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Friday, October 30, 2009


japanese LEI and the nikkei

as albert edwards is drawing parallels to japanese fits of frantic leading indicator expansion followed by disaster selloffs, it seems appropriate to highlight the history of the japanese LEI as maintained by the conference board through the period 1990-2005, which contains virtually the entire japanese private sector balance sheet recession.

i hope you forgive the crude overlay -- i'm sure professional web designers cringe at such things. the overlay of the nikkei has been stretched to fit exactly the same timescale, so comparison is easy.

the first thing to deduce is that the leading indicators will lag the market. this probably isn't news, as the most forward indicator in the LEI itself is the equity market. edwards may be right to the point that, once a downturn in LEI began, it often telegraphed the most severe contractions in price. but in truth it seems on this evidence that, if you wanted to preserve capital most effectively, any significant moderation in the pace of strengthening was a better signal to find the storm cellar.

the second is that the equity market in 1993, again in 1995, and again in 2002-3 was hitting new lows even as the LEI was contracting only mildly or even rising and as the economy stayed out of recession. equity is after all the ass end of the capital structure, and should in a low-growth balance sheet recession be savaged as the systemic balance sheet capacity to warehouse equity contracts severely.

third, as has been noted in reviewing richard koo's data as given in exhibit 13 that accompanied this talk on the balance of financial deleveraging in japan (and which are also reproduced in his book), the character of japan's balance sheet recession changed over time. the 1990 bust saw corporate borrowing slow to nil by 1994 and then stay near the zero line through 1996. this might be characterized as a 'first phase' in which japan's banks with the blessing of the government engaged first in pretend-and-extend lending. the 'second phase' kicked off with the advent of the only true bank liquidity crisis of the entire period, which corresponded closely with the hashimoto fiscal rebalancing of 1997. as the government attempted to withdraw spending support from the economy and improve government finances, the economy dumped into a deflationary tailspin which forced radical deterioration of credit quality. following a series of massive liquidity injections which resolved the banks' liquidity issues, profitability returned as the economy emerged from this second recession in early 1999. as can be seen on exhibit 13, however, profits were directed by the corporate sector directly into debt repayment -- and this did not materially abate until 2005, when (as can be seen in exhibit 11) japanese corporate debt fell to a 32-year low of approximately 40% of GDP.

examining the LEI-nikkei chart, it is possible to discern a change of phase around 1996 as well. (further, i suspect but cannot show one would find similar action following the distressing 1937 fiscal rebalancing attempted by the roosevelt administration.) though economic activity boosted by renewed efforts at government deficit spending thereafter improved, the prices in asset markets diverged from LEI and continued on their downward path throughout the second phase. this is i think the kind of repudiation of the cult of markets and the asset-based economy on which recently bill gross and many others have mused. japan had at long last by 2005 returned to a asset valuation regime dominated by discounted cash flows, and not leverage seeking capital gains. so i expect will the united states in time.

in any case, that change of regime still lies in the future. while material evidence of contracting credit outstanding is plentiful, a lesson of the japanese example may be that credit outstanding may merely stagnate for some time pending future developments for so long as government spending maintains employment and income levels. edward harrison has made tentative suggestions in this direction, and does again today with the PCE release. but it must also be said that the nature of the american credit bubble -- being primarily household and not corporate as was the case in japan -- i think diminishes the capacity of the banks to conspire on the kind of pretend-and-extend schemes that are easier to keep quiet at the corporate level of discussion. particularly considering the potential of household strategic default on mortgage debt, which is an option not open to companies wishing to avoid bankruptcy, individuals can free a significant amount of cash flow by simply walking away and renting for a while without terrific consequences. moreover, household cash flow may be quite a bit less reliable given the potential for growing unemployment and strategic (or simply unavoidable) wage reductions on the part of businesses. such are concerns evidenced in household surveys, as relayed by ft alphaville. should default play a larger role in the resolution of the american credit bubble, one might expect credit outstanding to households to deteriorate quite a bit faster than was the case in japan. and that would advance our transition to the 'second phase' markedly.

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Good post, gm. And with respect to your last paragraph, I've had very similar thoughts regarding how a debt bubble dominated by household debt might play out differently than one dominated by corporate debt.

