The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

…than to open it and remove all doubt.

Invictus here.  I usually know exactly where I’m going when I sit down to write a post — some numbers tell me a story that I think would be interesting to be share.

Not so this time.

I’ve wondered often and aloud what it takes these days for an individual to be discredited.  The answer seems to be that it is simply not possible.  Being wrong — about anything and everything — no longer carries any consequences whatsoever.  On many levels, it’s quite remarkable.  As it relates to economics, stories about hyperinflation, sky-high interest rates, rampant government spending, expansionary austerity, an economic plan that will get the unemployment rate to 2.8%, etc., etc., have been making (or made) the rounds for the past few years.  Yet the purveyors of these fictions lose no credibility and somehow maintain their status as experts, continuing to appear on business television shows and on op-ed pages nationwide. (Post-market on Friday, December 23, Bloomberg Television trotted out Harry “Roaring 2000′s” Dent, for example.  How’d that call work out?)  Paul Krugman has railed about all this countless times, most recently here, and he has a very valid point.

But Rush Limbaugh has now taken it all to a new level by demonstrating a mind-numbing cluelessness about one of the most fundamental of our employment statistics, the unemployment rate.  Mr. Limbaugh did not just twist, distort, or massage statistics (though he most certainly did do those things), he displayed an abject ignorance of what the BLS measures and how it is measured.

In an error-laden, wince-inducing screed that was somewhat painful to read, Rush explains to his Dittoheads that the government manipulates its economic releases to make them administration-friendly.  (Of course, that being the case, he does not tell us why, three years into the current administration, the unemployment rate is not a second-term-insuring 5 percent instead of 8.6, but never mind that.)

In the hope of maintaining my sanity, I’ll confine myself to the most egregious assertion in Rush’s comedy of errors (emphasis mine):

What was the number of jobs created [in November]?  It’s 120,000 jobs.  It’s 120, 126,000, whatever. That’s in the ballpark.  That number of jobs created can lower unemployment rate 0.4%, almost one half of a percent? Creating 120,000 new jobs can do that?  [...]

A mere 126,000 job increase drops unemployment rate almost one half of a percentage point.

If you’re thinking, “Hey, Invictus, the payroll number comes from the Establishment Survey and the Unemployment Rate from the Household Survey,” congratulations, you know more about how BLS does its job than Rush Limbaugh.  Try as I might to think of something funny to say about this, words escape me.  What is there to say?  Millions (tens of millions?) of people listen to this man, and in all likelihood believe what he said, despite the fact that his claim is wholly, totally without any merit whatsoever because he conflated the two surveys to simply fabricate a narrative — the narrative being that a modest rise in payrolls could cause an outsize decline in the unemployment rate. So, the question then becomes, did he know what he was doing and just not care, or did he simply opine ignorantly on a topic about which he clearly knows nothing?  Honestly, as jaded as I have become, this one threw even me for a bit of a loop.

For those who are going to accuse me of picking on Rush, I’ll simply say this:  Find me other examples of such blatant intellectually dishonesty and I’ll criticize those, too.

If there are any Rush defenders in the audience, please drop it in comments — I’m tired of the market volatility and could use both a break and a laugh.

Invictus here.

Interested parties were treated to a fascinating debate on the evening of November 14, as the Munk Debates assembled four estimable economic minds to debate the following resolution:

Be it resolved North America faces a Japan-style era of high unemployment and slow growth

Arguing the pro side of the resolution were David Rosenberg and Paul Krugman.  Arguing the con side were Lawrence Summers and Ian Bremmer.  Should the video be made available for replay, I’d suggest it’s well worth ~90 minutes of your time to watch.  Felix Salmon posted on the debate here, and Paul Krugman made mention of it on his blog here.

The results tell us that Summers/Bremmer swayed the undecideds to their side:

Personally, I went in on the “pro” side and came out unpersuaded by Summers/Bremmer.

My take on the essence of each debater’s arguments:

• Krugman – There are solutions to our current issues, but our political system is — and will remain — too dysfunctional to enact them.
• Rosenberg – We are undergoing a massive, wrenching deleveraging that must run its course, notwithstanding monetary/fiscal policy.
• Bremmer – Essentially argued that the US will always be the least dirty shirt in the hamper.
• Summers – His most persuasive argument, I thought, was his closing comment that pessimism can be a self-fulfilling prophecy.  The audience seemed swayed by this rhetorical flourish, though we certainly all know by now that hope is neither a plan nor a solution.

