Edward Harrison

Labor Market Still Grim, But the Worst Is Over

I think you're on to me, Dialectical. I am the most bullish bear. I try to call it as I see it. Just because I have a particular view doesn't mean I should twist the data to fit that view.

My bearishness stems from my fundamental belief that economic policy is creating unsustainable debt-fueled growth. But it is not clear when this unsustainability will be made manifest once and for all. In the meantime, I take bull markets and cyclical upturns at face value, cognizant of the underpinnings in regards to debt and leverage.


On Nov 08 05:25 PM Dialectical Materialist wrote:

> I can't figure out if you are the most bearish sounding bull I have
> read or the bullest bear. You have a tendency to paint a really
> ugly picture of the economy and then say that the recovery is moving
> forward. And the odd thing is that I mostly agree with you. I think
> that both the rampant recovery folks and the apocalyptic crash camp
> are probably both wrong in the long run.
>
> Having said that, I'm not sure I agree the "recovery" will be "sustained"
> in the short run. We are a long ways away from gaining traction
> due to the number of unemployed and its impact on consumer spending.
> So while I think we'll pull out of this, I think we are in for a
> very long period of sluggishness.

The Imminent Collapse of Municipal Bonds

You make some fair points. Obviously, one reason Munis are attractive has to do with the tax free status for many investors and that gives it a yield pickup over Treasuries.

The question you ask which is most interesting has to do with the seniority of the bonds and the security of the income stream to investors. general obligation bonds are obviously of more dubious security than bonds funded by specific income streams. I would expect there to be a dichotomy in performance based on this factor.


On Nov 05 08:33 AM GlobalTrekker wrote:

> I guess I am starting to become the contrarian voice in the never
> ending tirades against public institutions and their funding. But
> I believe the intellectual thrust of this article is a tad facile,
> preaching to the choir, as it were, and ignores some distinct features
> of the municipal bond market. Municipal markets may not be able
> to print money, but they have many tools at their disposal to satisfy
> bond holders.
>
> Interest payments are usually very senior in the states' hierarchy,
> and revenue bonds continue to collect tolls, fuel taxes, and utility
> surcharges. These have fallen little. CA and others have risen
> the sales tax 1%, and that's a lot of money in the world's 8th largest
> economy.
>
> Many states actually are cutting back services, so much of what the
> old saws say in this article is untrue.
>
> Also, comparing expenses in 1955 versus nearly 2010 is really quite
> a mental stretch. This is not the same nation as 55 years ago, despite
> what perhaps many readers might wish.
>
> It's always a little surprising to me that people claim to be so
> patriotic but deride all those who work for the nation. Do you really
> have so little regard for the value and services of our nation's
> military, teachers, forest fire fighters, meat inspectors, police,
> firemen, park rangers, state university professors, flight controllers?
>
>
> Factually, the article also falls a bit short: "the investor gets
> only a slightly better return than in Treasuries." Uhm, on what
> planet have you been residing? My Vanguard muni funds have been
> yielding 4.3%, a double-tax-free equivalence of nearly 8%, not counting
> the huge appreciation I've enjoyed. The triple-A rating may be suspect,
> but I'll take my chances. In the CEF muni world I have funds paying
> out over 10% in tax equivalent yields, again, ignoring the far larger
> appreciation received since purchase in the spring.
>
> In all, the muni market is in trouble, like most of the economy,
> but the writers protest too much. The states comprise America, and
> America is filled with potential, creativity, and vigor -- throughout,
> not just in a few Silicon Valley start-ups.

The Fed and Executive Branch's Creeping Power Grab

It is completely relevant. For a number of years now, the executive branch has been trying to usurp power from the legislature. As I recall, declaring war falls to the Congress. Yet, for 50+ years we have gone to war without a formal declaration.

The U.S. is becoming an empire and it has much to do with executive power creep. The 9/11 power grab is very much relevant to remind people that it is not a new phenomenon.

On Nov 04 08:39 AM casey00001 wrote:

> Why even mention Bush at all? This is a blatant Obama power grab.
> Once again Blame it on Bush has no relevance.

Japan: The Problem Is Taxes

Chap, I'm glad you noticed the contrast to my post. This is my colleague Marshall talking, not me! He and I see this issue differently (and Seeking Alpha reproduces most of the posts on my site whether by me, Marshall or guest authors).

