>   (email exchange)
>   On Sat, Nov 6, 2010 at 7:10 AM, wrote:
>   The yield spreads on Irish and Spanish bonds are blowing out even as we speak, as
>   well as those on the rest of the periphery. While all eyes are on the Fed, the real action
>   may be in Europe.

Agreed! The question remains, is the ECB still there to backstop short term funding. So far seems yes.
It’s entirely a political decision. Think of the euro zone as an under water city, with the ECB controlling the air supply.

Also, I like the next chart. A 9% federal budget deficit is so far been enough to muddle through with very modest GDP growth and stabilize employment, albeit at very low levels. With a proactive fiscal adjustment, it doesn’t get much better until consumer credit expansion kicks in, which could be quite a while.

It also looks to me like a dollar rally that will revive deflation fears might still be in the cards, as it’s been sold mainly based on a misunderstanding of QE.

A Few Thoughts on the Employment Numbers

By Dr. Lacy Hunt, Hoisington Investment Mgt. Co.

The October employment situation was dramatically weaker than the headline 159k increase in the payroll employment measure. The broader household employment fell 330k. The only reason that the unemployment rate held steady is that 254k dropped out of the labor force. The civilian labor force participation rate fell to a new low of 64.5%, indicating that people do not believe that jobs are available, but this serves to hold the unemployment rate down. In addition, the employment-to-population ratio fell to 58.3%, the lowest level in nearly 30 years.

While not actually knowing what happened to the net job change in the non-surveyed small business sector, the Labor Department assumed that 61k jobs were created in that sector. This assumption is not supported by such important private surveys as those from the National Federation of Independent Business or by ADP. Just a month ago the Labor Department had to revise downward the job totals due to a serious overcount of their statistical artifact known as the Birth/Death Model.

The most distressing aspect of this report is that the US economy lost another 124K full-time jobs, thus bringing the five-month loss to 1.1 million in this most critical of all employment categories. In an even more significant sign, the level of full-time employment in October was at the same level that was reached originally in December 1999, almost 11 years ago (see attached chart). An economy cannot generate income growth by continuing to substitute part-time work for full-time employment. This loss of full-time jobs goes a long way to explain why real personal income less transfer payments has been unchanged since May.

The weakness in real income is probably lost in an environment in which the Fed is touting the gain in stock prices and consumer wealth resulting from the latest quantitative easing (QE), but QE has unintended negative consequences for real household income. Due to higher prices of energy and food commodities, QE may result in less funds for discretionary spending for consumers whose incomes are stagnant. Also, with five-year yields falling below 1%, rates on CDs and other types of short-term bank deposits will decline, also cutting into household income. At the end of the day these effects will be more powerful than any stock-price boost in consumer spending, which, as always, will be very small and slow to materialize.

To have a broad-based recovery, the manufacturing sector must participate. Contrary to the ISM survey, manufacturing jobs fell 7k, the third consecutive drop, resulting in a net loss over the past three months of 35k.

In summary, the latest economic developments indicate a slight worsening of underlying fundamental conditions.

10 Responses

  1. Warren,
    Did you actually manage to have an email exchange with Mauldin? Amazing, as you are not Paul McCulley or one of John’s many “good friends”.
    I find Mauldin one of the most frustrating of the commentators out there, because even though he has managed to get as far as looking at the economy from the sectoral approach (for which he credits Rob Parenteau), and seems to understand the implications, he still never manages to get over his deficit hysteria. The deficit, and of course all those other “unfunded” liabilities like Social Security, etc is going to eat us alive according to him, and he constantly worries about WHO will buy our debt. He cannot get his head around the difference between a household or a business and a sovereign government who is the sole monopoly issuer of its currency in a floating FX non convertible world.
    He’s a real hard head and it’s a shame a lot of people read him, because he seems intelligent. Good luck to you if you have managed to have any sort of dialogue with him.

    1. Mauldin is another moralizer. A lot of people know better, but their ingrained norms get the better of them.

      See Robert H. Nelson, Economics as Religion: From Samuelson to Chicago and Beyond (Penn State, 2001), and Duncan K. Foley, Adam’s Fallacy: A Guide to Economic Theology (Belknap, 2006) for articulation of the syndrome.

      1. Tom,
        I ordered that Nelson book, hasnt come in yet. Found this article of his online,excerpt:
        “Samuelson and his generation converted the entire economics profession to the emulation of modern physics and chemistry – a style of doing economics that continues to the present day.” This is perhaps where all the hard science terminology crossed over into ecnonomics.

        Also: “It is more correct to say that Princeton turned from one religious mission to another.” Uh-oh. 😉 Resp,


      2. Ha ha, you just reminded me of a conspiracy theorist I heard on the radio a few months ago…

        Both physics and finance can be thought of in two different ways. One is a closed system, based on scarce resources, energy or money. The other is an open system, in which energy is in abundant supply, “and where money in turn reflects this by being a creation of the state, and therefore a debt-free instrument of exchange,” he detailed.

      3. Good article, Matt. Thanks for pointing me to it. It’s kind of a summary of his book, but the book is much more detailed, of course. The main point is that economics functions more normatively in society than as a science on a par with other sciences.

        Nelson uses Samuelson and others as examples to show how the principal economists have become the new priesthood and their teaching the new theology as normative in policy-making. If one questioning this teaching, one becomes a heretic.

        Nelson shows how assumptions are actually norms rather than heuristic devices. When norms dominate, operational and empirical matters aren’t regarded as decisive. No wonder MMT is having a difficult time getting heard in this cultural environment.

  2. “Think of the euro zone as an under water city, with the ECB controlling the air supply.”

    That’s certainly an optimistic analogy, Warren!

    Yes, a 9% Federal Budget Deficit seems to have been enough to stave off total collapse; instead we get a slow cancer. Next step: the House Republicans propose fiscal austerity and Obama goes along with them because we have “run out of money.”

  3. I had a very brief exchange with Mauldin on demographics, but every mention of sovereign deficts and debts has gone unanswered (there haven’t been many, maybe two or three). Similar experience with another financial analyst who is published and appears to have a following (much smaller than Mauldin’s I suspect). One email exchange on deficits, then silence. He’s still an unrepentant JGB black widower, this many decades later.

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