Initial Claims: Major Seasonal Divergence

The seasonally-adjusted (SA) headline number for initial unemployment claims looked lousy, but the non-seasonally adjusted (NSA) figure continues to grind lower, approaching the levels seen in November 2007, before the last recession began. 

Before taking too much comfort in that, it’s important to note that:

• NSA claims are still well above (~20%) the 2000-2007 norm for this time of year.
• Given 9% unemployment, there’s still the nagging question of whether there are simply fewer people to lay off.
• Seasonally adjusted figures are painting a grimmer picture than non-seasonally adjusted ones.

We should see NSA claims bottom in about two weeks, at which time they’ll start they’re normal ascent into mid-January. If January 2012 NSA claims surpass 600,000, that would be bad news, and it would confirm the trend indicated by the SA figures.

If they stop well short of that level, it would indicate that the positive trend remains intact.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. All views and positions are subject to change without notice.

Texas Twister Tears Up The (GOP) Field

In a very short period of time, Texas Governor Rick Perry has managed to energize and intensify the GOP presidential primary in a big way.

Though I know little about his acumen to carry out the office, it’s clear that he has a charismatic presence that human beings often value in a leader. (That’s arguably a result of evolution and natural selection; is it safe to assume that Perry doesn’t see holes in that part of prevailing theory?)

In a summary of his first debate against other GOP hopefuls, Reuters reports that Perry ‘came out swinging’ and that his tactics made it very clear that the race is going to be between him and former Massachusetts Governor Mitt Romney.

Perry, a conservative Tea Party favorite and the Republican front-runner, traded barbs with closest competitor Mitt Romney over who has created more jobs.

Their testy exchange in Perry’s first presidential debate was proof that the fight to determine the 2012 Republican challenger to Democrat Obama is becoming a two-man contest…

The Perry-Romney fireworks largely overshadowed the six other candidates in the debate, reducing almost to spectators Minnesota Congresswoman Michele Bachmann, seen as the third-placed contender, and the gaggle of other longshot candidates.

He also continued to exhibit a penchant for strong words:

Perry, who entered the race only a month ago and has leapfrogged over Romney in Republican polls, was full of confidence but may be forced to defend some blunt comments.

Using harsh language, he said Obama is an “abject liar” if he believes the U.S. border with Mexico is stronger.

And Perry declared Social Security a “Ponzi scheme,” the kind of comment that Democrats can seize on as proof that the Texas governor would try to dismantle the popular government-run retirement program.

“Anybody that’s for the status quo with Social Security today is involved with a monstrous lie to our kids, and it’s not right,” said Perry.

Clearly, the man doesn’t understand how our fiscal and monetary system operate today. But he’s hardly alone in that.

What will be interesting to watch as this primary unfolds is how the two position themselves relative to the GOP’s constituencies, which seem to have become more bitterly divided of late, and to the voting public. It will be a balancing act for both of them.

It was up to former Massachusetts Governor Romney to defend the popular entitlement program for seniors and allow him to appeal to independent voters who may well decide the 2012 election.

“You can’t say that to tens of millions of Americans who live on Social Security and those who have lived on it,” Romney said.

Romney’s stance on social security is clearly the more sober and rational one, and Perry comes across as a guy who likes to shoot from the hip. But we wouldn’t count him out yet. He has that charisma thing over Romney in a big way, even when he’s sticking his cowboy boot in his mouth. Consider that there are already several notable quotes from Perry that will make you remember him, for better or worse: Bernanke, evolution, Michael Dukakis (no Ann Richards retort, Mitt?), Obama as an abject liar, and social security as a Ponzi scheme (has any serious candidate ever uttered something like that?).

Romney’s been at this more than once, and I can’t think of a single memorable thing he’s said. A reserved person might make a good president, but this is primary season. And if Perry is better able to energize the GOP base (or enough parts of it), he might be the one facing off with Obama next year. Time will tell.

In the meantime, while we’re being entertained by political spectacles, let’s not forget that unemployment is twice as high as it should be (9% higher than it could be) and is lasting three times longer than it used to.

