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

Way too conspiratorial for my taste, but interesting:

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Yesterday, I went into some detail as to why a few people got the NFP data so (disingenuously) wrong. Then Invictus pointed me to this Economic Populist post, titled, Getting It Wrong on the BLS Employment Report. It came out late on Friday, hence why it may have been overlooked.

The long term chart via FRED shows the impact the Census has every 10 years on the civilian population. As you can see in the first chart below, this baseline adjustment to population is about 25% larger than 1989′s, but 35% smaller than 1999′s:

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Decennial Change Reflecting BLS incorporating Census Readings

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The next chart shows the BLS annual population benchmark to make sure their models reflect the latest estimates of population size, growth and characteristics. Note the monthly change between December and January every year — that is the yearly population adjustments.

These are not month-over-month changes, they reflect the adjustments made for the prior year showing up all at once in the month of January.

Hence, to quote the Economic Populist, “it is statistically invalid to compare December to January monthly changes. You simply cannot compare a change of a month, when one of those month’s includes a year of population adjustments.”

Annual Change in BLS Population Measures

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Anyone who thinks that 1.2 million people suddenly dropped out of the labor force needs to take a basic statistics course. I wont hold my breath waiting for the usual suspects to admit their errors.

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Source:
Getting It Wrong on the BLS Employment Report
Robert Oak
Economic Populist Fri, 02/03/2012 – 21:46,
http://www.economicpopulist.org/content/getting-it-wrong-bls-employment-report

SilverOz is an MPA specializing in local economic development and have worked in local economic development for a mid-sized midwestern county for over 10 years.  He has personally worked on/managed projects that have totaled over $500 million in direct investment into the county.

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So today following an otherwise pretty darn good jobs report, we get the usual perma-pessimists at Zero Hedge and Rick Santelli over at CNBC proclaiming that the report showed a drop of over 1 million people from the labor force in one month. Of course, as ususal, both Santelli and Zero Hedge have a real reading comprehension problem and completely missed that this million+ people isn’t some new January phenomenon, but a result of the BLS using the 2010 census data to have more accurate data. In other words, the changes in the Household Survey to the various measures had taken place over the years prior to 2010, but for simplicity’s sake, the BLS incorporates these changes into one month (which they clearly point out). The relevant text from the report is below (bold is mine):

“Effective with data for January 2012, updated population estimates which reflect the results of Census2010 have been used in the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau. Each year, the Census Bureau updates the estimates to reflect new information and assumptions about the growth of the population during the decade. The change in population reflected in the new estimates results from the introduction of the Census 2010 count as the new population base, adjustments for net international migration, updated vital statistics and other information, and some methodological changes in the estimation process. The vast majority of the population change, however, is due to the change in base population from Census 2000 to Census 2010.

In accordance with usual practice, BLS will not revise the official household survey estimates for December 2011 and earlier months. To show the impact of the population adjustment, however, differences in selected December 2011 labor force series based on the old and new population estimates are shown in table B.

The adjustment increased the estimated size of the civilian noninstitutional population in December by 1,510,000, the civilian labor force by 258,000, employment by 216,000, unemployment by 42,000, and persons not in the labor force by 1,252,000. Although the total unemployment rate was unaffected, the labor force participation rate and the employment-population ratio were each reduced by 0.3 percentage point. This was because the population increase was primarily among persons 55 and older and, to a lesser degree, persons 16 to 24 years of age. Both these age groups have lower levels of labor force participation than the general population.”

So Rick/Zero Hedge, unless you would like to argue that the population of the United States also grew by 1.5 million in one month (since that is from the exact same report/revision you quoted), I think both of you should retract your extremely misleading statements about those not in the labor force increasing by over a million in January and simply admit that you are either too stupid or too focused on selling a particular world view to read the data correctly.

At the very least, a reputable financial news organization like CNBC needs to set the record straight on data like this as while Mr. Santelli is entitled to his own opinion, he is not entitled to his own facts, and the fact is 1 million people did not drop out of the labor force in January 2012.

With this post, we officially move Meredith Whitney into the Unguru camp. You can blame the headline on me; the rest is by David and Janet. -BR

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Janet Tavakoli Gets 5 Stars!
December 30, 2011

A year ago, Muniland faced a Rubicon as Meredith Whitney’s words caused a wholesale slaughter in the tax-free and taxable Muni bond market. Investors who listened sold their Munis at about the worst relative pricing they could experience. We have encountered Whitney all year. We took the opposite view and our clients have benefitted by owning their bonds and not panicking. We were buyers during the Whitney-exacerbated sell off. We have written about that many times. The comments are archived at www.cumber.com.