Also, AEP is a monetarist I believe and he believes in QE. Marshall sees fiscal policy as more effective and QE as ineffective. I understand you are more in AEP's camp. I think AEP is wrong here on QE because the demand for credit is lacking in Japan and QE just inflates asset prices and produces a carry trade in conjunction with low nominal rates. This is what is happening now in the US as well.


On Nov 04 07:27 AM chap08 wrote:

> Edward, I'm confused, or maybe you're confused. This article seems
> to be by your colleague, but appears under your name without comment,
> so I take it to represent your views.
>
> The article appears to advocate monetization of government spending.
> That is the only way that "Debt is serviced by data entries". If
> Japan are servicing debts through "debits and credits to securities
> accounts and transactions accounts at the BOJ" then that is monetization.
> Otherwise debt has to be serviced by real interest payments to 3rd
> parties. If you are making interest payments to 3rd parties, then
> the debt trap risk that Evans Pritchard discussed is very real. It
> is not "ludicrous".
>
> So, the article advocates monetization of spending. But yesterday,
> in your article on Japan, you said that you were against QE. I am
> curious to know how you could be against QE and yet support monetized
> spending. Although they have different objectives, in some senses,
> QE is just temporary monetization of spending. Please clear up my,
> or possibly your, confusion.

Japan's Cautionary Tale: Stimulus Without Reform Leads to Policy Cul de Sac

Chap, you are right, I should separate the two. The reason I am lumping them together is because they are both designed to reflate the economy and I have growing scepticism about the political process behind fiscal stimulus.

QE doesn't work - flat out. I am more supportive of fiscal stimulus. The question I have is whether fiscal stimulus is used as an excuse to not reform or reduce overcapacity as it has been in Japan.


On Nov 03 06:55 AM chap08 wrote:

> Edward, I think that you should make a clear distinction between
> fiscal and monetary stimulus. The big difference between us and Japan
> is monetary policy. This is fundamental. As Evans Pritchard says
> of Japan, "QE was too little, too late". They did nothing on monetary
> policy for over a decade and concentrated wholly on fiscal stimulus.
> Whatever else you say about the Fed, you can't say that they have
> ignored monetary stimulus.
>
> So when you say "What this illustrates is that stimulus cannot be
> seen as a cure-all in an economy which lacks in domestic demand or
> in which debt burdens are high", you are not comparing like with
> like. You might still be right, but Japan provides you with no supporting
> evidence. Indeed, what the evidence does show is that, after Japan
> introduced QE in 2001, their economy was transformed.
>
> Monetary stimulus is not a free lunch either of course, but I think
> that you are wrong to worry about the impact on private sector savings.
> What exactly are you worried about? Is it consumer debt? Well, for
> those with debt, there is plenty of incentive for this to be paid
> down, without increased savings rates. Increased rates only make
> it harder for them to achieve it. Is it the impact on investment?
> Fear not, there remains an excess of bank reserves and other funds
> to support any viable investment. Remember that the last decade has
> been a story of both low savings rates and massive (mal)investment.
>
>
> I agree with a gloomy outlook for Japan, and for us, but the two
> are not the same and are being given different stimulus.

Sustainable Recovery with 530,000 Weekly Claims?

It's a bit of apples to oranges given how much more heavily geared the economy was to manufacturing. That meant heavy layoffs due to the inventory cycle. Moreover, what you have to look at is net jobs i.e. Non-Farm Payrolls (NFPs). I have posted often that it is the lack of hiring which makes a 500K or 530K number deceptively high.

What I have said before is that we want to see claims declining more rapidly so that the benefit of stimulus and cyclical factors will still be boosting the economy before the employment situation takes its toll and leads to a double dip.

I expect us to shed jobs into Q1, so that is consistent with 1983. Beyond that and you're in murky water.