Previewing Obama’s Speech (And Suggested Revisions)

President Obama is scheduled to address the nation tonight about proposals to jump-start job creation in the U.S. economy. According to the Financial Times:

According to Democratic officials familiar with the US president’s plans, Mr Obama will present himself as the defender of the nation’s struggling middle class and will make an urgent call for Congress to act on proposals that he will argue will immediately create jobs.

The plan is expected to include an extension of tax relief for workers, a short- and long-term infrastructure proposal that will centre on fixing schools and aid for the unemployed and cash-strapped states.

All fine and good, and targeted at areas that will support overall demand, but likely to continue in the old J. Wellington Wimpy vein of half-assed policy measures and incantations to the sacred cow, PAYGO:

The officials said the plan would be paid for with future savings and that the president would also address deficit reduction and the country’s long-term fiscal outlook…

Republicans have concerns about the measure, which costs $110bn a year, but it is unclear whether conservative lawmakers will mount strong opposition to a tax cut.

It’s also highly questionable what can be accomplished given the GOP’s 2012 election strategy and likely tactics, and the mandates of the recent debt ceiling agreement.

As economist Stephanie Kelton recently wrote, “what will we hear on Thursday?  Look mostly for carrots with small price tags.  Probably a lot of talk about confidence, (un)certainty and incentives.  (Don’t make a drinking game out of it, or you’re liable to miss the second half of the speech.)”

She then suggested that Obama instead follow a speech that Warren Mosler penned for him (adding pro bono presidential speech writer to his CV):

My fellow Americans, let me get right to the point.I have three bold new proposals to get back all the jobs we lost, and then some. In fact, we need at least 20 million new jobs to restore our lost prosperity and put America back on top.

First let me state that the reason private sector jobs are lost is always the same. Jobs are lost when business sales go down. Economists give that fancy words — they call it a lack of aggregate demand.

But it’s very simple:

• A restaurant doesn’t lay anyone off when it’s full of paying customers, no matter how much the owner might hate the government, the paper work, and the health regulations;

• A department store doesn’t lay off workers when it’s full of paying customers; and

• An engineering firm doesn’t lay anyone off when it has a backlog of orders.

Restaurants and other businesses lay people off when their customers stop buying, for any reason. So the reason we lost 8 million jobs almost all at once back in 2008 wasn’t because all of a sudden all those people decided they’d rather collect unemployment than work. The reason all those jobs were lost was because sales collapsed. Car sales, for example, collapsed from a rate of almost 17 million cars a year to just over 9 million cars a year. That’s a serious collapse that cost millions of jobs.

Let me repeat, and it’s very simple, when sales go down, jobs are lost, and when sales go up, jobs go up, as business hires to service all their new customers.

So my three proposals are specifically designed to get sales up to make sure business has a good paying job for anyone willing and able to work. That’s good for businesses and all the people who work for them. These proposals are bipartisan. They are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between…

My first proposal is for a full payroll tax suspension. That means no FICA taxes will be taken from both employees and employers. These taxes are punishing, regressive taxes that no progressive should ever support. The Tea Party, of course, is against any tax. So I expect full bipartisan support on this proposal. Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living.This is big money, not just a few pennies as in previous measures.

These are the people doing the real work. Allowing them to take home more of their pay supports their good efforts. Right now take home pay is barely enough to pay for food, rent, and gasoline, with not much left over. When government stops taking FICA taxes out of their pockets, they’ll be able to get back to more normal levels of spending.

Many will also be able to better make their mortgage payments and their car payments, which, by the way, is what the banks really want — people who can make their payments. That’s the bottom up way to fix the banks, and not the top down bailouts we’ve done in the past.

The payroll tax holiday is also for business,which reduces costs for business, which, through competition, helps keep prices down for all of us, which means our dollars buy more than otherwise.

So a full payroll tax holiday means more take home pay for people working for a living, and lower costs for business to help keep prices and inflation down, so sales can go up and we can finally create those 20 million private sector jobs we desperately need.

