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Overstated Job Growth & the Annual Establishment Survey Benchmarking

Thursday, January 31, 2008 | 08:30 PM

Tomorrow, we find out just how much the B/D adjustment overstated true job creation in 2007. Every year, the Annual CES benchmark revisions are published in the February NFP. It has all the makings of a potential disaster.

To quote the BLS:

Benchmark revisions reflect a re-anchoring of CES sample-based estimates to incorporate near universe counts of employment. These comprehensive counts of employment, or benchmarks, are derived primarily from employment counts reported on unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.

In other words, the hypothetical Birth Death adjustments should have no impact. 

Here's Floyd Norris' take on other, recent, BLS adjustments:

"The American economy appears to have created far fewer jobs this spring than has been reported so far, a new government report indicated yesterday. That could provide further impetus for the Federal Reserve to lower interest rates when it meets Dec. 11.

The report included a sharp downward revision of the government’s estimate of personal income growth for the second quarter. Because the changes were made as soon as better employment figures were available, the revisions made it seem likely that figures on job creation are also likely to be revised downward in coming months.

The new report concluded that personal income from wages and salaries grew at an annual rate of 1.6 percent in the second quarter, far below the 4.5 percent that had previously been estimated."

Note that the personal income data are based in part on BLS Establishment Survey. This income statistics revision implies that tomorrows benchmark revision of NFP may be quite substantial.


Tomorrow, we'll look into January's shocker of a B/D adjustment -- invariably negative due to holidays . . .


Estimates May Have Overstated Job Growth   
NYT, December 1, 2007

Technical information: Revisions to CES data for late sample reports, annual benchmarking, and other factors

Thursday, January 31, 2008 | 08:30 PM | Permalink | Comments (22) | TrackBack (0)
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Quote of the Day: Ludwig von Mises

Thursday, January 31, 2008 | 03:00 PM


"No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves."

-Ludwig von Mises



Thursday, January 31, 2008 | 03:00 PM | Permalink | Comments (63) | TrackBack (0)
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Influence Ripples + Tipping Points

Thursday, January 31, 2008 | 12:30 PM

I was doing some prep work for my panel appearance on next week's MoneyTech conference, when I came across David Armano (Critical Mass) and his neat illustration below.

He created this after reading Clive Thompson's "Un-Tipping Point."

David's supposition? While the Tipping point may be an overstatement, there are many different levels of influencers -- A-listers, Mainstream Media, ordinary bloggers -- but each can influence the other, as well as the general public.

Add to that George Soros' theory of Reflexivity

(1) Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.

(2) Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the equilibrium process's character is best considered in terms of probabilities.

(3) Investors' observation of and participation in the capital markets may at times influence valuations AND fundamental conditions or outcomes.

Back to David Armano: he visualizes the MSM/Blogosphere/Social Network Universe as shown below. I don't know how to visualize this (4th dimension? different color dotted lines?) but if we were to add Market Reflexivity into the illustration, we would then see another layer of how the market (5? or 1A, 2A, 3A, etc) influences the various parties (1, 2, 3, 4), and how they in term feedback into the market.

Visual Thinking 


graphic courtesy of  David Armano of the Logic + Emotion blog



Thursday, January 31, 2008 | 12:30 PM | Permalink | Comments (31) | TrackBack (0)
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Violence Erupts at Barron's

Thursday, January 31, 2008 | 11:30 AM

Below you will find the cover image art from the past two weeks Barron's. I cant wait to see what this week's version looks like!

Gee, you think the market is getting to these guys?



Soon, some half-assed group will be complaining about violence in the business media . . .

Thursday, January 31, 2008 | 11:30 AM | Permalink | Comments (17) | TrackBack (0)
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Media Appearance: Fox Business News

Thursday, January 31, 2008 | 08:45 AM
in Media

Fed_ratecut Good morning.

I have a date today with the lovely Alexis Glick, discussing the Fed, the markets reaction to it, and what it might mean for the future. Sometime between 9:00 am and 9:30, we'll have a short chat.

This is my first visit to Fox Business News.

It should be interesting . . .


UPDATE: January 31, 2008 9:58am

(Videos below)

That was interesting. The FBN crew seems to be rather aware of the economic problems -- much more so than my last visit.

My favorite part of doing these shows is not the 5 minutes I get to spit out to sentences, but rather, the people I bump into in the Green Room. Today, it was Charles Payne, and of Liz McDonald of Forbes.

Video: The Big Picture

Video: How Low Can the Fed Go?

