Sunday, May 1, 2016

Sir Charles Bean Report on GDP Under Reporting and Spurious US Employment Data

Today a good friend and I visited the Metropolitan Art Museum and after we had finished with the American Wing we sat down in the courtyard in front of the entrance to the federalist building facade.

My friend in the in the alternative industry and he relayed there is an ever building buzz or unease with the current depiction of GDP, that the group he hangs with are suspecting it is under reporting.  He cited the  Independent Review of UK Economic Statistics by Sir Charles Bean as the main reference for this group.  Bean maintains that GDP is missing the impact of the digital age.  This is not a new idea and first came to light in the 90s with the work on "weightless" by the work of Dr. Danny Quah and even Greenspan was citing "weightless" as the reason productivity at the time was being understated at the time.  Quah and Greenspan turned out to be right event though it ended in a rather messy bubble, but still Google is with us to this day.

Sir Charles Bean has taken this idea (here a summary in Vox Dec 2015) and applied greater granularity and applied it to GDP measurement. His work is exhaustive in the larger study The Independent Review of UK Economic Statistics It is a fascinating read and will require more hours of study - and I admit I am late as missed this when it first came out in the end of last year.  It has chock full of great analysis and graphs, one of the first such studies to full embrace "data science".

After I received the email from my friend that provided the Vox link to Bean, I responded that I have noted a similar under reporting in employment and sent him this email:

I think only employment now offers a good read into the current strength of the economy, and only claims non seasonally adjusted provides that read.
The largest part of the hit in 09 tool place in January 2009 and a fair amount of that hit was considered to be seasonal.  I suspect this was political and not a misread.  Unemployment likely hit 12% at the worst but the UER 3 headline was capped at 10% so as to avoid panic.  Remember a key part of the TALF ABS were auto loans and the generally accepted wisdom was that default of the auto loans would equal unemployment and most Auto ABS would start to fall apart at 11% or higher, though supposedly able to survive up to 18% UER.
The difference between 12% ad 10% is about 2.6  million employed and I think the "fix" was achieved by shoving the larger unemployed into a reduction of the Labor Force Participation Rate.  The same seasonal jiggering was made to claims data at the same time. 

While the seasonal and nonseasonal could be tampered with via the LFPR reduction, and thereafter fixed into the ARIMA seasonal machine, claims data could not be so tampered with for long in seasonal and certainly not at all with non-seasonal claims.  When the economy rebounded each change was fairly accurately reported for the monthly survey, but the labor force had to be gaining at a faster rate than reality, to bleed back in the political fix.  The recovery in emplyment has been so strong they are just starting to get caught up but I calculate there is about 1 million under reporting in the monthly data and Seas adj claims data is pretty well caught up given the 5 year memory in the ARIMA seasonal machine, and of course non seasonal adjusted claims data has always been accurate, by definition.

So I examine the year over year change in non seasonal claims data and it shows complete recovery was reached last year and the recovery has been an unusually strong and swift recovery in claims, as shown by examining the data since 87.  The best way to show this data is via a heat map provided here (I cap the levels reached for both claims series so I have more shades of granularity).  Looking across a row gives you a specific week from week 1 to week 52 since 1980.  I find this startling, almost worthy of starting an Inspector General investigation given how out of whack claims are to the monthly data at 5% currently:


The BLS/CES website notes that weekly claims data trumps the survey and once a reasonable time period has gone by to avoid weekly noise, the survey is to re-calibrate to the claims data.  Remember the huge payroll jump we had after the 82 Reagan Recession, or the lesser amount but still shock in 1994?  That was this re-calibration kicking in but this time, even though the recession was equal or worse than the Reagan Recession we have not had the shock re-calibration.

This discrepancy also shows up where there was not a heavy hand in seasonal fudging or manipulating the Labor Force size.  The Beveridge Curve for insured labor force - JOLTS v insured unemployment rate shows a normal recession followed by a normal recovery.  But when a Beveridge Curve is put together for JOLTS v headline unemployment one can see the date they put the fix in to cap headline unemployment at 10% in2009 and 2010.  This is so obvious I stopped keeping the graphs current past last year and here is my last one (I have the axis reversed to usual Beveridge Curves having the JOLTS as causal (x)):

This all fits with the Bean thoughts on GDP for the above political fix could only be allowed if GDP was slow "secular stagnation" type of pattern.
I think the actual headline monthly household unemployment rate is now no more than 4 1/8% and that means GDP is under reported by 1% to 2%.

Feel free to share.....  "

Monday, January 25, 2016

The Great GOP Platform to Gain POTUS

I would like to think I am a true GOP card carrying member.

But over the last 20 years I have found less and less of what I think are true GOP principles as part of the  GOP election platforms.

This gap started with two new streams of thought which sought power in the GOP tent.  The first stream was the likes of Peterson Institute, Newt Gingrich and other fellow travelers introduced the  idea that the US federal budget must be balanced and the country could not "live beyond its means" or take money from "future generations" and that US federal debt was an undeniable evil.  I wont get into this in depth, but not only was this wrong in terms of economic understanding or could not find empirical support,  but was for the most a cynical power grab by the uber wealthy to eliminate the inflation tax.  This crew, I will call them "Swabians" after Merkel's "Swabian Housewife", replaced the "supply side of Laffer and Jack Kemp and Ronald Reagan.  Under this supply side ethos, which use to be the GOP central economic thesis was in reality classical Keynesian economics on the macro federal level.

The second crew that has elbowed into the GOP big tent is the Christian Right movement.  They have taken it upon themselves to define the GOP platform for societal and moral planks from abortion to homosexuality and gun control.  Claiming to be God's representatives with the Big Man's direct word that empowers their views and policy proposals, they are therefore by definition anti-constitutional as they challenge the First Amendment.  They sell their votes to anyone  as long as they will in any proposed coalition adopt their moral social planks and in turn support their partners planks.

This has made what is the GOP platform now - the Christian Right - Swabian coalition.