My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments on a per capita basis with no strings attached. This will help the states to fill the financial hole created by the recession, and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday restores their lost revenues.

Again, I expect bipartisan support. The progressives will support this as it helps the states sustain essential services, and the Tea Party believes money is better spent at the state level than the federal level.

My third proposal does not involve a lot of money, but it’s critical for the kind of recovery that fits our common vision of America. My third proposal is for a federally funded $8/hr transition job for anyone willing and able to work, to help the transition from unemployment to private sector employment. The problem is employers don’t like to hire the unemployed, and especially the long term unemployed. While at the same time, with the payroll tax holiday and the revenue distribution to the states, business is going to need to hire all the people it can get.The federally funded transition job allows the unemployed to get a transition job,and show that they are willing and able to go to work every day, which makes them good candidates for graduation to private sector employment.

Again, I expect this proposal to also get solid bipartisan support. Progressives have always known the value of full employment, while the Tea Party believes people should be able to work for a living, rather than collect unemployment…

In theory, the third one should be capable of garnering bipartisan support, as we’ve pointed out in the past. Nobel economist and occasional GOP advisor Ned Phelps has written about similar ideas, and GOP iconoclast David Frum has publicly endorsed the idea (it’s disconcerting when the sober and critical members of an institution’s ranks are the iconoclasts).

Today, Kelton and fellow economist Randy Wray expounded upon the employer-of-last-resort policy that Mosler proposed:

…reports suggest that [President Obama] is mulling a $300 billion jobs package that includes more of the same—a one-year extension of the payroll tax cut, a continuation of unemployment benefits, some additional spending on infrastructure and tax incentives to encourage businesses to hire and invest in new capital. Too little of what will work and too much of what won’t for an economy that’s teetering on the brink of a double-dip recession and a president who is running out of time to deliver jobs…The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community. And here he is committing one of the few big policy blunders from Lyndon Johnson’s War on Poverty. Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist. Time and again, Obama has shown that he will only tinker around the edges…

Economists and policymakers alike appear to believe that if we can only improve the outlook of our entrepreneurs, they will suddenly begin hiring. All the nation needs is a bit of Prozac slipped into the martinis of the captains of industry to turn this ship around…

When it comes to the health and welfare of a nation, there is no economic policy that is more important than job creation. And yet decades of experience, in nations across the globe, provide ample evidence that while the private sector plays an important role, it cannot by itself provide employment for all who want to work.

There is a way to do that: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits…

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles…Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers…

…the $300 billion the president might propose Thursday is more than enough to jump-start our economy if it is really targeted to job creation. We can estimate the total program cost at $20,000 per worker, times 15 million workers. That adds up to a $300 billion gross cost, less savings on unemployment compensation (roughly $150 billion), welfare and food stamps, as well as the social cost of depression, divorce, abuse and crime. A direct job creation program modeled on the New Deal’s WPA could create 15 million jobs for less than $300 billion net spending, while also providing the infrastructure and public services required to bring our nation into the 21st century.

And because the job guarantee is designed not to compete with other employment options, the program would not result in the bidding up of wages (and prices) as workers were absorbed into the buffer stock. This is because the job guarantee program would hire only those that the market was not yet ready to employ. Because the program would not intensity competition for workers, it would not lead to wage-push inflation. It would, however, help to stabilize output and employment by establishing a floor on wages.

The program should be permanent, offering a good job at a basic wage to anyone who wants to work. With recovery, the number of jobs required in the program would quickly shrink, as the private sector would ramp up hiring as sales to consumers rise.

By keeping the program in place even once the economy recovered, we’d ensure continuous full employment, with the job program acting as a “buffer stock” that absorbed workers laid off when the private sector contracted and as an employment recruitment pool when private sector hiring resumed. In this way, full employment is maintained through the thick and thin of the business cycle.

Only jobs will create the infrastructure we need to compete in the 21st century. Further, Americans have never embraced welfare. For better or worse, our nation has always preferred a more libertarian path: self-help, personal responsibility, individual initiative. As a result, our welfare programs have always been stingy, temporary and purposely demeaning. They are not designed to reduce insecurity—while they relieve the worst of the suffering, those receiving handouts are supposed to quickly get back into the workforce, to pull themselves up by their own bootstraps. But they cannot do that when the nation is 20 million jobs short.