"2005, when (as can be seen in exhibit 11) japanese corporate debt fell to a 32-year low of approximately 40% of GDP"

I don't see this on exhibit 11. Do you mean exhibit 16? If so the credit to GDP scale is on the right and shows corporate credit closer to 52% in 2005. Also note that this is bank credit only, so it excludes non-bank forms of debt (bonds, etc). Which, while it doesn't change any of your broader points, makes your statement regarding "japanese corporate debt" mildly misleading (admittedly Koo's source material is misleading here too). As I mentioned before, I think Japan's total corporate debt (loans and debt securities) dropped from 150% of GDP to 100% of GDP from 1990 to 2005. (See the graph on this post). The deleveraging trend is clearly the same in both cases, I just thought I should point out the discrepancies.

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you're right hbl -- i'm drawing the 40% figure out of memory and it isn't evident on the charts even if the delevering is. moreover we are talking bank credit and ignoring capital market debt, though iirc japanese firms are closer to the euro model of bank borrowing than the american one of corporate bond issuance when it comes to debt finance.

as a thought -- have you ever tried to contact koo with your data, hbl?

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The data I found says you are correct regarding bank financing being dominant -- it shows bank loans to non-financial corporate sector at 84% of GDP in 2005, versus debt at a total of 102% of GDP when you add in bonds and other non-share securities.

It hadn't occurred to me to try to contact Koo... senior as he is at Nomura and being the expert on this stuff I assume he's tough to reach and would be aware of the source of this data already, since it's just official Japanese government stats pages... It does differ a little from the data he presents, but there is probably some good explanation.

The main surprise for me was just how much extra government debt was added relative to the reduction in private debt... which doesn't reinforce his verbal selling points very well on how to navigate through balance sheet recessions by replacing private debt with public debt, then reversing them later. So he may not be that interested!

I was more curious as to the take of some of the chartalist thought leaders (such as Bill Mitchell), but despite fishing for comments twice on his site, I got no response. Oh well, I think I know what they would say anyway (the data doesn't particularly contradict any of their arguments as best I can tell).

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Thursday, October 29, 2009


ECRI weekly leading index turns down

via zero hedge, albert edwards outlines a basic investment strategy for the duration of the balance sheet recession.

One of the key conclusions from our late-1996 Ice Age thesis was that once the bubble burst, the close 35-year positive correlation between equity and bond yields would break down. This relationship had persisted for so long that it had become ingrained in investor psychology.

The 35-year period could be divided into two phases. The 1982-2000 equity bull market had largely been driven by PE expansion (not profits), which in turn had been driven by lower bond yields and lower inflation. Conversely, in the dismal years, the Dow went sideways for 17 years between 1965-82 as profits growth was wholly offset by multiple compression - driven this time by higher bond yields and higher inflation. Indeed, throughout this 35-year period, "bad" economic news was generally good for equities as it drove bond yields lower and PEs higher. Equities had only a very loose relationship with the profits cycle.

We knew though from Japan that in a post-bubble world, once bonds and equities had decoupled, that the equity market would mirror the economic and profits cycle. And so, despite Japan's structural equity bear market, one could enjoy numerous 50%+ rallies if one invested as the cyclical lead indicators bottomed out. Conversely one should have ALWAYS sold when these same lead indicators peaked out. After recent massive cyclical gains in equities, that extremely dangerous topping out phase looks as if it has begun.

We have long advocated that in a post-bubble world, investors could participate in explosive upside equity rallies driven by decent economic data and an underlying improvement of profits. We saw many of these rallies in the Nikkei over Japan's lost decade. And even if one believed, correctly as it turned out, that each 50% rally would wither away, it would be simply daft not to participate in these policy-induced cyclical rallies.

UPDATE: pragmatic capitalist picks up the news as well.

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Would be consistent with Dueker's business cycle index too. The question is whether that matters for the rally for reasons such as Barry describes .