The current platform of tax policy, immigration, healthcare, basic safety net, and military hard power will not only fail to gain the White House but will likely end in the destruction of the GOP.

The extreme thoughtless opposition to the crisis in US healthcare is also this coalition product. Before this coalition the GOP was  thoughtful and provided  leadership in establishing the vital safety net for the people.  Nixon was the first to introduce the concept on universal health care with his proposal to provide catastrophic (ie "major medical") health insurance to all, expanding on LBJ's  "Great Society"   Medicare policy.  But Nixon was shot down by the then "Blue Dog" Democrat Senate.  Obamacare is really a much smaller version of Nixon's ideas. The idea of a safety net and social welfare is not a liberal idea but originated with Bismarck's ideas so as to forestall the communists and socialists.  Bismarck recognized the legitimate right of all citizens to basic necessities of life and livelihood.  Bismarck stated: ". . .those who are disabled from work by age and invalidity have a well-grounded claim to care from the state." 

This coalition that now represents itself as the GOP does not have in the slightest the ideals I perceive the GOP stands for and is making the GOP unelectable for POTUS though the GOP does sway in and out controlling congress from jerrymandering and special interests.  They generate intense partisanship and cause the functionality of Congress to cease.  Compromise is impossible as this crowd speaks with God's knowledge and empowerment.

They are a terrible boil on the fabric of the US political fabric.

And the Swabian fiscal thoughts have never worked in the USA as it is at odds with the size and majesty of the USA.  No future generation has ever been harmed and the USA "means and treasure" is a size so vast it defies almost all's political imagination, which might be a good thing.

Now this is what I propose as the true GOP platform:

1.  A scheduled elimination of the national border and allow anyone in the world the ability to immigrate to the USA near immediately as long as they are people of good character, healthy, and without criminal records or record of acts that are anti-American.  The border would be replaced with a bio-metric census, good policing insisting on "rule of law" and medical examination.  The USA would thrive and could easily double in size in a prosperous fashion under such a schedule.  All those who are now graduating from US colleges could stay if they wish as well as all those who will wait by a Home Depot in cold rain seeking work on a bleak Saturday morning or who have  served the nation via  military service.  This policy would eliminate the entire immigrant, both recent and past, from the Democrats roll call, and by definition such immigrants respect for the USA tend to be grateful and very aware of any advantages they acquire for themselves and their family.  They are "true" conservatives.

2.  Enforcement of the First Amendment.  The GOP needs to get with the age, embrace the freedom of people to express love and union in anyway they wish as long as it does not "frighten the horses."  The difficult question of abortion must rest within the constitution and the government must support the Roe versus Wade.  Great advancements could be made with women's health and equality not by the right to abortion - which must be a right - but more importantly eliminate a separate standard for expression of sexuality and the contract of marriage for men and women.  The all important issue of  child bearing and raising must be equal for both men and women with enforced required paternity leave for both sexes of equal time.  The male CEO and the female secretary have the right and the required absence of at least 10 weeks per child.  Parents can meet this obligation in series with the man or the woman taking the first watch and then the other the last watch providing 20 weeks of initial childcare.  And day care has to become universal.  The rules and regulations that are applied to gender must have gender eliminated as the defining factor.

3.  The GOP must provide universal health care for the nation.  Bismarck did not have the great strides of medicine when he "invented" social security but if he had he would have invented universal health care.  The GOP must completely knock the Democrats ideas of universal health care showing they are feeble, not "rights" based,  but mercurial and lacking any imagination.  The GOP must table health care so the state can provide the equal "pursuit of happiness", and it is on this basis the GOP health care is designed.  I propose a two tier system, extending Nixon's ideas on state funded catastrophic health insurance by extending Obamacare to market based insurance that covers the first $40,000  lifetime costs of health insurance and the fine for not doing so equal to the $5,000 or so annual premium.  So there is no advantage in gaming the system.  After the lifetime $40,000 spend the state would pay for all healthcare costs.  Health care would be reformed with health car becoming universal and egalitarian with no difference in rooms care procedures and drugs if a citizen is worth billions or in poverty.  This would raise health care to the Mayo Clinic billionaire standards.  Fraud in medicine becomes  a capital crime and federal and full RICO standards applied.  Medical malpractice would be limited to $500,000 for mortality cases and $100,000 for damage.

4.  Corporate tax.  Corporate tax must be cut to the effective average of all OECD countries.  That would result with about a 12% corporate tax rate.  Offshore tax havens would be be eliminated and after a suitable time if taxes not paid would result in 100% seizure of such accounts.

5.  Personal taxes.  The USA must adopt a flat tax of 15% of all income no matter how provided over the poverty level.  Any income of any type that is below the poverty level would receive 100% of the deficit.  All welfare federal state city and local would be repaced with this "negative income" taxes.  No exemptions would be applicable, especially home mortgages.  For example a hedge manager who received a $2 million dollar payout offshore onshore bonus or salary in any form cash  or PIK would pay $300,000 in income tax.  A janitor working part time  in the hedge fund shop who made $15,000 in a a year the poverty level was deemed to be $30,000 would receive $15,000 from the federal government.  All option payments would be valuated annually and taxed 15% of the appreciation.  Anything purchased with after tax dollars - homes, durables, art, equity - anything would be tax exempt from any capital appreciation.

6.  Estate tax.  Use it or lose it. $10 million would be exempt from estate tax but 90% of any amount over $10 million would be taxed.  No exceptions.  Of course any charitable donations are not aprt of the estate.

7.  Embracing the tried and true Keynesian economics and apply them to the US federal budget, perhaps tempered by non societal ambitious Minskian guidelines.  The US government would not work under a cash flow annual basis but on a typical future valuation of  the country's balance sheet with the cash flow of annual flow of funds.  The current "valuation" of the USA is well over 100 trillion, to make a point, yet the USA debt is about 15 trillion. Debt service concerns should only be based upon the ability to keep current with debt service and not at all with the FV of debt, the principal.  Severe differentiation should be made on the investment that the US government makes and the consumption of investment and transfer payments made.