And we cannot restore the security needed to turn around expectations, to get the sales the private sector needs, with anything less than a nationwide universal jobs program.

The $300 billion “investment” in a direct jobs program would be the best way to prove that President Obama is committed to resolving the jobs crisis.

L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City. Stephanie Kelton is an associate professor at the University of Missouri-Kansas City and a research scholar at the Levy Economics Institute in New York.

It would be wonderful if the U.S. government actually started having some conversations around a policy like this. Unfortunately, there seem to be few adults in charge of Washington these days, and those who are there operate under the same defective macroeconomics as the rest of the world. We expect the speech to be little more than campaign positioning. The U.S. may have one of the most innovative political systems ever designed, but at times like these, it’s clearly far from perfect.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. Some clients of the firm hold long put options on EWA, EWC, and EWG. All views and positions are subject to change without notice.

Initial Claims Still OK—Waiting On January Data

Despite another now-customary upward revision to the prior week’s preliminary estimates, initial claims for unemployment benefits are still not signalling a recession.

Unadjusted numbers remain below their level of a year ago.

Seasonally adjusted numbers are in a rising trend, which could be an incipient sign of deterioration, but only if the BLS is getting the volatile seasonal adjustment factors right.

While the the U.S. economy may be more fragile due to chronically high un- and under-employment, labor markets are not signalling an endogenous, business-cycle variety recession.

However, the U.S. and global economies remain vulnerable to external shocks. The known risks include China, Europe, and the U.S. Congress.

The amplitude of any recession that occurs will depend in large part on the degree of systemic financial distress.

Right now, some key asset classes are signalling a looming recession, but not of the depth of the one in 2007-2009.

However, a handful of credit market indicators are showing signs of growing stress within the global financial system, especially in Europe and China (we see risks in Australia, Brazil, and Canada too).

As long as the European Central Bank’s checkbook remains open, it should be able to prevent systemic distress, even with Europe entering a recession.

China looks fragile, but like much of the developed world, still appears to be skirting recession. However, if its financial system continues to come under pressure, the policy measures it will be forced to take may put its slow-crawling Yuan-USD peg at risk, creating the possibility for renewed friction between the Chinese and U.S. governments. In a best case outcome, perhaps this would simply open the door again to additional quantitative easing measures by the Fed, however useless they are likely to be.

Perhaps most importantly, if the most draconian aspects of the U.S. debt ceiling agreement are triggered in the next two quarters, and/or if Republicans put the 2012 election before the health of the U.S. economy, global financial stresses will intensify considerably, increasing the risk of a sharp, deep, global recession. It’s going to take some skilled statesmanship to avoid this. Unfortunately, both sides continue to surround themselves with advisors who seem rather unlikely to point them in the right direction.

At this point, the appropriate thing to do with the claims data is to watch the moving averages for any sudden surprises, and barring any, see where the normal, seasonal, mid-January spike tops out:

• If it’s below 545,000 or so, the current downtrend remains intact.
• If it tops out between 545,000 and 607,000, then the trend has flattened out.
• If it spikes above 607,000, this would mark a new uptrend, and be a pretty strong indicator of a U.S. recession.

Until then, credit markets and other leading indicators deserve the most attention. If they continue to warn of recession, then it’s reasonable to expect that claims should eventually catch up.  

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. Some clients of the firm hold long put options on EWA, EWC, and EWG. All views and positions are subject to change without notice.

A New Kind of Internet Disruption?

Few people would challenge the disruptive power that the internet has exhibited. It’s caused pain for storefront retailers, the U.S. Postal Service, media companies, and (to a more limited extent) telephone companies, as just a few examples.