Rosie was clearly the most fact-based debater.  The arsenal of facts he has at his disposal is simply mind-boggling.  He could likely tell you the unemployment rate in April 1955 as easily as he could tell you his youngest son’s name.

The sad truth of the matter, though, is that we’re already mired in an “era of Japan-style era of high unemployment and slow growth.”  The only real question for debate is how much longer it will last.  Consider:

The unemployment rate has been above 7 percent since the end of 2008.  The Fed, which has done nothing but downgrade its economic assessments for quarter after painful quarter, did so again earlier this month:

(Click through for larger)

(Source: FOMC release November 2, 2011)

Note the drastic uptick in their assessment of the unemployment rate over the next few years, and the introduction of a forecast for 2014.  Here’s a graphic representation that metric:

(Source: FOMC release November 2, 2011)

If they’re right — and they’ve been too optimistic all along — and we see a 6.8% unemployment rate in 2014 (best case), that will take it down to a level last seen in November 2008, a six year round-trip up to 10.1% and back.  And, by the way, let’s not even kid ourselves that 6.8% is anywhere near acceptable.

In metrics that matter most to Americans, we are simply not moving the needle.  Or, more accurately, we’re moving it in the wrong direction.

(Click through all for larger)

(Source: Census.gov, Household Tables, H-6)

Takeaway: Well over a decade of stagnant incomes.

(Source: St. Louis FRED, Series SPCS20RSA)

Takeaway:  Home prices are at mid-2003 levels, so we’re where we were 8+ years ago.

(Source: St. Louis FRED, Series USPRIV)

Takeaway:  Private Payrolls are at about the same level they were at in late 1999 — well over a decade of stagnation here while the population has done nothing but go up.

I’ve already gone over poverty and food stamp statistics — the trends there are downright depressing, as were last week’s Census releases on children in poverty.  Of the myriad statistics I look at, analyze, and digest on a regular basis, nothing saddens me more than stats on children living in poverty, be it in the United States or elsewhere.  Many studies have shown that it is virtually impossible to overcome such an early disadvantage, and we should be doing all we can to eradicate this problem and ensure that our children begin their lives on a solid footing.

Bottom line:  Had I been drawing up the debate resolution, I would have written it as follows: “Be it resolved North America faces an ongoing Japan-style era of high unemployment and slow growth.”

Next month will mark the fourth anniversary of the beginning of our Great Recession — December 2007.  The progress we have made since then has been painfully slow and many metrics, some of which I display above, are still at levels first seen years ago.  Given the glacial pace at which things have been improving, it’s hard to argue that the answer to the original debate resolution — or my modification of it — is anything but “yes.”

Today has been called a one-derful day. At eleven seconds past 11:11 am, on this, the 11th day of the 11th month of the 11th year, we have an unusual date and time:

11/11/11 11:11:11

This is not going to happen again for a while.

And 1000 900 years ago, in the year 1111, we had two extra digits in the run.

Meanwhile, enjoy your one-derful day.

According to a Global Investment Strategy Special Report, the Occupy Wall Street movement symbolizes the fact that political extremism is rapidly becoming mainstream.

But is it really extremism?

Consider the following, from BCA:

The Occupy Wall Street movement is rooted in the secular decline of the American middle class. Judging from the GINI coefficient, the distribution of income is more unequal in the U.S. than OECD countries in general. Moreover, real wage growth in the U.S. has stagnated since 2000, while education and healthcare costs have soared. High education costs have serious social repercussions since they are a strong drag on upward class mobility.

While it is currently impossible to boil down the Occupy Wall Street movement to a single issue, it is a symptom of deepening social strife, political polarization and spreading discontent in the U.S. These are ingredients that, if left unchecked, can lead to potentially radical shifts in policy made to score political points with the extremes, rather than to address underlying economic problems. Both the extreme right and left of the political spectrum will be energized by genuine social discontent – which can nonetheless translate into completely opposing policy preferences – leading to further political polarization. If the clash between left and right intensifies, policy making will become even more difficult. This would mean a heightened political and policy risk premium on equity prices among all G7 markets.