Thursday, January 31, 2008 | 08:45 AM | Permalink | Comments (28) | TrackBack (0)
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Financial Sector: More Damage to Come

Thursday, January 31, 2008 | 06:37 AM

Someone needs to inform the SEC that their job is to protect shareholders -- not wayward corporate management.

For an SEC commission staff to even hint that its okay to move sub-prime junk off balance sheets is not only wrong -- its outside of their jurisdiction. That's FASB's purview, not the SEC. The goal should be accurate, transparent accounting -- not sleight of hand and misdirection.

Allowing this kind of misleading reportage is simply unacceptable gimmickry from the regulatory body that is SUPPOSED TO STOP this sort of crap:

"Just when it seemed as if the mortgage mess had hit a new low, now comes this: The Securities and Exchange Commission's staff has granted the subprime-lending industry a huge exemption from the normal rules for off-balance- sheet accounting.

In effect, the move will let home lenders keep their balance sheets looking much smaller and less leveraged, even while the off-the-books loans they made get a makeover.

For months, banking regulators and politicians have been pressing lenders to freeze the interest rates on many adjustable-rate subprime mortgages that are scheduled to reset soon at higher interest rates. The idea is to minimize defaults and foreclosures.

While that's a noble objective, all good deeds must be accounted for, and that's been a sticking point for many banks. Through September, just 3.5 percent of subprime mortgages that reset in the first eight months of 2007 had been modified, according to Moody's Investors Service. Even lenders inclined to help don't want to hurt their financial results. And now they might not have to, thanks to a Jan. 8 letter from the SEC's chief accountant, Conrad Hewitt. . . .

The SEC and the FASB at least should acknowledge this subterfuge for what it is."

Strong words -- but it raises the question: Why is the SEC allowing investors to be misled? Aren't they merely delaying the eventual truth coming out? Why get in the way of that process?

C_ubs_mer Today's Heard on the Street column notes that some of the bigger banks have been dribbling out the write downs -- and there is very likely more to come:

"After racking up more than $100 billion in mortgage-related losses in recent months, banks and their investors had hoped they were out of the woods. They aren't.

UBS AG's warning yesterday that its 2007 write-downs would be $4 billion higher than it predicted last month signaled that further pain may lie ahead for Wall Street banks still vulnerable to the U.S. housing sector's strife."

And that's before we get to the issue of Counter Party Risk, and  the losses that will result if Ambac (ABK) and MBIA don't make good on their derivative trades. Those losses potewntially range form $50 Billion to $150 Billion.

Me? I prefer to rip the band aid off all at once. I find Death by 1000 cuts totally unappealing . . .


Subprime Lenders Get Big Accounting Break at SEC
Jonathan Weil
Bloomberg, Jan. 30 2008

More Subprime Pain in Store
UBS Write-Downs, Insurer Downgrades Point to More Unraveling
January 31, 2008; Page C2

Banks May Write Down $70 Billion, Oppenheimer Says    
Adam Haigh and Eric Martin
Bloomberg, Jan. 30 2008

Thursday, January 31, 2008 | 06:37 AM | Permalink | Comments (52) | TrackBack (0)
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Whiner of First Resort

Thursday, January 31, 2008 | 04:00 AM

Harvard's Ricardo Hausmann has some tough comments for the US politicians and Fed: Stop whining and take your medicine like a man:

"The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis. Interest rates should be slashed quickly and $150bn put into taxpayers’ pockets by April at the latest, they say. The Fed cut by another half-point on Wednesday.

The goal seems to be to avoid a 2008 recession at all costs. As Larry Summers, former Treasury secretary, put it, failure to act would make Main Street pay for the sins of Wall Street.

It is easy to lose sight of the overall picture. Main Street consumers have overspent and over-borrowed and are unable to meet their obligations. The fact that households may have so behaved because they were enticed by “teaser loans” does not change the facts; it only assigns blame. Consumption has been above sustainable levels and needs to adjust down, whatever view one has about the responsibility of adults over their financial decisions . . . 

Hence, macroeconomic policy should not be based on a panicky attempt to avoid a 2008 recession at all costs but on a forward-looking strategy that achieves the needed reduction in consumption at the lowest cost in terms of the stable growth. This is not achieved by giving US households a $1,000 cheque by April, a trick that no macro economic textbook would argue is particularly effective. If there is fiscal room – a big if, given the weak structural position of the US government and its likely cyclical worsening – it would be better spent in accelerating investments in plant and equipment via accelerated depreciation schemes, to improve the capacity of the economy to keep on growing after the crisis."