On Oct 30 10:29 AM thiazole wrote:

> The official end of the 1982 recession was Nov 1982. And it was
> obviously sustainable since we saw very strong growth afterward for
> most of the next 9 years. So if you are correct, then that SMALLER
> labor pool back then would be even MORE devistated by these kinds
> of numbers. Yet, those kinds of number persisted well into 1983
> as can be seen below (data obtained from research.stlouisfed.or...).
>
>
> 1982-11-06 626250
> 1982-11-13 612000
> 1982-11-20 600500
> 1982-11-27 594250
> 1982-12-04 586250
> 1982-12-11 569750
> 1982-12-18 554500
> 1982-12-25 523750
> 1983-01-01 518000
> 1983-01-08 512250
> 1983-01-15 503000
> 1983-01-22 500500
> 1983-01-29 492750
> 1983-02-05 490500
> 1983-02-12 492250
> 1983-02-19 494250
> 1983-02-26 488750
> 1983-03-05 487250
> 1983-03-12 484500
> 1983-03-19 480250
> 1983-03-26 480250
> 1983-04-02 479250
> 1983-04-09 484500
> 1983-04-16 495750
> 1983-04-23 497500
> 1983-04-30 497250
> 1983-05-07 496750
> 1983-05-14 484000

Expect Structurally High Unemployment to Continue; Risk of Recessionary Lapse

Yes! The purpose of stimulus is increasing aggregate demand. The best way to do that is to employ people or put more money in their pocket - not through trickle down economics and the invisible had, but through measures that create jobs directly: works programs, tax cuts.

More of that and less of the other, please.


On Oct 23 09:09 AM Old Trader wrote:

> Given that small business is said to account for between 50% to 65%
> of new jobs, depending at which study one uses, it might have been
> nice (as well as more effective), to direct some of the stimulus
> money to such programs as the SBA, rather than supporting "too big
> to fail" banks, and industrial dinosaurs such as GM and Chrysler.

Why Mortgages Aren’t Modified and What a Ruling Stopping Foreclosures Means

One thing I should note is that the Appeals court decision specifically said this is NOT a ruling on whether MERS can represent the mortgagee:

"We do not attempt to comprehensively determine all of the rights or duties of MERS as a nominee mortgagee."

That means the decision had a more narrow focus as to whether MERS was a 'necessary party' in this particular case. The finding is that it was not. The Kanas Supreme court agreed that MERS was not 'contingently necessary.' They went further in concluding that the fact that MERS neither possessed the promissory note or had authority to assign it means it cannot file suit.

"indirect monetary benefits do not establish protection under the Fourteenth Amendment"

However, because this is NOT a comprehensive judgment as to MERS' role as nominee, clarification is needed. That's why I think this is going to the Supreme Court.

Why Mortgages Aren’t Modified and What a Ruling Stopping Foreclosures Means

The question this now brings up is what is MERS' legal right to act on behalf of mortgage holders to enforce foreclosure. If MERS is limited, as this verdict suggests it is, then any homeowner could contest a filing. This gives them the right to continue in the foreclosed property until other means to force foreclosure are found by some interested party.

Ultimately that is good for the homeowner and bad for the investors/banks holding the securities linked to these assets.

I would expect this case to be contested.

U.K. PM Brown Rejects Call to Break Up Big Banks

I find it irritating as well. The title on my blog was:

PM Brown rejects BoE Head King’s call for breaking up big banks
www.creditwritedowns.c...

Somehow this gets changed to something with England in it. Obviously someone doesn't know their geography (or history).

Apologies.


On Oct 22 09:40 AM CraigB wrote:

> Good article but I think you mean UK in the title rather than England.
> Minor point.. but mildly irritating for the non-English Brits amoungst
> us.

Hands Off Goldman Bonuses

You bring up a good point about the agency problem in large corporations. When Wall Street firms were partnerships, they were more risk averse in my opinion. The fact that large corporations are run by managers (who have some stake) instead of owners sets up a conflict of interest that leads to problems.

That is an issue that definitely needs discussion, especially in regards to shareholders' rights and compensation practices.


On Oct 21 04:31 AM Jasper M wrote:

> This situation reminds me of some WW2 graffiti, from the Netherlands,
> when it was occupied by the Nazis, that appeared when they first
> started rounding up the local Jewish population. The original is
> likely too politically incorrect to print here, but a current version
> might be translated as -
> "Keep your dirty hands off those dirty Goldman bonuses!"
>
> You don't have to approve of something to recognize that it has a
> right to exist, and that contravening that right is, ultimately,
> a threat to all sorts of other things we DO approve of.