8.  Greatly increasing the size of the US military and project actively hard power to serve US interests and to protect the ever increasing original homeland of the US diaspora(s).  The USA simply cannot afford to allow Chinese power grabs in the islands off the Philippines.   Nor cant the USA afford the Islamist likes of ISIS.  A true Pax Americana must be imposed.  Constant innovation of the military capability of the USA must be made.  Different approaches or additions to naval air and ground hard power must be made.  It must be clear that while the USA is ready to discuss everything and anything, any use of violence and harm against the USA is no longer an option as it will bring near immediate total response.  Yet, to avoid bad leaders taking advantage of this response - the USA will remove bad actors.  The Bush Doctrine of liberal democratic governance will be applied and such democracies will be based on "universal values" with no allowances for "cultural sensitivities" such as misogyny that is central to not only Islamist but almost all of Islam. And this applies to the intense homophobia of much of African Christians, and so on.

9.  Rule of law fiercely imposed in the USA and around the world where all areas of the earth must at least have civil institutions that apply and police law at all sectors, legislative, judicial and enforcement.  This applies to Mexican cartels and Nigerian kleptocracy.  Fraud and corruption become capital crimes.

10.  The severe restriction of the power and governance of NGOs and the supra-national institutions.

If the above was tabled it would end with the GOP party providing not only worthy POTUS candidates as well as gain POTUS for the foreseeable future.  It would end with much greater prosperity and ability to pursue happiness for the USA people.  And if the USA gains such advancement, it would lift the next 500 billion of the world's poor out of poverty just as the USA following much of the above has provided for 500 billion over the last 20 years.

All my "ten points" are all tried and true conservative public policy.  If applied it would easily double the security, the worth, and the prosperity of the USA and would affirm that the USA is a beacon for the world and re-affirm the eventual, if not immediately, the Hegelian "End of History".

Sunday, September 13, 2015

How Syria Will Create the United States of Europe

Europe is under attack, an out and out invasion which if control  remedy is not applied soon the difficult choice of  using bloody hard power or surrender is presented.  I am not going to talk about the morality involving the true inequality of income in the world, which is the $5 a day folks in areas of $5,000 GDP per capita versus the $100 per day folks in areas of $40,000 GDP per capita.  Personally I think there should be no immigration or emigration controls and let people go where they wish and replace borders with clear “rule of law” of that of the specific locales.  But that is me and unlikely to be ever considered by the EU.
But the economic disparity which is right now only separated by the distance between Turkey and Kos , with Kos easily seen  from Turkey on a clear day, is the cause of the current so called “refugee” crisis in Europe.  While a relatively small amount of Syrians fleeing for their lives from Assad, ISIS or the “good guys” moderates do exist, they were merely the pathfinders and showed the way and how defenseless Europe is to the migration. Almost all the current migrant waves are looking to better their lot economically - and why not.
If you can land in Europe, especially Greece, you are in Europe for good.
There is not a father or mother in Africa and the entire Middle East and even South Central Asia who if they could afford the transit would not gather their children and strike out for Europe.  And thus small babies are washed ashore in Turkey.  Whats more it is the absence of law, of the state, which is allowing these parents to commit manslaughter on their own family as once they return from a failed attempt the state they originate from or the Turkish  court system do not prosecute them.  No one is gathering these people up at gunpoint and marching them into the sea, they are eagerly finding smugglers and paying the costs freely.  These are not “human trafficers ” providing transit but they are committing man slaughter as well.  But there is no court, no prosecuting authority, and if their heart is black enough they will accept the commission.
How many potential economic migrants are there?  If it is accepted that this is an economic migration the number is incredible – about 100 million or more and will reach 20 million to 30 million quickly if nothing is done.
Why is Europe so vulnerable?
Because of Germany and the arrested development of the formation of the United States of Europe. The migrant crisis is showing a cross roads, where Europe allows Germany to continue to dominate Europe and basically loot it with Germany quite willing to accept the cost if the migrants to keep that power, or Germany is quickly subsumed into a greater Europe, surrenders is hegemony and Europe starting with the Euro Zone becomes a federation.
Germany was onboard as was all of Europe – but for the Gaullist wing of France – prior to Germany reunification.  The program was the Monnet Plan, where periodic crisis would force Europe into further unity given that swaths of Europe were “straight jacketed” into a series of treaties that insist on only one direction.  The Monnet Plan would be allowed by the USA, who still occupies Europe via NATO and via a remaining occupying force, as it would  “keep the Russians out and the Germans down”.  And Germany, at first too feeble but to go along and then later with East Germany held as a hostage for compliance, was a member  participant of the Monnet Plan.  The creation of the Euro and Maastricht start of the treaties to create trans-Europe institutions such as the ECJ and the ECB all were headed, as agreed to by all – the “United States of Europe”.  The USE was to be a sovereign country with  not only all the sovereign institutions such as the ECJ and the ECB but also an executive and representative bi-cameral parliament.  That would lead to a USE hard power, a navy, army, air force and a coast guard.  But there were still crises to come to add the executive and the  representational  parliament.  So a ad hoc system of bureaucracy, competencies, and the EC providing the executive function.  Later, as complexity of  finance developed, the EuroGroup was created composed of the finance ministers.  Power for this adhoc grouping was confederate based on GDP size and to a lesser degree population. So power started to evolve to Germany.
German re-unification before the launch of the Euro ended the “hostage power” to keep Germany “down” and what’s more allowed Germany to convert DM to the Euro had very advantageous rates.  Then with the re-emergence of Gaullist in France, Germany struck a deal with France to end the Monnet Plan and jointly “rule” Europe.  There was no need for hard power as the USA provided that, and Germany kept the “guilt” over WW II to shred what was their peace terms for their surrender – the Monnet Plan.  Since the USA did the ugly tough stuff, Germany and France, with the balance of power  going more and more to Germany,  could simply start to loot the rest of Europe with the massively favorable internal terms of trade.  Other nations similar to Germany like Netherlands were cut into the deal.
What resulted was Germany achieved more economically with the current system than they did in WW II.
But now reality bites.  The USA hard power is there to protect American interests, certainly not to perform border duty or provide a coast guard.  The true war refugees showed the desperate poor how easy it was to get to Europe.  And a crisis now hits Europe unlike any of the others which cannot be handled with a confederacy but requires a federation.  Germany is trying to keep the confederate hegemon and claiming a sanctimonious high road is willing to accept up to 800,000 refugees but with the small print being the German controlled EC will dispense the majority of that around all of Europe.  Not considering how this “niceness” of Germany will double then triple then quadruple the migrant flow and there by kill scores of three year olds, mothers, children and fathers, it is obvious the German claims to “nice” is a ruse.  If it were real Germany would be establishing beachside processing in Turkey or all launch points for the migrants and then provide secure transportation to Germany.  They of course are doing anything but that rescue.   Germany wants them to hit the seas in puny blowup almost toy boats or scramble through Hungarian razor wire.
So this ruse by Germany won’t work, and in fact gas the opposite effect and will induce a flood of ever greater migrants who now expect a welcoming Germany.  No doubt  ISIS and al Quada  operatives are in the flow already with more to come.  The debacle will become apparent, perhaps with a massacre of thousands by close to fascist Hungarians, or terrorist attack in Europe in support of ISIS, and thousands upon thousands drowned.
Obama won’t take action and after the poor way Europe used the USA in Libya and the lack of any real support against Assad and ISIS – Obama will just let Europe hang on this.  The USA knows where the Monnet Plan  will take Europe, a slightly large populace just as prosperous as the USA with a matching nuclear armed hard power.  So the USA will allow this crisis to carry on as Germany wants.   The “Obama Doctrine” offered in Cairo by Obama  is showing its results – death and chaos – and now Assad does look like a more useful and beneficial partner to Europe and the USA.  The Bush Doctrine was the right plan and would have prevented all of this from occurring, and if Obama had not surrendered Iraq to chaos and now ISIS, none of this would be happening.
But this is Europe’s crisis now.
Germany will work on keeping power, they will try as hard as they can to prevent Europe returning to the Monnet Plan, so many will die as they  do so until the slaughter is of such a nature Germany relents.  When that happens, and it will be terrible in the process, Europe will be shaken to its core.  The current shredding of the Schengen Convention will make the confederacy with German hegemony exposed for the non-democratic construct that it truly is, an occupation of the rest of Europe by Germany and their cronies.  The need for a functioning federal Europe will be obvious and the Europeans will insist that it is democratic.  Along the way Greece and Italy will realize they can call Germany’s bluff and will do what Germany should  if it were sincere – they will arrange safe transit and passage for hundreds of thousands form Africa and the Middle East but then dispatch them to Germany for processing.
Europe will not take even another 100,000 migrants.
So the country of Europe will be formed, perhaps not being called so but defined by its apparatus and institutions.  First a coast guard will be formed to either prevent the migration (as Australia is doing now) or to provide rescue and security.  But that will not slow the flow so a trans-European marine force will go and occupy areas that the migrants launch from or for areas like Turkey it will be a a police action in coordination with the local government.  But in the end the only real remedy is to  re-establish the state of Syria and other areas so as they can provide their own policing and social services and stop the migration.  This will require a united Europe common force – an army and to support the army an air force and navy.

