Weekly Wrap

The number that spooked Wall Street yesterday was the figure released by the U.S. Labor Department showing initial claims for state unemployment benefits. The 480,000 reported was up from the week earlier and higher than the four-week moving average (plotted above). After a peak approaching 700K a year ago, job turnover has lessened considerably since. Still, as John Thomas (a.k.a. the Mad Hedge Fund Trader) points out, there is room for improvement:

Someone once asked PIMCO’s bond king, Bill Gross, if he were stranded on a desert island and could get only one statistic on which to base investment decisions, what would it be? He didn’t hesitate. Initial claims for unemployment insurance, released by the Labor Department every Thursday at 8:30 am EST, gives the best real time snapshot of economic activity... During the first half of 2009, more than 600,000 new claims a week were common. Since then, they have dropped to a still serious 450,000/week, indicating, at best, a tepid recovery. When claims drop below 400,000, the unemployment rate will stop rising, below 350,000 a recovery is in progress, and below 300,000 the boom times are back.

This "morning after" the mini-meltdown in the markets brought the monthly unemployment report from the Bureau of Labor Statistics, and investors are having a hard time grappling with the data. The report gave mixed signals as to whether jobs were added or lost in January. The Establishment Survey says we lost 20K. The Population Survey says we gained 785K, a number that, if believed, should be igniting a rally in stocks. But the report cautions that, effective January 2010, the latter survey uses "updated population estimates" and may be overstating the job gain by 243K. The apples-to-oranges comparison is apparently confusing not just me. As of 10:55 a.m. the Dow is unchanged.

Nobody is talking about the Adjusted Household Survey number, a series that attempts to reconcile the CES and CPS numbers. That one is +841K! Maybe we should take these preliminary numbers with a wheelbarrow of salt; they will just get revised again (and again) anyway. For example, December's CES figure got changed from -85K to -150K. An annual benchmark revision moved up the job-loss figure for all of 2009 another 617K, bringing the two-year recession total to 8.4 million. As Benjamin Disraeli once said, there are three kinds of untruths: lies, damn lies, and statistics.

Channeling Disraeli, Mike Mish Shedlock points out that the BLS massages the unemployment data even more than usual in the month of January. And he has a graph to prove it:

[click to enlarge]

The rest of every year is spent reverting to the mean. All this suggests that the 9.7% unemployment rate reported for January is a myth and that we could easily see 11% by summer. TrimTabs, working backwards from tax-collection data, calculates that the number of jobs lost in January likely exceeded 100K, or five times more than the "official" number.

On the bright side, the average work week inched up in January another six minutes, which, believe it or not, is the wage equivalent of tens of thousands of jobs. State governments, obliged to balance their budgets, cut 41,000 jobs last month. The federal government, under no such budget constraint (more on that below), added 33,000 jobs. You can thank our creditors (China et al.) for those. All in all, the BLS report was a wash. But whatever the real job numbers are, they need to improve dramatically, and soon. Adjustable-rate mortgages across the land are ready to explode. Disarming them will require millions of new jobs, not thousands.

President Obama's FY2011 budget was greeted with angst when it was rolled out to the press on Monday. You got the heads-up here last Friday that the headline number on the expenditure side was going to tickle $4 trillion, 40% to be funded by new debt. I'll say it again--four trillion dollars. Hopefully by now I have trained you to look for the REAL number.

Before we can find that one, we must review how the federal government keeps its books. Unlike all the banks it regulates, it uses the cash method of accounting, tracking only current expenditures. The Citigroups, the JPMorgans--all those financial institutions that we love to hate--use the accrual method. They attempt to project costs beyond the present and will reserve some of their earnings to meet those future liabilities. The global financial crisis that has been brewing since the summer of 2007 can be blamed on the failure of the banks to reserve enough for the future in light of the high degree of risk that they were undertaking with subprime and subslime lending.

Federal regulators are now (a bit late, I would say) tightening up on the banks, raising capital requirements. But who is overseeing the federal government, which has been piling up liabilities within its entitlement programs (primarily Medicare and Social Security)? It is supposed to be holding monies in trust for future pay-outs, monies paid into the system by employers and employees under one of the government's original mandates. But since the days of hey-hey-LBJ, the government has been raiding the trust accounts to fund current operations, creating future liabilities without tracking them in annual budget statements. If we were properly reserving for future pay-outs, we would be showing much higher deficits.

On Christmas Eve, Treasury Secretary Timothy Geithner gifted taxpayers with the announcement that the federal government would backstop all home mortgages held by GSEs Fannie Mae and Freddie Mac. Presto! Trillions in new liabilities added to our collective balance sheet, all without congressional approval. Which brings us back to the question, what is the real annual federal deficit? Answer: no one knows. But the number must come from a certified public accountant (any of those in DC, or are they all attorneys?) and is assuredly some multiple of the $1.556 trillion that the Big O is proposing for 2011. The Government Accountability Office, which audits the books, will not even hazard a guess, offering this disclaimer:

Because of the federal government's inability to demonstrate the reliability of significant portions of the U.S. government's accompanying accrual basis consolidated financial statements for fiscal years 2008 and 2007, principally resulting from certain material weaknesses, and other limitations on the scope of our work, described in this report, we are unable to, and we do not, express an opinion on such accrual basis consolidated financial statements.

"No opinion" means the numbers are worthless. As the debt rolls forward to our children and grandchildren, I will whisper in their ears the magic words. Strategic default. That's right, it's time to repudiate the national debt. It is not morally defensible for one generation to sell another one (or more) into slavery. And what would I say to the creditors, the ones holding all those Treasuries? Tough noogies. You took on the risk, you suffer the consequences. In the Mother of All Workouts, you bondholders, as always, will have to take a haircut.

There, glad I solved that one.

[update, 02-08-10: In this Bloomberg interview, Marc Faber calls U.S. debt "junk."]

[Niall Ferguson in a Financial Times column, 02-11-10:

US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941. Even according to the White House’s new budget projections, the gross federal debt in public hands will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.]