If I could get one question posed to the candidates at the next debate (Tuesday night), which is to focus solely on the economy, it would be this:

“We repeatedly hear about taxes, regulations, and uncertainty standing in the way of job creation. However, the National Federation of Independent Business (“The Voice of Small Business”) surveys its members every month as to their “Single Biggest Problem.” Among the possible answers are both taxes and regulations, yet “Poor Sales” has, in fact, dominated for the past three years.  Additionally, as we see in the chart, “Poor Sales” and the Unemployment Rate correlate very strongly, at about 0.87.

Given these facts, is it disputable that our problem is one of aggregate demand and that, if we could improve demand we could lower the unemployment rate notwithstanding the tax or regulatory environment?”

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Drop your own (serious, well-formulated) questions in comments and hopefully we might get one or two plucked for inclusion in the debate.

(Catch up with me @TBPInvictus)

Update (10/9 @ 3:20 ET): I have a critic here at Cafe Hayek.  Not sure yet whether to append a response here, over there, or make it another post entirely.  Thanks to Pantmaker and Jojo for the additional commentary here and here; had just about forgotten those citations.  I will ping Russ Roberts, my critic, to make him aware of them.

Here’s a great chart just released by the International Monetary Fund.   Note that almost half — 47 percent –  of the US$14.7 trillion U.S. federal government debt is held by the Federal Reserve and the government itself, such as the Social Security trust fund. Add to that the 22 percent foreign official holdings (mainly central banks)  and almost 70 percent of the debt of the U.S. government is held by non-market/non-profit oriented investors.   Stunning!

It’s also interesting to hear Europeans quote the $14.7 trillion (apx. 100% of GDP) figure while U.S. officials like to refer to marketable or debt held by the public, which totals US$10.1 trillion (apx. 75% of GDP).   We’ll be back to you with more on this issue.

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click on the chart to enlarge

Herewith a potpourri of unrelated items I’ve found on my never-ending voyage through the internet. Grab a cup of coffee and pull up a chair.

Seen This Movie Before

First up, an excerpt from a speech given by Teddy Roosevelt in December 1906. I was taken by the opening line and the third paragraph. Indeed, his opening line could probably have been used countless times since he spoke it, most recently six or seven years ago:

As a nation we still continue to enjoy a literally unprecedented prosperity; and it is probable that only reckless speculation and disregard of legitimate business methods on the part of the business world can materially mar this prosperity.

But the third paragraph was really the jaw-dropper for me:

I again recommend a law prohibiting all corporations from contributing to the campaign expenses of any party. Such a bill has already past one House of Congress. Let individuals contribute as they desire; but let us prohibit in effective fashion all corporations from making contributions for any political purpose, directly or indirectly.

I’m always fascinated by how little we seem to learn and how likely we are to simply ignore history’s lessons. I wish I had more time to study our country’s history via the infinite documents and archives that have made their way on to the internet. So much to learn, so little time.

Maybe We’re Not So Lazy After All

I took Senator Jon Kyl to task here (March 2010) for an offensive comments about lazy Americans who would prefer to remain on unemployment benefits than be gainfully employed (“In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”). It’s worth re-running the chart I used at the time:

We now see, in a newly issued report, via the Wall St. Journal that:

“Any negative effects of the recent unemployment insurance extensions on job search are clearly quite small, too small to outweigh the benefits of transfers to people who have been out of work for over a year in conditions where job-finding prospects are bleak,” according to the report. [...]

There’s a chance extended benefits actually increase the number of Americans who find new jobs, according to the study. By one calculation, unemployment insurance extensions increased the share of workers who became reemployed by about 1.3 percentage points in January 2011 by reducing the fraction who excited [sic] the labor force.

Industrial Production and Private Sector Jobs

The change in year-over-year Industrial Production (INDPRO) and Private Sector Jobs (USPRIV) have a correlation of 0.83 over the past 50 years. Industrial Production seems to have put in a peak and, if my eyes don’t deceive me, I see payrolls just starting to rollover:

Buy-Side: Not Much Better Than Sell-Side

I posted here back in early August about Street-wide year-end S&P500 forecasts. I will say that I’ve breathed a sigh of relief as it’s become clear over the last six weeks that those forecasts were too optimistic and have been chopped across the board. I then posted here about one month ago when the first batch of 2012 S&P earnings estimates were published (Median: $104). I suspect it’s only a matter of time before those start getting pared, if they haven’t already.