Now it’s threatening the political status quo. I have no idea if this will work, but it’s clearly a potential disruptor, and something to watch: http://www.americanselect.org/about

Why are you doing this?The goal of Americans Elect is to nominate a presidential ticket that answers to voters—not the political system. Like millions of American voters, we simply want leadership that will work together to tackle the challenges facing our country. And we believe a direct nominating process will prove that America is ready for a competitive, nonpartisan ticket…

Is Americans Elect just choosing an “Internet President”?No. We’re using the Internet to give all voters an equal voice, but the winning ticket will really be on the 2012 ballot. The Internet is simply the technology that makes Americans Elect possible. For the first time, America will nominate a president directly.

Why do we need another candidate?

The party primaries offer few choices, and leave too many Americans out of the process. In many states, voters have no real say at all about who gets nominated. Americans Elect gives all voters greater choice and an equal vote, no matter their party or where they live. And by nominating a nonpartisan ticket, Americans Elect will create a path for our leaders to start working together on the challenges facing our country…

Can Americans Elect really succeed?

The American party system could benefit from some healthy competition. Americans Elect will succeed by putting a nonpartisan ticket on the 2012 ballot in every state—the first ever that’s chosen directly by voters. And in doing so, Americans Elect will demonstrate that an open, online nominating process can give all Americans a choice that answers directly to them…

Is Americans Elect just choosing an “Internet President”?

No. We’re using the Internet to give all voters an equal voice, but the winning ticket will really be on the 2012 ballot. The Internet is simply the technology that makes Americans Elect possible. For the first time, America will nominate a president directly.

Meet Mike Lofgren

A lengthy, scathing indictment of both national political parties by a recently retired Congressional staffer, Mike Lofgren, just came across my desktop. Parts of it seem a bit over the top, and his invocation of gold standard monetary and fiscal paradigms are irrelevant today, but it contains plenty of interesting (if depressing) stuff, as well as some astute observations on the U.S. political climate. This one is particularly choice, and spot on as far as I can tell:

It was not always thus. It would have been hard to find an uneducated farmer during the depression of the 1890s who did not have a very accurate idea about exactly which economic interests were shafting him. An unemployed worker in a breadline in 1932 would have felt little gratitude to the Rockefellers or the Mellons. But that is not the case in the present economic crisis. After a riot of unbridled greed such as the world has not seen since the conquistadors’ looting expeditions and after an unprecedented broad and rapid transfer of wealth upward by Wall Street and its corporate satellites, where is the popular anger directed, at least as depicted in the media? At “Washington spending” – which has increased primarily to provide unemployment compensation, food stamps and Medicaid to those economically damaged by the previous decade’s corporate saturnalia. Or the popular rage is harmlessly diverted against pseudo-issues: death panels, birtherism, gay marriage, abortion, and so on, none of which stands to dent the corporate bottom line in the slightest.

It reminded me of a recent email exchange I had with someone. I sent them a link to a recent poll showing that more Americans than ever blamed the federal government for their pessimistic outlook on the economy and their  financial circumstances. My correspondent sent a two-word reply: Fox News. I think the blame can be spread more widely, including to some culprits on the left (who never hesitate to tell us that we’re running out of money because millionaires and billionaires are hoarding it), but nevertheless, there seems to be some truth to it.

The problem, as Lofgren also points out, is that the alternatives are all pretty crummy.

http://www.truth-out.org/goodbye-all-reflections-gop-operative-who-left-cult/1314907779

http://www.washingtonmonthly.com/political-animal/2011_09/mike_lofgren_leaves_the_cult031989.php

Martin Wolf Nails Germany

For anyone wondering how the once outperforming German economic miracle could possibly come under attack, here’s Martin Wolf elucidating the obvious in his FT column yesterday:

Much can be argued in response to the FT column by Wolfgang Schäuble, Germany’s finance minister. But two points stand out. First, it is impossible for both governments and private sectors of deficit countries to pay down – as opposed to default on – their debt, without running external surpluses. What is Germany doing to accommodate such an external shift? Next to nothing. Second, inside a currency union, a big country with a structural current account surplus is nigh on compelled to finance counterpart deficits. If its private sector refuses to do so, the public sector must. Otherwise, its partners will default and their economies collapse, so damaging the exporting economy. At present the European Central Bank is offering much of the needed finance. Does Mr Schäuble actually want it to stop?