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Monday, October 26, 2009


obama maintains expanded presidential powers

though the behavior of the administration has been clear for some time now, glenn greenwald in salon comments on the sharpest attack to date on the obama administration by the new york times.

my question: why did anyone think that a democratic president, any more than a republican president, would be inclined to diminish the power of his (or her) office? was that ever a serious consideration? who here wishfully cast obama as cincinnatus?

the sensible hope one might have had last year around this time for the obama administration and obama himself was that he might have at least slowed the relentless expansion of presidential authority which so thoroughly undermine the principle of divided powers as enshrined in the constitution -- but even this was but a hope, best founded in the notion that it would have been very hard to accelerate that expansion from the pace set by the preceding bush administration. the harder underlying truth, however, is that the era of divided powers is rapidly passing from the american political landscape, and that we are instead continuing a multidecadal transit into a post-constitutional model where the legislative branch, though it may retain the trappings of power, is increasingly a rubber stamp to be manipulated by the executive in order to give the appearance of democratic process to an imperial power structure. barring a successful revolt on the part of a divided, obsequious, self-interested, rent-seeking and typically incompetent legislative branch, this trend figures to propagate indefinitely -- and, should economic conditions deteriorate, perhaps even intensify with frightening speed.

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It was an error to combine the roles of Prime Minister and Constitutional Monarch in the same office. It's remarkable that it's taken a couple of centuries for the flaw to become so flagrant. Unless you think it started with Andrew jackson.

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never quite sure where you're going when you reference the un-constitutionality of various policies.

making the argument that a government policy is unconstitutional is typically a very difficult thing, even for the NYT editorial pagers.

That is not to say that it is "right" as a normal non-political wonk would interpret the word. It is simply that over the years the consitutution (appears at least) to have been interpreted governmental powers very broadly (i.e. the commerce clause, the delegation principle, general welfare clause, supremacy clause...) yet interpreted rather narrowly references to due process or equal protection (usually depending on the needs of the federal government).

Scrutiny over questions of the last two can vary widely depending on whether the policies which may conflict with strict interpretation serve a vested government interest. But at that point it begins to look circular rather than a formula for a system of governance based on any higher principles (i.e. does it serve legitimate government interests to implement policies which conflict with laws that limit government power?).

we appear to have our assumptions rather backward it seems. Rather than presume that any old garbage can be thrown into that elegant constitutional equation and the right results will be shat out the other side, perhaps it is exactly the opposite. It doesn't matter what is thrown in anymore, an autarky blooms.

Left or right... it makes no difference since both have little interest in remitting any acquired power back to the people.

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I'm reminded of the comment of one wag a few years ago, commenting on the delay in Iraq's formation of a new constitution. "Why don't we just give them ours, we don't use it anymore". It is so painfully obvious how we have lost our way as a nation. It is particularly painful when viewed from the perspective of the refreshing miracle of what it represented at the time of its creation.

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Thursday, October 22, 2009


LEI deconstructed, update

today the conference board released its leading economic indicators, showing a sixth straight month of increase. separately, the ECRI has been pounding the table as a bull on the back of their weekly leading series.

i last took a look at this in july -- pulling apart the various components of the LEI to distinguish between the effects of federal reserve and treasury liquidity provisioning for the financial sector -- money supply, yield curve, asset market prices and the consumer expectations that closely track them -- and the indications being provided by the 'real economy'. this is done on the principle that monetary policy in a balance sheet recession is basically broken and has little if any effect on an economy where debt reduction is now the priority of participants and loan demand is net negative.

the result largely conforms with some of the other evidence of the last few months. though the LEI as reported (blue line) is powering upward, the LEI netted of the most liquidity-sensitive components (yellow line) is decidedly underperforming. perhaps unsurprisingly, the more liquidity-sensitive elements are removed, the worse the performance of the series since march. moreover, the degree of underperformance appears to have widened again since july -- which again finds some confirmation in the talk about town, as it were. indeed the 'real economy' LEI has been barely positive in august and september, which has run the spread between the as-reported and net-of-liquidity cumulative series out to the wide of the (admittedly short) sample.

in fact it's hard to find a lot of encouragement in the slope of the curve even inclusive of liquidity-sensitive factors since april and may. just as the severity of the contraction in LEI softened from december to february, late in the cyclical recession which likely ended in the second quarter, this softening in the expansion of LEI -- along with persistently high initial claims and the continuing contraction in total loans and leases -- may rightly fuel concerns about a double dip.

of course this may simply be noise to be followed in october and november by booming new orders, sharply higher hours and more building permits as precursor to a sharp expansion. but for the time being i read this as a datapoint indicating sluggish and vulnerable economic performance.