I decided to take a look through the Barron’s archives to see what the seers were saying year-end 2010, and found the following graphic. What really jumped out at was the extent to which the consensus was looking for the 10-year in the range (generally) of 3.50 – 4.00% at YE 2011. Of course, it is only September, but I’d say that call’s as shaky as S&P1400. I also noted that the buy-side doesn’t look much better than the oft-maligned sell-side.

Fed Flow of Funds

The Fed released its Z.1 Flow of Funds report which, although always a bit stale, is a treasure trove of data. I never tire of finding ways to look at the data presented in the report.

Here, from Table B.100, are Household Real Estate (Line 4) and Corporate Equities (Line 24) as a percent of Total Household Assets (Line 1)

Here are Treasury Securities as a still-insignificant part of the American household’s financial assets (not total assets, just financial assets):

In terms of dollar holdings, Treasuries are now $835 billion on the household balance sheet versus financial assets of $49 trillion and total assets of $72.3 trillion. Liabilities stand at $13.9 trillion. Household real estate stands at $16.2 trillion, down some $6.6 trillion from the 2006Q4 high of $22.8 trillion.

Here’s Owners’ Equity as a Percentage of Household Real Estate:

On the chart above, we have made no progress since since the fourth quarter of 2008, when we sat at 40.1 (we’re now at 38.6 for two quarters running).  This decline in homeowners’ equity speaks to the credit expansions that allowed Americans to live beyond their means while incomes — as we saw when the Census released its report last week — have been stagnating.

Last but not least, here’s Liabilities as a Pct of Disposable Income:

Though we’re below the upward sloping trendline on this file, the average over the period shown is 102%, which is a further shedding of about $2.25 trillion in liabilities (or similar gain in income, which we plainly know is simply not happening).

Are We Beyond Civil Discourse?

As has been noted in several places, it appears we have moved as a country toward something that I find unrecognizable:

1. Rick Perry’s inappropriate claim that Ben Bernanke’s actions as Fed chair could be “treasonous” and that he’d be treated “pretty ugly” in Texas drew approvals.
2. The mention that Perry has presided over more state-run executions than any other governor in modern times drew rousing (and to me, shocking) applause.
3. Wolf Blitzer’s question to Ron Paul as to whether a hypothetical comatose citizen without insurance should be left to die were met with audience hoots of “Yeah!”
4. Noise was made about offsetting the cost of emergency relief in the wake of Hurricane Irene.

Via Mediaite:

Jon Seidl at The Blaze tries to get the Tea Party audience some room to wiggle out of this ghoulish display, theorizing, alternately, that it was a delayed reaction to something Paul said earlier (not unless those folks were watching on their portable DVRs), or that the hoots were from liberals, cheering on Blitzer’s “Gotcha!” (which would make them the quietest bunch of liberals in the world for the rest of the debate)

The reactions of three or four audience members at a debate isn’t all that meaningful on its own, but this outburst follows last week’s Death Penalty Ovation at the Reagan Library debate, and another ugly moment at the Tea Party debate in which the crowd cheered for fed chairman Ben Bernanke to be tried for treason, a capital crime.

I’m still trying to figure out exactly what’s going on here. While Perry’s presiding over 234 state-run executions during his terms as governor may speak to our adherence to the rule of law (much as I may wish we had no such law), should we really be applauding the fact that our government puts people to death? Similarly, should the uninsured — specifically those who can afford but choose not to buy insurance — be left to die should something happen to them? And how far have we drifted from our moral moorings that we have a president (Obama, not Bush) who unilaterally orders the extra-judicial execution of American citizens? These developments are all deeply troubling, and speak to a society that has lost its way.  It’s almost as though we can no longer distinguish between “reality TV” and reality.

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I found myself in complete agreement with Phil Angelides in this interview with Bloomberg’s Lisa Murphy.

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Catch up with me on Twitter: @TBPInvictus

(Source: Census.gov)>

If we were all to become suddenly rich tomorrow, the government’s revenue problems are solved at the current tax rates, so no worries in that case. But I place long odds on that, so let’s move on to what’s actually happening.

It’s as if the entire country has turned into Lake Wobegon, as if we’ve been overcome by an epidemic of illusory superiority.  As I’ve watched the Republican debates, I’ve listened closely for the applause lines, paid close attention to the questions and answers. I also keenly read a variety of papers and  occasionally watched Fox News.

My conclusion?