A Cechetti Craptacular

Economist Stephen Cechetti has become a worthy nominee for the title of World’s Most Dangerous Man since taking the helm at the Bank of International Settlements (BIS). His latest piece of co-authored research (pdf) is, like most in the government debt threshold genre, world-class garbage. Don’t let the mysterious cloak of macro-econometric symbology and mathematical trappings fool you. It’s craptacular nonsense.

Unfortunately, it provides yet another club with which austerity proponents can bludgeon the world. It will be used to reinforce the shoddy inferences drawn by Carmen Reinhart and Kenneth Rogoff that are now guiding fiscal authorities the world over toward unnecessarily austere and counterproductive policies. Watch for these two memes to follow in the wake of this paper—I guarantee that they will get plenty of spin:

1. Beyond 80% to 100% of GDP, government debt is bad for growth!!!
2. Total non-financial debt has ”risen relentlessly” to 310% of GDP in developed economies!!!

When you hear someone repeat those, consider pointing the following out to them, or at least remind yourself:

1. The authors admit that their inferred impacts are “very imprecisely estimated.”
2. Like Reinhart and Rogoff, they fail to distinguish between sovereign, currency monopolist governments and all other economic sectors.
3. They do not offer any sound theoretical foundation for their analysis (more on that below).
4. They claim but do not even test for (much less prove!) causation.
5. Like Reinhart and Rogoff, their use of impassioned prose makes it plain that this work is politically rather than academically motivated—which might explain items one through four.

The paper also provides the rather bizarre spectacle of PhD economists trying to lay out a macro framework that accounts for debt while still assuming away the significance of money (where it comes from, how it’s used, etc). Yes, Knut Wicksell may have done a similar thing 100 years ago, but he did it in order to come to a deeper understanding of money and monetary policy (and I suspect that he would be horrified by the incompetence currently on display among macroeconomists of all political stripes).

Cechetti and crew aren’t doing anything remotely like that. Instead, they’re on a political crusade that seeks to preserve cherished and nearly (nearly?) religious concepts of mainstream macroeconomists and political powers-that-be about fiscal prudence, and to impose this malformed dogma on the rest of humanity.

In laying out an extremely casual theoretical underpinning—in a way that called to mind for me a really bad, amateur garage band jam session—Cechetti and his co-authors state:

…the ability of the public sector to sustain a given level of debt depends on its ability to raise revenue or its fiscal capacity – something that could become compromised if the private sector is already highly indebted…

It’s rare that you get such a solid foundation for proclaiming the ignorance of an established, mainstream macro economist, but Cechetti and team have laid out the pad and poured the cement—so here goes.

If the world were still on a gold standard, where net new financial assets had to literally be dug out of the ground with each passing day in order to support nominal spending and saving desires, then Cechetti’s assertion might hold up. It would also hold up if new money were delivered regularly to earth by alien cargo ships, or took on some other form of manna from heaven.

But the world is not on a gold standard. And new money is not dug out of the ground or delivered unto us by mysterious outsiders (even though some people think of central bankers that way).

New money is created out of thin air, like points on a scoreboard, as Warren Mosler likes to say.

It is created when the Treasury deficit spends, in which case the Federal Reserve (Fed) adds newly created dollars to recipients’ accounts.

Money is sometimes created out of Fed initiatives as well, but not under its normal operating procedures (though paying interest on reserves has now added that element). Rather, the Fed adds new dollars only when it does not exchange them for an existing, monetarily equivalent financial asset.

That last one is a crucially important qualification. The Fed rarely ever adds net financial assets to the system, even though we’ve been conditioned to believe that they do by the misunderstandings that mainstream macro perpetuates regarding the money (or non-interest-bearing debt) and interest-bearing debt of a sovereign government.

Almost all of the net additions to financial assets have come about via Treasury (i.e., fiscal) deficits, and that’s true for all developed countries (save the European Monetary Union, which took design suggestions from economists like Cechetti to heart and is now reaping the whirlwind).