There is more to the Whitney saga. Today, it was superbly revealed by Janet Tavakoli in her Huffington Post column. With her full permission, we have reproduced the entire piece below. We thank Janet for allowing us to reproduce her column and wish her all the best for the New Year. We wish the same for you, dear reader. 2012 promises to be full of surprises and laced with volatility. We will do our best to help readers navigate through the storm. For those clients who have helped make Cumberland a success, we promise to try to anticipate the storm for you. Now to Janet’s post. The link and the full text are below.

Here is the link.

2011: The Year 60 Minutes Misled Americans About Municipal Bonds

Huffington Post – December 30, 2011

Here is the full text.

In previous posts, I’ve mentioned serious fiscal problems that need to be addressed at state and local levels. This varies by region and some issues are potentially solvable.

I live in Illinois, which is ground zero for fraud, corruption, underfunded pension funds and general fiscal mismanagement. It’s an example of one of the worst fiscal messes in the United States. This year Illinois hiked personal income taxes from 3% to 5%, and increased corporate taxes. We’ll be slammed with hidden tax increases in utilities, purchases, and more. When now Mayor Rahm Emanuel left his post as White House Chief of Staff to run his election, the Chicago mayoral race centered partly around steps, including budget cuts, needed to solve Chicago’s serious fiscal issues: See “Third World America: Drowning in Debt and Chocking on Lies,” Huffington Post, June 24, 2011, and ‘Fast-Tracking to Anarchy;” August 25, 2010.

On December 19, 2010, I was (at first) happy to see 60 Minutes highlight fiscal problems of states and municipalities. It explained how Illinois was late on payments to service suppliers, and it’s a huge problem for people doing business with the state. The state’s pension fund is underfunded and although 60 Minutes didn’t mention it, state pension funds are the prey of Wall Street cronies that stuff them with losses and then propose fee-loaded leveraged financial products that are bets to make up the shortfall. Then 60 Minutes went completely off the rails by suggesting that these problems would lead to widespread defaults on municipal bonds in 2012. You can still view the segment, “State Budgets: Day of Reckoning,” on the CBS web site.

A “Performance”

Instead of focusing on the implication of these problems to public services including police protection, fire departments, city maintenance, and city jobs (among other things), 60 Minutes let a pundit claim these problems translate into near-term massive municipal bond defaults. Meredith Whitney, the pundit, had written a report, “Tragedy of the Commons,” which supposedly backed her claims.

Contrary to 60 Minutes‘s assertion, Meredith Whitney, a banking analyst, did not have a great track record. Gullible reporters had given her great PR for an October 31, 2007, call on Citigroup that had been correctly made many months earlier in her presence by my friend Jim Rogers, a legendary investor. They appeared on television together, and at the time she refuted Rogers. I was later bemused to see that either she or her PR flacks apparently took credit for my early warnings about serious problems at AIG. (See: “Reporting v. PR: Meredith Whitney and AIG,” TSF, March 23, 2009.)

Whitney was quoted as claiming: “Clients are not pleased with my call and I have had several death threats.” A 2008 Fortune cover story reported she had received “one death threat.” (Perhaps clients were displeased that her ignoring Rogers had already cost them thirteen points and even then she didn’t directly tell people to bail out.) With characteristic humor Rogers quipped: “Gosh, I have never received a death threat ever for saying I was short a stock or that a company would be going bankrupt. What have I been doing wrong?”

Whitney told 60 Minutes: “You could see 50 sizable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults….It’ll be something to worry about within the next 12 months.”

A Wild Guess

Subsequently, Whitney wouldn’t justify her analysis saying “Quantifying is a guesstimate at this point.” (“Whitney Municipal-Bond Apocalypse Short on Specifics,” by Max Abelson and Michael McDonald, Bloomberg News, Feb 1, 2011.) 60 Minutes admitted it had never reviewed her much-touted report. The report never mentioned sizable defaults, only that there “invariably” would be defaults. Bloomberg also reported that 60 Minutes was wrong about her “untarnished’ track record. Since she started her company in 2009, about two-thirds of her stock picks since starting her company underperformed market indexes. A 2008 Fortune cover story ranked Whitney 1,205th out of 1,919 equity analysts the previous year, based on stock picks.

Whitney told Bloomberg’s reporters: “A lot of this is, you know it, but can you prove it? There are fifth-derivative dimensions that I don’t think I need to spell out to my clients.” As a derivatives expert I can attest that this is gibberish. But I want to hear her explanation of “fifth-derivative dimensions,” because I adore a good belly laugh.