A crisis that even the brilliant Monnet could not have possibly foreseen may  cause the final step in the creation of the United States of Europe.

Friday, August 21, 2015

Best Weekly Commentary Ever

It was also pointed out that a prompt start to normalization would likely convey the Committee’s confidence in prospects for the economy.”…..

…. was in the minutes of the July FOMC meeting, released Wednesday.  We feel this is a most telling statement and seemed to be shared by many of the participants at the meeting.  While it  was immediately thought by the markets that the minutes showed a Fed that was still stubbornly “dovish”, ready to wait for – well whenever,  before ending the adherence to Zero Interest Rate Policy (ZIRP), a growing group in the Federal Reserve is becoming impatient.   The market is perceiving the Fed as enacting a very poor over-acted financial “Hamlet” with “to be or not to be” replaced by “to ZIRP or not to ZIRP”, except the phrase is heard only once in Hamlet, now being repeated over and over and over……..

So the Goldilocks trade, where the market perceives a long term period of ultimate liquidity as the US economy shows greater and greater strength, is coming off,  and the market is not waiting for the above play to end but is arranging business as if rates were already normalized and ZIRP in the review mirror.

This could leave the Fed with a fierce tactical challenge for if the market has lost patience and gone on without the Fed leadership, once the Fed does normalize they will find they have to raise quicker and harsher than they are ponderously planning on now.  This means the current game plan and stately controlled manner of the Fed is thrown out the window as the Fed scrambles to regain “leadership”.  Not getting into what that means for rates but to note that rates will be higher than they are now, it does make it a fait accompli that the risk and drama of  sudden lurching acts by the Fed to regain that leadership will end with greatly increased risk (volatility) in all assets.

We think this pricing of anticipated  greatly increased volatility is what has been happening over the last week with the large drop in the SP500.  While most stress only one or two factors (DIS earnings as content goes “over the top” bypassing the commercial channels of ESPN or other commercial TV,  Walmart who showed they weren’t kidding when they said earlier this year that they were raising wages (wage inflation), China  continually deteriorating authoritarian designed market and economic structure,  and residual of Greece) which are valid but not focused on the main event.  The Fed and what is starting to seem to be financial dithering, is at the heart of this down trade.

Economic data continued to show the very strong robust strength to the US economy with strong home sales, real earnings and especially unemployment claims data which is showing such strength it is off the grid in terms of comparison to any prior period.  Yet  all survey data which is based on opinion or very small samples to deduce very large populace continued to be lack luster such as the NY Federal Reserve “Empire State” survey of business conditions or the “Business Leaders” survey.  The Fed’s dovish concern over the economy is almost solely based upon the survey based input, and now they are willfully ignoring the census based data.

