Posts filed under “Think Tank”

The Glide Path Option

The Glide Path Option

November 6, 2009
By John Mauldin
The Present Contains All Possible Futures
The Ugly Unemployment Numbers
Argentinian Disease
The Austrian Solution
The Eastern European Solution
Japanese Disease
The Glide Path Option
Philadelphia, Orlando, and Phoenix
The present contains all possible futures. But not all futures are good ones. Some can be quite cruel. The one we actually get is dictated by the choices we make. For the last few months I have been addressing the choices in front of us, economically speaking. Today I am going to summarize them, and maybe we can look for some signposts that will tell us which path we’re headed down. For those who are new readers and who would like a more in-depth analysis, you can go to the archives at and search for terms I am writing about. And I will start out by briefly touching on today’s ugly unemployment numbers, with data you did not get in the mainstream media.

But first, let me welcome the readers of EQUITIES Magazine to this letter. The publisher is sending the letter to you directly. This letter is free, and all you have to do to continue receiving it is type in your email address at Likewise, I have arranged for my regular readers to get a free subscription to EQUITIES Magazine, if you would like. You can go to For those who don’t know, I write a brief monthly column for them.

The Ugly Unemployment Numbers

The headlines said unemployment, as measured by the “establishment survey,” was down by 190,000; and even though that was slightly worse than forecast, market bulls were cheered by the fact that the number was not as bad as last month’s. It is an improvement that we are not falling as fast.

Well, maybe. What I did not see in many of the stories I read was that the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey. The establishment survey polls larger businesses; the household survey actually calls individual households.

Let’s look at the real number in the establishment survey. If you don’t seasonally adjust the number, the actual change in unemployment for October was 641,000, or about 450,000 more than the seasonally adjusted number. And the Bureau of Labor Statistics added 86,000 jobs that they simply guess were created through the so-called birth-death ratio. Interestingly, the birth-death ratio number is not seasonally adjusted, so it is just added to the unemployment number.

The total (U-6) employment rate is at a record high of 17.5% (this includes those who are part-time for economic reasons). There are now over 10.5 million people who have lost their jobs since the beginning of the downturn.

My favorite slicer and dicer of data, Greg Weldon (, offers up an even more horrific number. As I have noted before, if you have not looked for work in the last four weeks, the BLS does not count you as unemployed. Quoting Greg:

“Moreover, when we combine the monthly change in the number of Unemployed, with the number Not in the Labor Force, we might consider the result to be a proxy for the actual ‘change’ in the underlying labor market situation … in which case, October’s figure of 817,000 represents the fourth LARGEST yet, behind last month’s (September’s) second largest figure of 1,021,000 … for a two-month combined figure of 1.838 million, in newly Unemployed, or no longer ‘in’ the Labor Force …

“… the second LARGEST two-month total EVER posted, barely trailing the December-08/January-09 total 1.955 million.

“Bottom line … basis this measure AND the ‘Total Unemployment Rate,’ we could conclude that not only is there NO ‘improvement’ in the labor market, but moreover, that it continues to DETERIORATE, intently.”

There are plenty more implications in the data, but let’s turn to the topic of the day.

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Category: Think Tank

Consumer Credit continues downward trend

Consumer Credit outstanding fell $14.8b in Sept seasonally adjusted, almost $5b more than expected and marks the 11th month in the past 12 of declines. At $2.456T outstanding, it is 4.9% below the record high in July ’08. After a flat reading in Aug, (didn’t fall b/c of the CARS program), non revolving debt outstanding…Read More

Category: MacroNotes

The Home Buying Tax Credit costs what?

The Home Buying Tax Credit costs what? On the day President Obama signed the extension of the home buying tax credit, Rasmussen Reports released the results of a poll today saying that 57% favor the $8,000 tax credit for 1st time home buyers but when they hear that it will cost an additional $10b+, support…Read More

Category: MacroNotes

Payrolls, sluggishness continues

Oct Payrolls fell by 190k, 15k more than expected BUT net revisions were up by 91k over the two prior months. The unemployment rate rose to 10.2%, .3% more than expected and up from 9.8% in Sept as household employment fell by 589k and the labor force shrunk by 31k. The all in rate rose…Read More

Category: MacroNotes

As of today, our automated tool to gather FDIC bank call reports and generate Stress Index ratings has gathered data on some 5,063 institutions. Users of the professional version of the IRA Bank Monitor can see the ratings on a list we have built on the Bank Monitor home page that is sorted by assets….Read More