Genuine Research via Bloomberg

Bloomberg is also the financial news service that has done great early work on fraud and related municipal bond defaults, because that’s a worthy story. Municipal credit issues are granular and the severity of the problem — or non-problem — depends on the specific situation.

In September 2005, Bloomberg broke a story about Jefferson County’s hair raising problems, “The Banks that Fleeced Alabama,” by Martin Z. Braun, Darrell Preston and Liz Willen. According to the article, “taxpayers blame the $160 million in fees JPMorgan Chase and other banks have charged to arrange the county’s financing–in deals that were never put out to bid.” This year, Jefferson County filed for bankruptcy.

As the year wore on, Meredith Whitney waffled and by May she told a Bloomberg radio host: “In the cycle of this municipal downturn, I stand by it. But we never had a specific estimate for that.” Fortunately, Joe Mysak, a Bloomberg print reporter, exposed that for the nonsense it was. Whitney had indeed given a one-year time frame on 60 Minutes and had called for hundreds of millions of dollars in defaults with 50 to 100 or more sizable defaults. (“Meredith Whitney Trips Over Her Muni Default Tale,” May 19, 2011.)

A Stellar Performance

Whitney’s prediction of “hundreds of billions” of defaults was way off the mark. Even with Jefferson County’s $943 million filing, defaults for 2011 were down from 2010. Bonds that dipped into reserves to make payments totaled only $24.6 billion according to Richard Lehmann, publisher of the Distressed Debt Securities Newsletter. Defaults defined as bonds that missed payments are down to only $2.1 billion from $2.8 billion in 2010. In 2011, municipal bonds had stellar performance as an asset class returning more than 10% of potentially tax exempt returns. They beat the S&P, treasuries, corporate bonds and most commodities. (“Whitney’s Armageddon Belied by ’11 Returns,” by Martin Z. Bruan, Bloomberg News, December 16, 2011).

CNBC Schools 60 Minutes

As for the actual analysis in Meredith Whitney’s “Tragedy of the Commons” report, it seems that it had serious flaws, at least when it came to Nevada.

Nevada State Treasurer Kate Marshall appeared on CNBC to debunk Whitney’s claim that Nevada’s municipal bonds were troubled. Marshall challenged Whitney’s analytics saying (among other things) that Whitney apparently misinterpreted a PEW report on pension plan liabilities. Nevada only represented 1/16th of the plan, and state employees pick up half the tab. Marshall then explained why Nevada’s municipal bond claims paying ability is much better than it would appear to the casual observer. The economy was still tough, but Nevada managed in anticipation of the ongoing crunch. Property tax revenues dropped, but sales tax revenues were up, gambling revenue was up, and business modified tax revenues were up. Her cash position in June 2011 was much better than 2010.

Thank you, Janet.

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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business.

She is the author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

David R. Kotok, Chairman and Chief Investment Officer

I am please to report that calling out the Big Lie has now gone fully mainstream.

Recall last month, I had two Big Lie columns in the Washington Post:

• What caused the financial crisis? The Big Lie goes viral.

• Examining the big lie: How the facts of the economic crisis stack up

The first column was the most popular article on WashingtonPost.com for a full week. It generated nearly 1845 comments.

Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia Journalism Review as well).  In today’s NYT, Joe Nocera does too, once again calling out those who are pushing the false narrative for political or ideological reasons in a column simply called “The Big Lie“.

Nocera details exactly how its done:

“So this is how the Big Lie works.

You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings.

You’re chosen for an investigative panel related to your topic. When other panel members, after inspecting your evidence, reject your thesis, you claim that they did so for ideological reasons. This, too, is repeated by your allies. Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.

Thus has Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie’s chief credit officer.”

Longstanding readers of TBP may recall the genesis of my interest in this:  When I was writing Bailout Nation, I did lots and lots of research into exactly what it was that led to the housing boom and bust, the stock market crash, and the Great Recession.

The answer was “its complicated.” There were many many factors, lots of bad ideas, plenty of poor judgement all around.

I summarized these into 7 broad categories. The incomparable Jess Bachman (of Wall Stats) created this fantastic graphic that is the centerfold of the book:

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The perpetrators of the big lie all have something to hide. Whether they voted for more deregulation or passed the ridiculous the CFMA or supported the repeal of Glass Steagall or cheered Alan Greenspan’s monetary policy, the Big Lie supporters all bear some resposibility.

In the case of Peter Wallison, he was the Co-director of AEI’s financial market deregulation project. That was scrubbed from his AEI bio.