SP500 was down 72 points from last Friday’s close of 2091 trading at 2018 at the time of this writing.  While Consumer Discretionary was given as the leader, as in most large declines the losses were fairly evenly distributed with only high dividend or utilities not trading down as much.  Unlike previous down trades in equities, US Treasurys did not trade up as much as other equity declines and the US Treasury 2 year  is now at still recently high levels of .65%, down 5 basis points (.05%) from the .70% level.  When the market traded down for Greece, the US Treasury 2 year traded down to a low of .50%.  Our read is the US treasury 2 year is priced anticipating near immediate end of ZIRP.

BBBBBBB, after a brief drop in the weights immediately after Greece, has been maintaining our highest cash weights throughout this downslide.  This was not so much in anticipating a drop in equity levels, but rather in anticipating the large increase in volatility that has been occurring and will increase as markets reorganize given the end of ZIRP.  Our cash weights for our model portfolio have been 22%.  We do not see value in fixed income and out fixed income is still short maturity corporates. Equity sector weights are still financials, consumer discretion, and some health and tech.

We are still waiting for the “fat lady to sing” which will be the Federal Reserve normalization of rates, but since we do not think this normalization will behave and act to the Fed’s script, we will carefully assess and not re-deploy fully weighted into equity until we think all the increased volatility has been priced. But it should be kept always in the forefront that the reason that will force or prompt the Federal Reserve rate rise is the ever increasing strong robust strength to the US economy.  This makes us very constructive for the long run on US equity which will likely be the bell ringing asset for the next decade, barring any exogenous foreign shocks.

Thursday, July 23, 2015

Claims Redux

The writing was on the wall a long time ago for the claims data released this morning.  Sorta cute folks are "discovering" claims data now when its key importance started around this time July 2012.  Claims data then was the most important key input for Bernanke (along with how it was picked up in the new "spider graph" the Atlanta Fed started doing) such that he started the Fed towards a traditional tightening phase, ending QE and setting the stage for the end of ZIRP.  He was cut off at the knees by the politicos like Bullard, Yellen, and English and the "true believers" at the Chicago, Minneapolis, and Boston Fed.  So the end of QE became a "taper" and what I think was to be the first rise in Dec 2013.  Was all inspired by claims.  And in particular claims over the July auto refit week as 2012 was the first year many of the auto and auto parts plants did not shut down as auto sales started their surge towards 16MM annual sales rate.

While tech and finance will end  the USA biz cycle - the biz cycle recovery is accomplished by autos and housing.  This makes the July refit period of great importance in a recovery.

The claims data carried on after the 2012 refit surge, and as BLS calibrated the monthly surveys to the claims data, we had the early fall UER  surge through 7% in UER that left Jack Welch sputtering (he was right, the data was being manipulated, just he had the sign wrong, it should have dropped all the way towards 6% then.

The babble of the power play, to wrestle the Fed from economic data carried on, deeply entrenched by the time of Bernanke retirement.  I believe the BLS was coordinating with this group at the Fed  to put a drag in improving the monthly data.  BLS also had a huge problem as they capped UER at 10% when it should have gone on towards 12% or even 13%, so there were about 2 MM Labor Force reduction made in 2009 to 2010 that was being carried like a bad trade in the drawer.  Pity that, as I think that was the main reason the Democrats lost Congress to the GOP midterm as the economy was already in solid shape but depicted by the Fed and others as still in dire shape.  Greece Crisis I was also covering the huge US econ improvement as well as a completely contrived US budget crisis. Obama was now full throttle in one of the most sincere austerity movement of any POTUS prior and considering how little time had passed since the worst solvency crisis in a century, was a bizarre policy.  This is still Obama's economic policy, just he is lightening up on the brakes.

So the end was with Bernanke stifled, Obama's austerity, Greece, the fogging of the monthly data by the BLS for whatever reason, and new GOP dominance of Congress, the massively improving status of the US econ and the labor market was missed.

This became even more apparent in 2014 as the 1stQ weather hit immediately threw cold water on the bulls and then the roar of 2nd Q with obvious significant inflation showing the Phillips Curve is still with us and is axiomatic.   But then oil was crushed and the last phase of the "currency war" kicked in, especially German influence to drop the Euro towards parity with the dollar so they can take their mercantalist pillaging of Greece et al (there wasnt anymore to be had for Germany anyway as unemployment rose to high 20% in those countries), and the BLS kept the bad trade in the drawer, though they did manage to get 1MM or so of the "error" back into the labor force. This meant that after what appeared to be a flash in 2nd Q 2014, the view was the market returned to the secular stagnation weak labor market meme that was essential to keeping your macro job and for the Fed to maintain power.  The Fed with the import price pressure and PPI pressure on CPI and PCE was able to keep the disinflation, low inflation thesis alive.  This in turn kept Congress at bay and allowed the Fed to keep their extraordinary powers that were not even seen by most as they are now expressed in "macro-prudential" policy.  So Yellen was able to deflect Congressional challenges for the Fed to maintain their massive new found power, which are most dangerously poised in  FRAT, HR 5018, which is to force the Fed to return to their own defined "Taylor Rule.  Later, in this year, John Taylor noted that the bill is always in the forefront of Yellen's mind when dealing with Congress.

So all through 2014, but for the "hiccup in 2nd Q"  the weird political mixture that requires a bearish view on the USA econ, especially labor, was able to be maintained.

Then into 2015, a repeat of the 1st Q weather occurred, this time with the GDP of Boston being wiped out of all data for months, allowed this bearish momentum to continue.

Until now, now the obviousness of the claims data is showing how ludicrous the bear US econ story is, not just today - but if you had paid attention to the evolving claims data has been the case since 2012, as described above.  This has not been the only data showing the extremely strong US econ since 2012.  Auto sales, consumer credit, retail sales, tax receipts and now housing were also going at full throttle.