Go read the entire piece . . .


Stop behaving as whiner of first resort
Ricardo Hausmann
Financial Times, January 30 2008 19:36

Thursday, January 31, 2008 | 04:00 AM | Permalink | Comments (19) | TrackBack (0)
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Open Thread: How About That Fade . . . ?

Wednesday, January 30, 2008 | 07:00 PM


Mr. Market got the 50 bps he wanted -- and after a brief 250 point run up in the Dow, gave just about all of it back.

The excuse du jour was that its the traders fault blamed a Fitch downgrade of FGIC, or WIlliam Ackman's comments that MBIA and Ambac each had much bigger than reported losses. Maybe it was the report that S&P may lower or cut $534 billion of subprime debt.

Regardless, the gains were all spit up by the bell.

Question:  Will markets rally on this cut, or is the Fed pushing on a string?  Y'all discuss this, while I go out for a few drinks. (play nice)


What say ye?

Wednesday, January 30, 2008 | 07:00 PM | Permalink | Comments (77) | TrackBack (0)
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50 Bps and a Song . . .

Wednesday, January 30, 2008 | 02:17 PM

FOMC statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households.  Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity.  However, downside risks to growth remain.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.  Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.


Wednesday, January 30, 2008 | 02:17 PM | Permalink | Comments (103) | TrackBack (0)
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Q4 GDP: El Stinko!

Wednesday, January 30, 2008 | 10:17 AM

Q4_07_wsj_gdp The Advance GDP report was released today, and it came in at half of the 1.2% consensus: 0.6%.  This is a measure of Real growth, and is supposed to be adjusted for inflation.

A few highlights of the data:

• Consumption slowed to 2% from 2.8% in Q3; I suspect that only partly reflects real growth, meaning its partly inflated by price rises;

• U.S. exports continue to increase: Up 3.9% for the Q. Overseas trade added nearly half a point to Q4 GDP;

• Overall, the US economy grew 2.2% for the full year 2007 -- the slowest since 2002 (1.6%)

• Inventory  build, which drove the 4.9% Q3 data, was totally absent. It sliced 1.25% from GDP, after adding nearly a point in Q3.

• Inflation remains sticky: Price index for personal consumption expenditures rose by 3.9% in Q4 after a tepid 1.8% in Q3. This was  the second highest PCE # since 2001

• Q4 business spending rose 7.5%. Investment in structures went 15.8% higher (which seems an awful lot to me); Equipment/software purchases rose by 3.8%.

• Biz spending decelerated in the fourth quarter from Q3's hotter 9.3%.

None of this is a surprise to us, but I have two takeaways:

1) The Fed is likely to cut 50 bps today.

2) If we do, as my odds suggest, have an official recession, it likely hasn't started yet,  at least according to the traditional measure: Two consecutive quarters of contracting GDP.

However, there are other ways to measure a recession. As to the official definition of what a recession is, consider Jeff Saut's comments earlier this week:

"The most accurate definition is proffered by the National Bureau of Economic Research (NBER) that frames it this way: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale – retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” Rare indeed, as seen in the recession charts we included in last week’s report and have attached again this week.

By studying the charts, one observes that until recently recessions have been a normal conclusion to the business cycle. As seen, however, recently this has not been the case. In past missives we have railed at the central banks, as well as the politicians, for their continuing efforts to prevent the normal business cycle from playing. They did it again last week when the Federal Reserve panicked and cut interest rates by 75 basis points with a concurrent $150 billion economic stimulus package from the politicos. And if this is a typical recession, such maneuvers will likely ameliorate the downturn. But, what if this isn’t “your father’s typical recession?”

As always, thats smart stuff from Jeff.

Q4 2007 GDP


graphic courtesy of Barron's econoday

Note that this is the first of 3 GDP releases, and may subsequently be revised up or down.


BEA/Commerce Department, January 30, 2008

“Not your father’s typical recession?!”
Raymond James & Associates,, January 28, 2008

U.S. Economy Expanded 0.6 Percent, Less Than Forecast
Shobhana Chandra
Bloomberg, Jan. 30 2008

GDP Growth Slowed in 4th Quarter, As Housing Continues Its Drag
WSJ, January 30, 2008 10:05 a.m.

Wednesday, January 30, 2008 | 10:17 AM | Permalink | Comments (54) | TrackBack (0)
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