Category: Markets, Think Tank

Rate hike odds and inflation expectations update

With respect to future fed policy, here is an update in the fed funds futures for what is priced in for rate hikes in 2010. Odds of a 25 bps hike by the April meeting is now down to 28% vs 54% priced in just prior to yesterday’s FOMC statement release. Last Monday, the market…Read More

Category: MacroNotes

King Report: Treasury Minutes



While most of the known world was transfixed on the FOMC soiree and its communiqué, an equally if not more important Treasury soiree and communiqué went largely unnoticed.

November 4, 2009
Minutes of the Meeting of the Treasury Borrowing Advisory Committee Of the Securities Industry and Financial Markets Association The Committee convened in closed session at the Hay-Adams Hotel at 10:32 a.m.

The Committee then turned to a presentation by one of its members on the likely form of the Federal Reserve’s exit strategy and the implications for the Treasury’s borrowing program resulting from that strategy.

The presenting member began by noting the importance of the exit strategy for financial markets and fiscal authorities. It was noted that the near-zero interest rates driven by current Federal Reserve policy was pushing many financial entities such as pension funds, insurance companies, and endowments further out on the yield curve into longer-dated, riskier asset classes to earn incremental yield…A critical issue will be the impact on the riskier asset classes as market interest rates move away from zero.

The presenting member then looked at the likely sequence of the Federal Reserve’s exit strategy. The member acknowledged that the central bank must address the uncertainty and fragility of the economic recovery and the dependence of the housing market on low rates. It was suggested that the most likely sequence would be the [1] draining of excess reserves from the banking system, [2] the cessation of the mortgage-backed securities purchase program, and [3] only then raising the Fed funds target rate.

Several members at this point asked why draining reserves before ending the MBS program made sense. The presenting member noted that the program was already set to expire, and other measures, such as a revival of the Supplementary Financing Program, could be utilized by the Federal Reserve at the same time.

The Fed’s $1.25 trillion Agency MBS buyback program is set to expire at the end of March, 2010, according to the last FOMC Announcement from September 23, 2009…The presenting member points out that the Fed can avoid adding reserves after they are first drained through a revival of Treasury’s Supplementary Financing Program (SFP)…

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Category: Think Tank

Gold bullion surging in all currencies

Gold bullion surging in all currencies I argued the bull case for gold in my posts over the past few months (see “Gold bullion – regaining its shine?“, “Gold bullion glitters bright” and “Gold bullion – challenging $1,000“. With the gold price scaling fresh peaks and closing in on $1,100, it would certainly seem as…Read More

Category: Think Tank

Morning stuff and the aftermath of the FOMC statement

Following the very dovish FOMC statement, the odds of a 25 bps rate hike by April have fallen to 36% from 54% yesterday and the odds of a hike by June have fallen below 100% for the first time. In response, inflation expectations 10 yrs out have risen to 2.12%, up from 2% just one…Read More

Category: MacroNotes

The Fed and the Unemployment Rate cont’d

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).


November 4, 2009

In response to the recent piece we wrote about the Fed and the unemployment rate, Bloomberg anchor Kathleen Hays emailed the following: [Richmond Fed president] “Jeff Lacker told me he could see the Fed tightening before unemployment comes down when I interviewed him last month on The Hays Advantage.”

Kathleen also sent a recent NY Fed staff report (number 397) entitled “Monetary Tightening Cycles and the Predictability of Economic Activity.” We thank her for this response and we have posted the NY Fed staff study on our website, Also there is our original October 31 commentary.

We have several items to raise for discussion.

First point.

The NY Fed study seems to examine a separate issue than the study we cited. The authors looked at the unemployment rate AFTER the Fed had stopped tightening. In our view that may be helpful from a policy-issue perspective but it does not help us to determine whether the Fed will start to raise rates BEFORE the unemployment rate peaks.

As portfolio managers we are concerned with the latter. Academics can use the former to debate the efficacy of Fed policy making. We do not have that luxury. We must spend our days managing clients’ money in real time, not debating policy outcomes after the fact. We have to deal with what the policy is doing or will do to the financial markets. When government gets it wrong, which they often do, it is our clients who will pay the price for their errors.

Second point.

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Category: Federal Reserve, Think Tank