But the clearest depiction is  from claims data.  I have gone on quite a bit on the utility of claims data, just look at prior posts on this blog from 2012 onward.  The latest post was last week. This is perhaps the best time in the year where claims data has most utility as it is the 2 weeks where autos and other manufacturers close down operations, lay off workers and do refits.  This is the part of the US economy which has the most "Keynesian Multiple".   I use only non seasonal data, as the worst of the crisis hit took place in Jan and July 2009 and Jan 2010.  This was registered as mostly large "seasonals" which either was a deliberate attempt to keep claims data aligned with the capped at 10% UER.  So the seasonal data, if you are seeking trends, is just about useless.

The more important data is in the continuing claims, but it is lagged one week behind initial claims so this AM it was for Week 28, while initial claims is at the end of the refit week Week 29.  What initial claims shows it that there was almost no auto refit shutdowns this year, and what bears watching is if continuing claims close in on 2.1 MM and drop insured UER to 1.5%.  But as you can see, similar auto strength is shown in 2012 to 2014 shut downs as well.  The dichotomy between claims data and the monthly survey based employment is so egregious that this will force the Fed to give up on looking to employment as a factor to keep ZIRP.  ZIRP should have ended when I think Bernanke wanted to in 2013, certainly it should have ended by 2014.  Claims data is crystal on that.  The size of how high Fed Funds will go in the first quarter after the end of ZIRP is indicative of how far out of whack monthly survey data is from claims data.  When monthly data re-calibrates to claims, the UER will be in the low 4% area.  The Fed Funds then will certainly "pop" well over 1% very quickly, if not over 2%, once this correction is applied.  That is why claims data is not only of great utility, but essential at this point.

Thursday, July 16, 2015

Claims Data During Auto Refit (Week 28)

The claims data released this morning were extraordinary.

The very strong fully recovered labor market is still evident (and has been so for over  a year now), but this week, the 28th in the year, is the week that auto refits take place and auto and auto parts layoff their workforce for 2 weeks.  But the non seasonally adjusted, here mapped out in colors, with the year in the x and the week in the y shows, shows - by scanning down the week 28 row since 1992 - that this auto refit is basically not occurring.   This is shown by the dark brown color versus all other boxes being lighter brown or white (I cap the data at 400,000 or lower which provides a more nuanced color gradient.

This shows a very healthy labor market as well as strong durable goods sales (autos), and increase in durable goods inventories (again autos).  This should add .2 to ,3 to 3rd Q GDP and shows momentum from 2nd Q GDP which suggests it may be a surprise on the upside and then readjusted upwards.  3rd Q GDP may very well top 3%.

 Continuing Claims, those who have started drawing state unemployment insurance and are continuing claims shows the continued very strong robust labor status, but the continuing claims is lagged by one week to the initial claims which are concurrent.  So next weeks continuing claims will be of interest to see if they match the above view on initial claims.

The above claims data coordinates well with the JOLTS data, but is completely out of whack with monthly employment data.  Since claims data is an all encompassing census and not a sample based survey like the monthly employment, it is reasonable to consider claims data as more useful and to not see useful accuracy in the monthly data.  This is why the BLS outlines that they will adjust and calibrate the monthly data to the accurate claims data, for whatever reason the BLS is not doing so in this business cycle while they have done so in every business cycle prior.

Wednesday, July 15, 2015

The True Nature of the Greek Crisis – How it will All End; Germany is Closing in on Their Own Default

If you recall my thesis in 2011, I sketched Europe as a constitutional crisis  and not related to finance, though most then  saw Europe  as a financial problem contained in units of the separate EZ states.  They still do – everyone still does.

But I was right , and as usual for my forecasts, since they  are usually dependent on a political read rather than a micro-economic  read,  I have had  better foresight.  But  I also have a lack of timing as I am not very  involved with the noise of the markets.  By noise I mean the quarter to quarter swings.   I have found the important market moves occur on a seven to ten year cycle based on  a  political cycle (two terms for POTUS time usually).

So with the same qualified  foresight I showed  in 2011,  I wish to present my current view on Europe.

I am confident I have “nailed” the current situation.

Basically, I hold the same view as I had in 2010.  Europe is still a constitutional crisis and has little if nothing to do with Greek debt. 

Greece is immediately very important, but as most have quickly deduced it is “only” a problem as the entire Greek debt is  a bit under 3% of the Euro area.  So Greece is only a tactical situation now for most, with focus on the terms of the deal.  Greece ha d no choice but to surrender as Germany was ready to plunge the country into some Lutheran hell of original sin, backed by the other moralist Finland.  This not good for the Greeks, they will be beaten into submission and become a debt colony of Germany.  But is quickly being priced as a small factor for US and world markets in general.  At the time of this writing the SP500 was traded up 70 points to 2107, a large move, since Weds lows last week.

The more useful long term analysis would be at first curiosity as to why Germany was so adamant and so belligerent for what is really a small problem.  How they deployed the extra-EU Treaties institution to do the job – the Eurogroup – so as to avoid conflict with  and control France and Italy.  Why did Germany find itself at odds with France.  Why the debate was contained for 5  months in the Eurogroup with what Yanis Varoufakis called a plot. - so that in the end Greece faced a pre-planned outcome imposed upon them.  The above hyper link to Varoufakis interview  is a must read.  When reading Varoufakis it should be noted that he has the historical read of Marxist – ie brilliant. [ It is always best to use a Marxist to tell you where you are and how you got there, but then drop him and replace him with a Kissinger or a Fukuyama or a Keegan for forward for policy planning then a Nixon for implementation.]

Via  answering  the above questions the true nature of the European crisis  becomes clear.

Germany is facing, and  will experience, if nothing is done, default. 

Germany has built its own demise in typical Germanic fashion, only it was via  trade locked into the de facto gold standard of the Euro (for all those in the EZ) ,  and not armies that have built the " Fourth Reich" rise and will  assure the fall of Germany in the end. 

Trade economics are relatively straight forward, one of the first economics defined as far back as Hobson and Ricardo.   Trade economics uses a  ledger, a Pacioli double entry accounting approach.  In  international trade if one nation sells something  to another,  the seller needs to settle “money on the barrel”.  If the two trading counterparty nations are in balance, with no chronic competitive imbalance in the terms of trade, then the trade processing ends, and after short term trade financing is paid down, both countries current account is unchanged.  All common sense and easily described by Ricardo. 