From a purely technical standpoint, those funds hit recipients’ accounts without the Treasury having to borrow one thin dime. And despite the shrill emanations from deficit- and debt-phobes, that doesn’t harm our children or grandchildren any more than gold mines producing gold used to. (Though granted, those who were hapless inhabitants of resource-rich colonies, worked in mines, or were exposed to the residuals of cyanide-based and other extraction technologies were most definitely impacted by gold mine production. Fortunately, today’s additions to the money stock come at a much lower social cost.)

Armed with this small bit of knowledge, one doesn’t need a PhD in economics to know that lumping sovereign governments in with other levels of government, corporations, and households when studying the economic effects of debt is just plain stupid, and a waste of resources to boot.

But mark my words—Cechetti and/or his co-authors will jet-set and hobnob with these findings, and enjoy the benefits that come to those who protect what is sacred, no matter how wrong or harmful. Perhaps my criticism is beyond the pale, but as I’ve argued previously, people in positions of power and influence over policymakers have a sacred (yes, it’s that important) duty to act in the best interests of their fellow human beings. Like some others in their profession, Cechetti and his co-authors have committed gross negligence in publishing this self-serving piece of garbage that perpetuates the economic errors and toxic policy prescriptions of our day. And it’s not quite cricket that professional liability doesn’t apply to those who advise or work in governments.  

UPDATE 2011.09.07 – In far more gentlemanly fashion than me, Martin Wolf called the Reinhart-and-Rogoff-inspired debt meme into question in his Financial Times column yesterday (hat tip to Rob Parenteau):

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. All views and positions are subject to change without notice.

Is the Real Bubble in Corporate Profits?

A raging debate continues over whether gold or U.S. Treasuries are in a bubble. However, both sides are overlooking what appears to be a genuine bubble in corporate profits:

On a logarithmic scale, which gives a fairer view of a compounding variable like profits, the recovery and post-recession ascent don’t look nearly as “parabolic”:

However, it’s important to understand that profits are cyclical, as both charts show. And if today’s upward revisions to unit labor costs and continuation of negative productivity growth are any indication, corporate profits may well have peaked in 2011.

That means that equity analysts should be busy revising earnings forecasts downward in the weeks and months ahead, an activity presaged by recent credit market behavior and negative revisions to Wall Street strategists’ forecasts.

If this happens, then the surprisingly negative readings of late from “soft” data such as sentiment indicators should prove to be well-founded, with more “hard” data eventually confirming an economic downturn. Rising labor costs could work to offset this effect via higher household incomes, but whether it’s enough to keep economic growth in positive territory—especially if labor markets worsen in 2012—remains to be seen.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. All views and positions are subject to change without notice.

Initial Claims Still Relatively Tame

Despite another upward revision of 4,000 to the prior week’s seasonally adjusted data, initial claims for unemployment insurance remain relatively dovish. There are three main takeaways from the data, as shown in the chart below.

1. The downtrend in non-seasonally adjusted (NSA) claims remains intact, with NSA claims down more than 13% year-over-year.  
2. The seasonally adjusted trend is more of a mixed bag, down nearly 16% year-over-year, but 5% above its April low.
3. The next development to watch for is the mid-January peak in NSA claims. If it falls short of 550,000 or so, that will be a good sign. If it exceeds that level, it would indicate a bearish change in trend. (The timing would happen to coincide with the current recession prediction from one of our internal models). 

Although it hasn’t been fun over the last seven trading days, our outlook, as expressed following last week’s claims data, remains intact:

We continue to expect a bear market in risky assets between 2011 and 2013, and believe its severity will depend heavily on whether policymakers, especially in the European Monetary Union (EMU), Japan, UK, and U.S.  continue to pursue austerity measures (worse) or stop worrying and start to love sovereign deficits (better). Importantly, if a balanced budget amendment gets traction in the U.S. or EMU (the worst possible outcome), then all bets are off.

IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (SCM) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results. This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you. You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein. The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such. All views and positions are subject to change without notice.