The Non-Farm Payrolls November Boogie Woogie

It has become popular of late to pay attention to the Birth Death Model from the Bureau of Labor Statistics. Also known as the imaginary jobs number, it is the plug which BLS uses to account for jobs created by new businesses that are not captured by the normal reporting system. There is a method to this madness, but we'll leave that for another day. The good news is that the number has become fairly predictable, as shown by our first chart, which tracks the numbers over the past four years. This month the number willl be a manageable 20,000 jobs added, or so. This is a smallish number, and since it falls in a month where a huge number of jobs are added and seasonally adjusted lower, and since the number is added BEFORE the seasonal adjustment, we can safely ignore it.

(By the way you can click on the charts if you wish to read them, or just for fun if you don't care about details as you are on a managerial or government career path.)

The second chart is a comparison of the actual net jobs in red, and the seasonally-adjusted or headline number in blue. Please note that there may be a HUGE difference between the two. This itself is not surprising because employment is subject to significant seasonal variations, especially in some employment positions. The BLS statisticians use seasonal adjustment formulas to take the raw number as reported to them by industry, and develop the adjusted, headline number to which Wall Street overreacts. These numbers are further adjusted and revised, sometimes signficantly, a year or more after the original headline, although the first three months see the largest adjustments. The latest BLS trick seems to be to come in with an outlier number in the current month, but adjust the prior months higher or lower. Its a statistics thing. Statisticians can make accountants look intractable when it comes to pleasing the boss, especially with this kind of revisionist latitude.

Yes, you say, but what's your CALL there partner? Because we all don't care what's happening, we just want the over under, the hook, the net-net, y'know what we mean?

Having had some experience with trending large, seasonally variable data in private industry, and often having to look behind the forecasts in order to do the hairy knuckle work of providing capacity, we would like to stress that the punchline from the above is that acting on a single month's data is pretty much reckless and irresponsible, and only encouraged by marketing types, including those that work for government and Wall Street. The headline November Jobs number can easily be justified at 200,000 jobs added, with no help whatsoever from the Birth Death model, simply because the huge latitude in the seasonal adjustment, and the sloppiness of the current month data. On the other hand, (economic codeword for shit happens) that's bush league data massaging. A much more elegant approach would be to come in with the current number of about 90,000, but to adjust the prior month number higher. This is called planning ahead for the next time around. No one cares after two months anyway. Stock speculators have the memory span of a goldfish, which is why they never seems to be bored as they swirl around the bowl.

As all practical people understand, the real story is in the trend. Its the averaged trend that provides the most realistic picture, and helps you decide whether to spend your time polishing that provisioning plan, or to start polishing that resume and making calls to executive search firms. In this case, this chart of the Twelve Month Moving Average is the money chart, and the message is clear as crystal. The economy is in a slump, not a recovery, and the jobs trend is not only not good, technically its pretty damn scary (time to polish up the resume and get 'er done in private industry, which seems to be a trend in the Bush Administration). We won't bother with a forecast for the unemployment statistic, the percent of motivated workers actively seeking jobs, because its a slightly different set of useless data in which the unemployed workers get ghosted after they become inconvenient for reporting purposes.

A good analogy here is when tech companies write down inventories, or take reserves from current sales. You just know the respective realities are going to get resurrected on some future income statement and beat-by-a-penny earnings release. At some point the US is going to have hell to pay for how we have run this business called our country, but the goal is to set that day well into the future, at least until after the next election.

P.S. Kudos to Hank and his crew for the finely executed rally-for-no-reason today. It made our confidence swell like Bill Clinton's willy at a Girl Scout convention. The spokesmodels on the Orwell Channel got the message that Wall Street Likes the Hope Now Pay Later Mortgage Plan. On a happier note, there is a consensus among those that have actually examined the plan that it does less than a presidential visit to New Orleans during the Hurricane Katrina aftermath, thanking the Lord for small favours received.

Professor Marvel Never Guesses. He Knows!

Is it likely that a fresh look at the economic data had Ben Bernanke and Don Kohn doing a sharp about face on the balance of risks to the economy? Given the speed with which their change in policy was communicated, catching a fellow Fed head flatfooted in spouting the party line the day before, it seems more probable that something on the order of one or more major players started to spew smoke from the cracks in their mark to moonbeams calculations, and Hank made that call to the Professor.

We obviously don't know, but suspect this revelation was connected with a subprime contagion affecting the derivatives markets. If derivatives are Weapons of Mass Destruction, then the Credit Default Swaps market is the H Bomb. Credit Default Swaps, if they start unwinding, can develop a chain reaction that will take out a fair chunk of the real economy, in addition to two or three big name corporations.

Subprime had the Fed a little concerned; CDS has them staring into the abyss and shitting their pants. Aren't you glad we have men so familiar with the mistakes the Fed made in 1929 to 1932 with regard to Fed Policy? We wish they had at least audited the courses covering the Fed's mistakes form 1921 to 1929. Sure, they are the experts; we're just concerned that they may be preparing to fight the last war.

Citizen Kohn

US equity markets just had the largest two day rally in the last four years. The trigger for this rally, besides the happy coincidence of a surfeit of hot money, lots of short sellers, and end of month motivation was an interesting speech by the Federal Reserve vice-chairman Don Kohn to the Council on Foreign Relations this morning.