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Using the LEI to measure economic strength is like counting your cavalry horses to determine your military preparedness in WWI. The world has changed.

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Double dip recession probability looks low.

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Last update here

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Wednesday, October 21, 2009


too small to fail

via calculated risk:

From MarketWatch: Treasury to introduce program to help small banks

The ABA and other bank lobby groups for small banks are seeking to have Treasury develop a program to provide TARP funds to small stressed banks -- those with less than $5 billion in assets -- on the cusp of a default that haven't received TARP funds.

And I thought everyone agreed that the FDIC closing small failing banks - albeit slowly - was an example of how bank problems should be resolved. Now we have "Too small to fail"?

at this point it should be no secret to anyone that the bankers own some prime turf in washington. if you need a refresher, this week's frontline is up to the task. there is no systemic reason for small bank creditors and shareholders to be protected by the treasury in this fashion. and yet treasury will apparently be slave again to the special interests of bankers. this is likely a political horse-trade made to satisfy the powerful regional banking lobby kept in washington by the industry as reward for backing FDIC premium increases as the depository insurance fund seeks ways to replenish itself short of drawing on its credit line at treasury following on its actions to support refundings of the money center banks with bond guarantees.

one wonders at what point popular dissent against this manner of utilization of taxpayer funds might take on a more material manifestation. hard times incite radicalism, and there's been a thread of commentary fulminating in financial circles which saw some more light yesterday in the ranting of paul farrell. further, bruce judson -- who has apparently written a book exploiting what he sees as the inevitability of social fracture in the united states -- is making hay out of a telephone call he received on NPR with regards to domestic terrorism. even the op-ed page of the new york times is openly questioning public allegiance to a framework which concentrates capital at the apex of the pareto distribution -- a concentration that has already been seen in some quarters as deeply dangerous. and anyone who has cared to tune in marc faber recently has heard that western capitalist economies are approaching collapse -- the future "will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society" as faltering demographics shred government finances and force currency debasement throughout the decade of the 2010s.

now, a blog with the title this one bears cannot be unsympathetic to such views. for what its worth, my timeline of decline has less in common with faber than toynbee or spengler -- the end will come, give or take a century or three. but the views of faber, farrell, judson and many others are an expression of a popular skepticism that has really taken flight in the west only since the first world war (though its intellectual roots are certainly far deeper, dating back as far as the western schism and the fracture of the master institution of western civilization which cumulated in the reformation). that widespread pessimism with respect to the capacity and intention of institutions has worked to undermine social confidence throughout the last century, and provoked in response a steady increase of authoritarianism in western governments.

as such, it is important at least to note the brazenness of recent divergences between the perceived function of government in the service of the elite and the perceived interests of the population as a whole. such displays are frequently the spark of real popular dissent, and the return of hardship will have provided plenty of dry tinder. how, i wonder, would news outlets cast the first episode of political or commercial violence to which the result of public reaction polling was, say, 60% approval?

does this lot of outrage in print amount to a precursor of social collapse? that's great copy but also anyone's guess and in any case highly unlikely (if for no other reason that such collapses are, even if inevitable, quite rare).

what is clearer, however, is that government regulation is the intended counterweight to the protections of limited liability in an efficacious capitalist system -- and further that the level of protection now being offered banks both large and small is more than enough to suspend their private charter entirely in the longer-term interest of the public. protecting depositors with an insurance fund such as the FDIC is itself a tradeoff in this vein, as it diminishes incentives to responsible banking; but now that protection is being further extended not only to bank creditors but even shareholders to some significant extent, the entire system of private credit allocation should have to be brought inside the government firewall. for so long as the entire domestic funding structure of banks is insured, the alternative will be that lenders will have every possible incentive to abuse the underwriting taxpayer with the most extremely reckless and daring lending, knowing full well that no real harm can come to them in the likely event of failure. even if the program is retracted at some point in the future, who would believe that the precedent for the next boom and bust had not been set?

in other words, the establishment of "too small to fail" is inherently incompatible with responsible private credit allocation and indeed any meaningful conception of capitalism itself. it's at the point of "too small to fail" that the responsibility for credit allocation should be legislated to a government office, should it not? and if it is not, then does it behoove a public ultimately responsible for its own future to militate toward such ends -- or, more likely and surely better, toward a convincing repudiation of taxpayer backstops for the entire private sector bank capital structure regardless of systemic importance?

