending and overinvesting. If you set it too low, you get restriction of the very growth you want to achieve.  Sometimes the numbers are pure fantasy. For example, Detroit had consistent negative growth of 1.5% per year for 60  years (suggesting a planned slowing of city expenditures), but instead, the city used 8% growth in their calculations for revenue growth. I'm not holding Detroit as a microcosm of US trends except for this: You have to get the math right.

From time to time, it's necessary to get realistic about things, and Robert Gordon has done this with the analysis conducted for the National Bureau of Economic Research, titled  Is US Economic Growth Over?: Faltering Innovation confronts the 6 Headwinds

It may not be pleasant to contemplate a 0.2% growth scenario in a 2.5% Fed inflation target environment. Gordon points out that the path to higher growth will require much more than our leaders are thinking.

When Keynes will work

Jeffrey Dorfman posts an insightful piece in Forbes.com that should encourage the Keynesians out there...even though it renders their cause obsolete. Keynes was right about the stimulative effects of deficit spending...assuming we existed in an alternate universe.

It might have had a positive effect when there was a budget surplus, but the last one was squandered away quickly,  12 years ago. The next one isn't coming any time soon. Dorfman writes:

When government spends money at best they can manage to perfectly anticipate what we want, thereby matching the benefit we would have gotten from our own spending, or they can do worse. Government cannot do better unless it knows what we want better than we know ourselves.

Sadly, the government does typically pose as an entity that can anticipate our every need. This ruse gives the politicians just enough cover to plunder the system.

Economic literacy is taking a horrible beating these days. It's not something government schools will teach, either. Educate your children. I just sent mine a copy of Henry Hazlitt's Economics in One Lesson. I urge all parents to do the same.

Channeling Keynes

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. -- Paul Samuelson, economist (1915–2009), Inside the Economist’s Mind (2006)

John Maynard Keynes is my economic idol, which is why I jumped at the chance to write the intro to the new edition of The General Theory.  -- Paul Krugman

I know, it's usually broad and shallow sport to pick on Krugman. Anyone who spends that much time on one side of the teeter totter is bound to be dropped in the dirt fairly often. He's one of many voices you might be exposed to on economic matters (particularly if you follow the New York Times). He is known as the biggest voice for demand side economics. There are many who believe he is 93.6% or more wrong (your Wizer included).

Jeremy Hammond is the latest blogger to put him away