But if one country enters into trade with another that has  chronic competitive advantages in terms of  trade, usually because of large constant better  factors of production like labor costs and more often than not a “rigged” currency,  there are no comparative advantages. The country with the chronic competitive advantage not only sets the price, sells the good with one-way trading, but also finances the trade.  If the rigged currency levels can  be maintained, as well as the advantages in a lower cost of labor, with large  constant savings rate,  it is inevitable that the exporting country not only exports the  trade goods, but will inevitably finance the trade flow via debt from their larger savings rate,  and has ever increasing positive current account as well as a chronic trade surplus for the exporter and chronic trade deficit for the importer as well as mounting current account deficit financed by ever accumulating debt balance to the exporter.  Hobson described this centuries ago and provided its name: “mercantilism”.

The mercantalist colonial empire requires hard power, or some means of coercion and enforcement to keep the importer in thrall. Or the debt simply defaults sooner or later.
If the mercantalist does  not have the ability to enforce or coerce the importer into line, then what is a benefit and empowerment turns into a cancer and will force an overturn of the mercantilist in a sudden cusp movement – a very bad week for the exporter. 

A good rule of thumb is that without enforcement and ability to maintain a  long term colonialization of the importer, the accumulated trade surplus in the accumulated current account will be lost  or be devalued an amount  approximately  equal to whatever was the trade advantage.  Then  as the importer balks, and refuses servicing and repayment of debt, or simply cannot do so as the only rebalancing available is the raising of competiveness via  mass unemployment, weakens the economy such that the debt cannot be serviced .  Or the importer finds better terms away.  Giving the precedent that this cycle almost always occurs, it would be better for the exporter to look forward and manage the debtor, always keeping the importer in good health, and certainly never let the importer get to the point where there is nothing to lose and such that they  revolt and default. This is accomplished by equalization payments, or transfer payments or mass rebalancing like the Marshall Plan of which the largest recipient was Germany itself.

It is not clear if Germany knows they are in this situation with Greece, they may indeed believe in the clap-trap of Schaeuble.  What made Germany’s mercantilist status is not readily apparent and by being so may even have fooled Germany.  That Germany believes Greece arrived at their current status by choice.   Even the great Paul Krugman who one his Nobel Prize in trade economics, misses that the Greek debt crisis is a classic mercantalist trade imbalance problem. 

Germany, Krugman and others  may  not even  be aware of the  German  policy and factors for intra-EZ trade for the last 15 years, as it was cloaked under  the Euro. 

German  labor reforms so as to reunite with  East Germany, the cheapening of the DM value by absorbing the Ost Mark at clearly off  the market rates for conversion into DM, and then the entry into the Euro at a very cheap 2 DM per Euro conversion – all these factors set up German to pillage almost all their EZ partners  trade account. 

Germany insisted on no transfer or equalization payments, and had Karlsruhe enshrine that into the German Constitution.  These German terms of trade, and the inability of any EZ  trade deficit partner to rebalance to Germany but for unemployment, and then Germany – up until 2010 – is the cause of the crisis.  In the USA if one state has such  adverse pressure, folks pack up the Budget one-way rental truck and move to the other area in the USA which is doing better, as well as about 20% of the USA budget going to equalization and transfer payments.  In Europe there is no mass internal migration and there is now no currency, and until 2010 one could add to the debt from Germany to finance the next years trade imbalance, so massive imbalances have built with Germany since the Euro was launched and especially since Greece joined the Euro.  The impact on the comparative GDP per capita: 

And the rampage and damage that Germany is imposing on the EZ in comparative unemployment rate:

Given that the only way rebalance is to force unemployment, this ends in a perverse cycle as the country gets weaker  and  unlikely to repay the debt owed.

The level of German trade surplus growth is massive, and until recently most of that on exports to fellow EZ members.  The Germans, by insisting that there are no transfer or equalization payments, and the confederate nature of the Deutsche Bundesbanke  and to a lesser degree the Bank of France and the Bank of England, have the internal payment system of Europe to “firewall” the credit of each of the EZ country’s central bank .  As debits and payments are made in the interbank system, they move to the member country’s central bank and then to the ECB balance sheet for the credit or debit of the respective country’s central bank account. The US has a similar system between the regional Federal Reserve Bank, but the accounts don’t mount as imbalances develop between the region s, but are cleared each day.  In the EZ system they are not cleared but accumulate.  The system is called TARGET2.  By monitoring the TARGET2 accumulated balances at the ECB for each EZ country, an explicit and dynamic picture of the massive intra-EZ trade imbalances are obvious.

The changes in TARGET2 balances over the years compared to the change in the current account balances, showing the TARGET2 accumulation and change is from trade.  Germany is the obvious standout and the accumulated surplus is more or less offset by the changes in the other member EZ deficits:

The levels of the TARGET2 accounts then is a quick robust way to track they accumulated debt financing for the trade, as all deficit trade balance countries must finance by borrowing. 

The deficit levels, or accumulated payments owed to Germany and to a lesser degree Luxembourg (tax shelters for Dutch, German and French companies for the most part) , when considered as an accurate measurement of the growing trade balance in the EZ becomes telling.  First, Greece is a very small part of this “debt”, so why the vigorous hammering by Germany and the attempt to remove Greece from the Euro.   It is because Greece isn’t the problem Germany faces.  The real problem is if all the trade deficit financing becomes one problem – if Italy is packaged in with Spain.  But especially Spain, as Spain and Italy have not accepted the first bailout as Greece did in 2012, and their debt balances are not with a sovereign Germany alongside IMF financing, but are still with German financial institutions either directly or through Spanish and Italian banks.  Then if the unemployment adjustments Germany has imposed upon Spain and to a lesser degree Italy are added with the now radicalized Greek unemployment a mass of people appear on the scene that cannot be segmented into individual countries and overpowered as Germany is doing now.  So Germany is smashing Greece now so as to attempt to prevent that aggregation of trade debt financing. 
All of this could have been avoided if the Jean Monnet plan for the evolution towards a “United States of Europe” had occurred, instead of being interrupted post-Kohl.  It is cloudy as to why, but it seems all roads lead to Schroeder and the reunification of Germany has swung focus of Germany away from the EU and towards East Germany, but for the annoying Poles.  Germany is creeping towards association with Russia, whatever the reason.