Ed Pinto has taken a different approach to trying to deflect the blame from the blameworthy. He has continually thrown shit against the barn wall to see what will stick. Originally, it was the fault of the CRA. When that argument failed, he blamed Acorn.  And now its the GSEs. Wallison and Pinto have had their greatest success with this — its now a talking point amongst many of the GOP contenders for the Republican niomination for President.

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With this post, we move Peter Wallison an Edward Edward Pinto into the UnGuru category, where they can join the likes of Ben Stein, Elaine Garzerelli and Meredith Whitney as “Ungurus.” All posts that prominently mention these people include the category Unguru.

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Source:
The Big Lie
Joe Nocera
NYT, December 23, 2011  
http://www.nytimes.com/2011/12/24/opinion/nocera-the-big-lie.html

A musical econoparody of the Smith/Bernard song “Winter Wonderland,” about the legacy of Alan Greenspan and today’s GOP.

Amazingly, it is from Dec 2008

Hat tip naked capitalism

Parody Lyrics: MARCY SHAFFER
Music Director: GREG HILFMAN
Lead vocal: JANIS LIEBHART
Background vocals: SCOTTIE HASKELL, JANIS LIEBHART, GARY STOCKDALE

For the text of the parody lyrics: http://versusplus.com/cinders.html

For the complete collection of VERSUS political musical parodies, visit us at http://versusplus.com.

Today is the 15th anniversary of the infamous “irrational exuberance” speech by former Fed Chief Alan Greenspan (see below).

Here is the key excerpt from the speech (note the unintentionally ironic title):

The Challenge of Central Banking in a Democratic Society
Remarks by Chairman Alan Greenspan
At the Annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research, Washington, D.C.
December 5, 1996

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.

The public examination of Federal Reserve actions extends well beyond our stewardship of monetary policy. Our overall management of the Federal Reserve System should, and does, come under considerable scrutiny by the Congress. Since we expend unappropriated taxpayer funds, we have an especial obligation to be prudent and efficient with the use of those funds . . .

Note that SPX rallied for another three years and doubled from that point.

So much for the Maestro’s acumen . . .

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My Sunday Business Washington Post column is out. This morning, we look at part II of the Big Lie (Part I examined the actual factors that led to the crisis) in this part, we look at the data and factors that disprove the elements of the Big Lie.

The print version had the full headline Dissecting the big lie about the economic crisis; the online version is Examining the big lie: How the facts of the economic crisis stack up).

Here’s an excerpt from the column:

“I want to move beyond what I call “the squishy narrative” — an imprecise, sloppy way to think about the world — toward a more rigorous form of analysis. Unlike other disciplines, economics looks at actual consequences in terms of real dollars. So let’s follow the money and see what the data reveal about the causes of the collapse . . .

Consider the causes cited by those who’ve taken up the big lie. Consider New York Mayor Michael Bloomberg’s statement that it was Congress that forced banks to make ill-advised loans to people who could not afford them and defaulted in large numbers. He and others claim that caused the crisis. Others have suggested these were to blame: the home mortgage interest deduction, the Community Reinvestment Act of 1977, the 1994 Housing and Urban Development memo, Fannie Mae and Freddie Mac, Rep. Barney Frank (D-Mass.) and homeownership targets set by both the Clinton and Bush administrations.”

No graphics this week — so I created a run of charts to illustrate the facts in the main article.
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click for ginormous version of print edition

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Source:
Examining the big lie: How the facts of the economic crisis stack up
Barry Ritholtz
Washington Post, November 20, 2011
http://www.washingtonpost.com/business/examining-the-big-lie-how-the-facts-of-the-economic-crisis-stack-up/2011/11/16/gIQA7G23cN_story.html

Washington Post, Sunday November 20, 2011 (PDF)

Whenever I go off on a rant when writing some critical polemic screed, I try not to edit myself. Just get it all out in print, and we can worry about editing down for style and clarity later. That works especially well if you, as a writer, have a some idea of where you want to go and what you want to say with a piece.

It also helps if you work with a top notch editor, and I have been fortunate to work with several: Aaron Task, my editor on Bailout Nation as well as at TheStreet.com; Thom Donlan at Barron’s; and my  editor at the Washington Post, Kelly Johnson.

Its freeing to blather out 2,000 words and let the professionals focus and tighten it up. But every now and again, something interesting ends up on the cutting room floor. In Bailout Nation, a delightfully vicious comment about Greenspan’s relationship with Ayn Rand was edited out (It was so obnoxiously clever I may have to publish it posthumously).