Why Greed Is Not Good

My understanding is that the SS adjustment would have been down, not up because of deflation. SS is adjusted via the CPI which right now is negative. So, you should look at the no adjustment as a net win I think.


On Oct 16 05:49 AM Leftfield wrote:

> This is the day after it was announced there would be no SS inflation
> adjustment, although it is also paired with circuslike issuance of
> $250, one-time Obamachecks to oldfolks, which comes 2 days after
> Bloomberg radio announced record Wall St. bonuses this year, the
> day after Colorado announced minimum wage reduction.
> Greed has been good for the sociopaths who have won the game by any
> means necessary and will obviously stop at nothing. Not so good for
> Main St. where real pay has declined for 36 years, as the article
> mentions, to which I might add, stupid trade policies have been a
> major contributor.
> SS is no longer the third rail to Wall St. kleptocrats and their
> Washington stooges who are above concerns by mere voters over blatant
> wealth transfer to the wealthy, now.

More on Greed, Regulation, Lehman, The Financial Industry

Good point about definition. I will take that up directly in a post on Goldman. My answer to that here is that I don't want the government to define what is excessive and what is not excessive in finance, sports, music, television or anywhere else.

This is one reason I take a 'neutral' stance on the greed issue. My definition of excess may be vastly different than someone else's. I will say in this post on Goldman that there are other ways to attack so-called excessive compensation.


On Oct 16 06:55 AM chap08 wrote:

> Edward, I agree with you and what Roger Bootle had to say in your
> previous post. I disagree with the Austrians. As Bootle said:
>
> "These people are dangerous. The idea of letting the financial system
> implode and then waiting for the market to bring spontaneous, healthy
> revival out of the wreckage might read well on the pages of a book,
> but in the real world it would bring human misery on a gigantic scale.
> In today's society, people simply will not tolerate it. If that is
> what the market system is about then they will have none of it; and
> rightly so."
>
> Of course "people ... having none of it" is what has happened a number
> of times in history. It's called socialist, or national socialist
> revolution. I'd prefer that didn't happen here. As you said "a perfectly
> free market is a fiction". It is a fiction from the pages of the
> same book that Bootle was talking about. Consequently, we need regulation.
>
>
> As for greed, I believe that you need to do more thinking. I happen
> to agree that "greed is not good" but the statement is NOT self evident.
> The problem lies in defining "excessive", as in "excessive wealth".
> What is excessive? What is too much? Does Warren Buffett have more
> wealth than he needs? Of course he does. So why don't people think
> of him as greedy? Is America greedy - do we have an excess of material
> wealth? Does the rest of the world get by on less? Do our system
> and society promote greed but call it something else? I'm not sure
> that there are definitive answers.

Jobless Claims Down to 514,000; Two Things to Look for Now

Basically, there is so-called frictional unemployment meaning there is always hiring and firing in an economy of 300 million. The net hiring over firing gives us job gains. Most economists put a 400-450k weekly level as the level where enough hirings are taking place to show net job gains. That would mean a weekly loss of 400-450K jobs but also 400-450K in new hires as well.


On Oct 15 07:33 PM Dialectical Materialist wrote:

> Can you explain why we would see job gains if initial claims fall
> to 400k? I am sure you have this worked out, but I just can't see
> it. Continuing claims would have to fall, of course (and not just
> because they ran out of unemployment). What are you assuming would
> be the level of weekly job creation if we get job gains at 400k new
> claims? To my mind (and I could be way off base), we won't get a
> lot of new jobs being added in such a slow economy, so 400k new claims
> still sounds like a degrading employment picture to me, albeit at
> a slower pace.

Jobless Claims Down to 514,000; Two Things to Look for Now

I come to similar conclusions. In August, I posted similar statistics to the ones you site:

www.creditwritedowns.c...

That doesn't mean past is prologue. We still have to worry about the potential for a reversal.


On Oct 15 11:49 AM CautiousInvestor wrote:

> Edward, during the past two recessions and the ensuing recoveries
> initial claims fell to the 400k to 470k range within twelve weeks
> of the trough. Confident that we are well past the trough, these
> stubbornly high claims substantiate the nature of this recovery and
> the likelihood employment will remain weak for the foreseeable future.