When I presented this  to DC folks in 2011, was the only one of my group who saw that the crisis from 2010 onwards was solely constitutional.  All of my group dismissed my thoughts and went onwards into credit, flows, debt and financing.  What surprised me at the time, and I did not understand the importance, was the  staff we presented to all agreed with my views with an almost casual “off course”, all saw it as a political and constitutional problem.  Then they asked our group our views on when unemployment adjustment would cause civil strife and violence.  All of the NYers were surprised at the question and of course had no expertise in answering, so we dropped that question and drove on.  I know realize that was the main point, that we were there not so much to present new information, but to confirm existing  views.  That the unsaid view of the USA was to not encourage or insist on a constitutional remedy to Europe, but to monitor where the boundary was for mas civil unrest and only step in at that point.  That is suited the USA to keep Europe a weak confederacy under a short term grasping Germany.  But, since I had not realized the above until recently, I can assume that the audience was not watching the Hobson-Ricardo nature if the building trade deficit financing but were accepting the moralistic character view of the Greeks making these choices and self imposing their own problem, along with the rest of the periphery. 

But the ability to ride that edge and manage Europe towards a somewhat chaotic force muddling through are over, unless the USA desires the default of not Greece, but of Germany and possibly France as well.  NATO stuff.

It is useful to very briefly reconsider the Ricardo-Hobson nature of the current crisis.  It is not due to specific national traits to work and savings of tax scoff law, it is the Pacioli immutable reality that in a closed system like that the EZ became, without any adjustments of that imbalance available, the country with high savings ,low cost of labor and high productivity will “invest” in low saving if not deficit countries.  If the cost of the trade goods continues to be inefficient, the trade balances will result with the high saving exporter ever increasing  the debt financing.  They will keep doing this until the unemployment rate, in a democracy, results in an economy that can never repay the debt and will refuse to service it.  The adjustment via unemployment is insufficient to rebalance so the debt is violently repriced to finish the rebalancing required via default.

Looking at the TARGET2  balances, and considering past sovereign default, 60% of the TARGET2 level will be how much Germany will face in default – about 400 billion.  On a per GDP level, this is about double what the USA experienced in the 2008 mortgage default solvency crisis.

Germany will be ruined if nothing is done.

Greece is not the problem.  The problem will be  and is now Germany.

What can be done also provides prescience.

When a sovereign goes into default they either become excluded from the globalized financial system or they have a restructuring from the IMF or the US hegemon.  The amount of 400 billion for only Germany alongside with the equal amount  required for the rest of the EZ (remember the books will balance) is beyond the IMF.  And this will happen  quickly, especially if Germany keeps fighting this outcome.  And the USA will not provide a bond swap for that amount either, as the 700 billion ARRA 09 funding is still being dealt with along with the cost of security as ISIL and other problems flair.   When this happens Putin will likely take full advantage of the situation and will encourage many areas “hot spots” as well as continue with their own goals in the Ukraine and well as Latvia.  Russia will sue this situation to come and “aid” Germany, as well as Greece.  It would challenge the continuation of NATO.

What Germany will do, if this unfolds, will seek close cooperation of all the EZ and build the entity which they could swap their debt with and remedy the crisis.  The only entity to do that would be a “United States of Europe” where a Eurobond is swapped for all the defaulting sovereign debt.  That financing and bond issuance would require a federal financial structure from taxation to setting policy to paying all commonwealth enterprise.  As Hamilton did with the US retirement of the colonies debt with newly issued US Treasurys in 1789, it will launch the United States apparatus.   Unless all of the EZ wished to grant a dictatorial  authority to Germany to run this new country and manage debt and taxation, all the usual federal democratic apparatus will appear.  This would be easy to make as all of the EZ would be facing the problems Greece is facing now, and quickly the corporatist German hegemony partnership can be swapped into a federal structure.  The ECJ would be activated, as would the population defined European parliament.  The Euro Commission becomes the departmental bureaucracy which would be under an executive that is directly elected that replaces the Euro Council.  To avoid the problems of a confederacy rather than a federation, the Euro Council would either convert to an upper chamber based upon state, and the first ministers return home as governors.

This is what will happen and is the only way I can see Europe, and especially Germany being ruined.  The question as to whether or not the occupation of Europe by the USA ends or begins a wind down, but NATO would continue as Germany is turned away from Russia and back to being one amongst equals in Europe, and a European common force quickly becomes a full equal to the USA.  Which is the end results which I think motivated the Agency forward looking planners wished to forestall. 
I am constantly increasing the regard I have for Jean Monnet as the above is perhaps the only way the United States of Europe is created.  I will go further, I think this will create and finish the Jean Monnet plan, reviving it from the ashes of the Schroeder and  German re-unification destruction of the Monnet plan.  I think it is now time the USA swing back to supporting and encouraging the creation of the United States of Europe.  Once this is achieved all the debt crisis in Europe will disappear as quickly as the debt crisis in the newly created United States of America with Hamilton’s “Assumption of the Debt” in 1789.

Then over a suitable time the USA must withdraw from Europe, allow a European ‘Monroe Doctrine” develop,  and accept from time to time a United States of Europe will have serious differences with the United States.  But that outcome, even with the risk of a bipolar world as the United States of Europe would be every bit the equal in power to the USA, would be a more secure world for the United States in the long run, stop Putin’s vain-glorious nostalgia, and balance the load to contain China.  In the long wrong a united federal republic in Europe would lead to a secure and stable world for democracy and would be well down to the road of the “end of history”.  Fukuyama was right.