I am convinced that when President Obama mentions raising taxes on “the wealthiest Americans,” everyone thinks he is talking about them. I’m sure of it. I suppose I should be surprised, but when citizens admonish politicians to “Keep the government out of [their] Medicare,” I guess anything’s possible (like, say, an audience applauding the mere mention that Rick Perry has presided over more state-run executions than any governor in modern times).

Perhaps folks are thinking, “Well, my taxes might not go up now, since I’m making the median income, but my wages are going to quintuple any day now, I just know it.  And when they do, I’ll be damned if I’m going to pay one more plug nickel in taxes.  I also need to protect the loopholes for corporate jet owners, as I’ll surely soon be one.”  Folks, can we have a reality check here?  Pull out your most recent IRS Form 1040 and see exactly where you stand and whether or not you’re among the “wealthiest Americans” to which Obama has been referring.  There is no doubt that some of you are, but I am equally sure that the vast majority of you are not, even if TBP may draw a somewhat higher income cohort.  (As I read the comments to my recent post on the Census release (having already almost completed this post), I guess what I’m trying to say is summed up by Dogfish, who paraphrases Taibbi’s Griftopia:  “”…tea party types like Joe the Plumber identify with the rich because they think “they are one clogged toilet away from being millionaires.”"  News flash: they’re not.)

To quickly demonstrate the faulty thinking that must be at play here, let’s have a look at some economic statistics from the area in which Monday night’s debate took place.  Specifically the zip code in which the Florida State Fairgrounds resides — 33610.  Seems fair, since the audience was certainly enthusiastic enough about the slate of debaters and most definitely jazzed not to have their taxes raised.  (With all credit to The Reformed Broker for his astute observation, it did seem as though most of the audience arrived at the Fairgrounds in their Medicare-funded Rascal Scooters.)

Unfortunately, the American Community Survey (ACS) covering the 2010 Census won’t be released until Sept. 22, so we’ll have no choice but to use data from the 2000 Census (I’ll make a note to revisit this data in a couple of weeks).  So what do we learn about all those folks in 33610 (click through for Census fact sheet) who seem deathly afraid of having their taxes raised?

Give or take, it would seem there are probably just over 100 or so households (out of 12,000) that might see their taxes rise if some of what Obama proposes gets passes.  All the others, not so much.  We’ll have an updated number within the next two weeks, when the ACS is updated.  So let’s get a collective grip here, splash some cold water on our faces, and have an understanding about what is being proposed and whom it’s going to impact.

Having gotten that off my chest, below is another of the more distressing charts that appeared in the deck that accompanied the recent Census conference call on the Income/Poverty/Health Insurance release.  Neither chart (at the top or immediately below) really needs much by way of explanation.  It would be an understatement to call the trends disturbing.

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Lastly, might as well get it out there that I’m making an effort to have a presence on Twitter.  I’m @TBPInvictus if you’re interested; it’s almost exclusively economy and markets related.  You’ll be wealthier for the follow.

The Census Bureau released its annual report on Income, Poverty, and Health Insurance Coverage: 2010 (full PDF)  this morning.  Barry has posted the slide presentation that staff went through during the conference call over in the Think Tank (please have a look).  The (very ugly) bullet points from the release can be found here, and the centerpiece graph is below.

As time allows, I intend to do some work on the numbers in the updated report, but here are a few things that jumped out at me (straight from the summary):

1. Real median household income in the United States in 2010 was $49,445, a 2.3 percent decline from the 2009 median.
2. Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred prior to the 2001 recession in 1999.
3. In spring 2011, 5.9 million young adults age 25-34 (14.2 percent) resided in their parents’ household, compared with 4.7 million (11.8 percent) before the recession, an increase of 2.4 percentage points.
4. It is difficult to precisely assess the impact of doubling up on overall poverty rates. Young adults age 25-34, living with their parents, had an official poverty rate of 8.4 percent, but if their poverty status were determined using their own income, 45.3 percent had an income below the poverty threshold for a single person under age 65.
5. Based on the Gini Index, the change in income inequality between 2009 and 2010 was not statistically significant, while the changes in shares of aggregate household income by quintiles showed a slight shift to more inequality. The Gini index was 0.469 in 2010. (The Gini index is a measure of household income inequality; zero represents perfect income equality and 1 perfect inequality.)

More to come.

We’ll see what ultimately happens, but he clearly used the appropriate language given the stated purpose of the speech.

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Click through for larger graphic.