As you may recall, Mr. Kohn is the second most powerful member of the board, and only he and the chairman, Mr. Bernanke, are allowed to make speeches that may signal changes in Fed policy. What you may not know is that he is also the consummate Fed long term insider:

Dr. Kohn is a veteran of the Federal Reserve System. Before becoming a member of the Board, he served on its staff as Adviser to the Board for Monetary Policy (2001-02), Secretary of the Federal Open Market Committee (1987-2002), Director of the Division of Monetary Affairs (1987-2001), and Deputy Staff Director for Monetary and Financial Policy (1983-87). He also held several positions in the Board's Division of Research and Statistics: Associate Director (1981-83), Chief of Capital Markets (1978-81), and Economist (1975-78). Dr. Kohn began his career as a Financial Economist at the Federal Reserve Bank of Kansas City (1970-75).

There is a consensus among informed observers that Vice Chair Kohn signaled, contrary to the pronouncements of several lesser Fed lights in recent days, a fresh persuasion of the Fed to cut the Fed Funds rate this December 11, because of a deterioration in the capital markets and the real economy.

Is that all there is? A likely 25 basis point cut in the target Fed funds rate in December triggers one of the most powerful rallies in US equities this decade? Is a simple 25 basis point cut good for all that?

Well, we don't think as naively and simply as all that. Its the end of month, there was about a solid two days of float on short side at daily volumes, and the Fed and Treasury have been spooning out liquidity like K Street lobbyists handing out donations during election season.

Still, this is an exceptionally powerful rally. There has been no real 'good news' excepting a tsunami of excess dollars may be coming back at us from overseas, as witnessed by Abu Dhabi doing something more useful with their dollar reserves than letting them depreciate.

No. Its got to be more than that. So we did the unlikely thing among most investors and financial pundits these days, and in addition to sound bytes and commentary from the Babel-Babes of Bubblevision, we looked for a copy of the text of Mr. Kohn's speech, and actually read it.

Here to us seems to be a somewhat overlooked portion of his speech, in terms of what commentary we have seen so far. From the text of his speech:

Moral Hazard

Central banks seek to promote financial stability while avoiding the creation of moral hazard. People should bear the consequences of their decisions about lending, borrowing, and managing their portfolios, both when those decisions turn out to be wise and when they turn out to be ill advised. At the same time, however, in my view, when the decisions do go poorly, innocent bystanders should not have to bear the cost.

In general, I think those dual objectives--promoting financial stability and avoiding the creation of moral hazard--are best reconciled by central banks' focusing on the macroeconomic objectives of price stability and maximum employment. Asset prices will eventually find levels consistent with the economy producing at its potential, consumer prices remaining stable, and interest rates reflecting productivity and thrift.

Such a strategy would not forestall the correction of asset prices that are out of line with fundamentals or prevent investors from sustaining significant losses. Losses were evident early in this decade in the case of many high-tech stocks, and they are in store for houses purchased at unsustainable prices and for mortgages made on the assumption that house prices would rise indefinitely.

To be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment. But these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the population a lesson."

THAT was the heart of the signal, the change in policy that Mr. Kohn was embracing on behalf of the Fed. Moral hazard is not an issue when bailing out the banks of Wall Street, for the simple reason that innocent bystanders might be harmed in the process. A noble sentiment indeed. The banks, however repugnant, depraved, and venal they might become, are just too big to fail.

"But these people are still bearing the costs of their decisions..."

What costs? We won't go into a lengthy diatribe on the huge numbers of insiders who are most assuredly NOT being hurt one little bit in this wild West sideshow of a financial market, light on regulation and long on collusion. In fact we are absolutely appalled at what Wall Street has become. And we are sure that, given a little input from some of the innocent public on the chat boards we frequent, suitable punishments for that small segment of the population which harms us can easily be devised without holding the entire economy hostage.

What Mr. Kohn seems to be proposing is that, once again, as Mr. Greenspan before him so often concluded, the risk and penalties to be sustained by malinvestment and corruption are best handled by spreading them out from the few to the many, from the insiders to the public, from those who produce nothing to the broader public, which struggles to just keep going forward as best they can, in one of the great transfers of wealth in modern history.

Won't work you say? Well, of course it won't work!

The punch line, and what so few realize, is that the bankers are not trying to fix anything. The fixes were put in place after the Crash of 1929 and the Great Depression. Fixes, such as the Glass-Steagall Act. They are just trying to prolong the games as it is, which the Wall Street banking community paid good money to get, spending hundreds of millions of dollars in lobbying money to create over the period of almost twenty years.

Frontline: The Wall Street Fix - The Long Demise of Glass-Steagall

A relatively small percentage of the population can twist and corrupt the financial system, destroying the lives of hundreds of thousands of their fellow citizens, because its profitable, and because they simply do not care about the damage they do to others. The dirty little secret is that capitalism, like any other form of social structure, requires policing, regulation, laws, and enforcement to prevent the predations of sociopaths and con men, no matter what weapons they may choose to employ.

Text of Vice-chairman Kohn's Address to the Council on Foreign Relations Nov. 28, 2007