My column for this Sunday’s Washington Post, What Caused the Financial Crisis? The Big Lie Goes Viral, looks at the false crisis narratives pushed by people for various reasons. Its not unusual to see this from the usual suspects, but it is a big surprise when it comes out of NYC’s pragmatic technocrat Mayor Mike Bloomberg.

KJ slashed my blather in half, cutting out the flabby digressions and distractions. The finished piece just hums.

But as I alluded to earlier, some of the more interesting parts got lost in the process. What follows are some of the trimmings from two earlier versions of The Big Lie, none of which made it to the final piece.

First up: The original draft was all over the place, kinda randomly calling out people; the early version had the following text:

Peter Wallison, FCIC member: Before joining the financial commission, Wallison was the Co-Director of co-director of the American Enterprise Institute Financial Deregulation Project. Since the crisis occurred, the AEI changed the project’s name to the more benign “program on financial policy studies.” They also scrubbed Wallison’s bio from any mention of the Financial Deregulation Project.

Joe Kernan, CNBC Anchor: Viewers who tune in each morning expecting to get a quick update on the news instead see Squawkbox Anchor and former Merrill Lynch Broker Kernan shilling for the Street. He never seems to pass up an opportunity to exonerate banks and blame the wrong players for the financial collapse. Whether it was the Community Reinvestment Act or Fannie & Freddie, apparently anyone but Wall Street was at fault. Perhaps the tiresome repetition of the same discredited memes helps to explain the CNBC’s softening ratings.

Investor’s Business Daily: IBD published not an opinion piece, but an article laying fault for the entire crisis on a 1994 HUD statement against bank redlining. Of course, if that was the cause of the crisis, then the bank redlined areas of the country – inner cities like Harlem and the worst parts of Philly and Chicago and Detroit and Washington DC was were the lending boom and bust would have taken place. But we know it was the tony suburbs of California and Arizona, as well as the Condos in Florida and the Exurbs in Nevada that boomed the most.

Mayor Mike Bloomberg: Embarrassed himself this week, blindly repeating the discredited talking points. He exonerated Wall Street, stating “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.” What made Bloomberg’s erroneous comments so stunning is that he built his Bloomberg Data Service business on the notion that data is what ultimately matters most to investors. He ignored his own principles to repeat statements he knew (or should have known) were false.

I thought about the pieces to this as KJ and I edited it down to a more reasonable size. “Man bites Dog” is really the story here, mostly because Mayor Bloomberg is not just another wingnut. So the mid version of the column focused more on Bloomberg, and downgraded the usual Financial Crisis Denialists to a mere sentence apiece.

Cleaned up a bit, and notably better than the series above, it looked like this:

Mayor Mike Bloomberg: Embarrassed himself this week, blindly repeating the discredited talking points. He exonerated Wall Street, stating “It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.” What made Bloomberg’s erroneous comments so stunning is that he built his Bloomberg Data Service business on the notion that data is what ultimately matters most to investors. He ignored his own principles to repeat statements he knew (or should have known) were false.

Its not just Mayor Bloomberg – you can see the Big Lie in action everywhere. Perhaps the Mayor saw a recent The Investor’s Business Daily article that blamed the crisis on a 1994 Housing and Urban Development memo (Smoking-Gun Document Ties Policy To Housing Crisis, by PAUL SPERRY 10/31/2011). Maybe he read FCIC member Peter Wallison’s dissent; of course, Wallison was co-director of the American Enterprise Institute “Financial Deregulation Project” so its no surprise he dissented from the report laying blame on radical deregulation of the finance sector. Perhaps the Mayor watches CNBC’s morning program, Squawkbox. Viewers are treated to a regular repetition of the Big Lie, as anchor Joe Kernan exonerates banks and blames Congress for the crisis on a near daily basis.

The final version is even more compact. It dispatched all of the goofballs — Wallison, Kernan, IBD are totally dropped from the finished product. The focus is partly on why Bloomberg went off the reservation, but mostly on what actually caused the finacial crisis.

I’ll tweet it as soon as soon as its out online @ritholtz

The ever ironic former Fed Chairman Alan Greenspan on whether government intervention can create moral hazard:

“There were unintended consequences to almost every action I was involved in” as Fed chairman, said Mr. Greenspan, who himself cut interest rates to help stave off a bond-market crisis in 1998, and later was accused of helping inflate the stock bubble of the late 1990s. “If we anticipated the unintended consequences that were going to happen we might have changed the policy,” he said, but he added that it is impossible to forecast all the consequences of government action.

-WSJ August 29th, 2011

Please make it stop . . .