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"for what its worth, my timeline of decline has less in common with faber than toynbee or spengler -- the end will come, give or take a century or three."

What Freeman Dyson has to say about this.
So, lastly my third heresies, I say the United States has less than a century left of its turn as top nation. Since the modern nation-state was invented, about the year 1500, a succession of countries have taken turns as top nation. First it was Spain, then France, then and Britain, than America. Each term lasted about 150 years. Ours began in 1920 so it should end about 2070.

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I think this is just a manifestation of what happens when the government starts to bail out entities--all of a sudden everyone wants the same treatment. The pigs who can shove their way up to the front of the trough do so because that's where the slops are, and they are rewarded for it.

It's every man for himself, and God against all.

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well written; one of your best pieces so far

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CALPERS can join the too big to fail list

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Wednesday, October 14, 2009


approaching the double dip

pragmatic capitalist links to this letter by hoisington capital, which kicks off with a view of the most important chart in the world -- made additionally interesting by the inclusion of data reaching back to the long depression of 1873-79. i disagree with much of what hoisington has to say on the multiplier of government spending -- while they view fiscal stimulus as pointless, in truth as stated by richard koo within the concept of the balance sheet recession and highlighted by marshall auerback it is the only realistic means of avoiding an overwhelmingly intense deflationary spiral should the private sector set about debt reduction. koo estimates a multiplier of fiscal stimulus in japan during their balance sheet recession between 1990 and 2005 of close to seven -- which is to say ¥2000tn of private sector debt was retired income was created (see comments) with a stimulus of ¥300tn -- and this appears yet better in light of the alternative, which is a collapse of incomes, deposits and wealth to perhaps half their former level.

absent the political will to massive new fiscal stimulus, however, thomas palley in the financial times via mark thoma lights the pathway of deleveraging from this monster debt precipice.

The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the “cash-for-clunkers” programme.

... The economic crisis represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years. That paradigm was based on consumption fueled by indebtedness and asset price inflation, and it is done.

palley analogizes a two-step credit crisis outlined by mckinsey earlier this year. with perhaps a thousand american banks set to fail as step two unfolds over the next 24 months, this is about the near future.

mckinsey ... is describing a second-wave credit crisis -- one related not to mark-to-market but to mark-to-maturity, which constitutes 90% of the assets of the american banking system -- which would see banks largely unable to earn their way to solvency over the next few years as loan losses accelerate and net interest margin (NIM) deteriorates even in an environment of stable or increasing loan demand. this dynamic will be particularly effective in killing off smaller banks, as they are both concentrated in commercial/industrial loans with exactly the delayed-fuse features mckinsey describes and suffering already from a deteriorating in NIM.

and this presuming stable loan demand. in an environment of contracting loan demand and insufficient stimulus, this figures to be a lethal banking (and economic) environment, with collapsing incomes driving asset prices lower and losses higher -- notwithstanding this morning's earnings announcement from JPM, which is heavily reliant on asset writeups resulting from remarking risk assets which, though still impaired and now wildly overpriced, have benefited from the liquidity-fueled rally since march. notably, via calculated risk, JPM highlighted continuing increases in loan loss reserving as they see weakness in their prime conforming mortgage portfolio -- a trend mckinsey and others obvious expect to continue.

the $64 question is whether sincere private sector deleveraging gets underway in spite of the efforts of the government. could the government blow another bubble? edward harrison has been playing angel's advocate with regard to this by examining unadjusted figures, and appropriately so. but this interesting takeaway from the JPM call underscores what i think will, with so much damage to the valuations of pledged collateral already having been done and likely to continue as valuations return from ponzi finance models to discounted cash flow, become the dominant dynamic:

Analyst: Loans were down about 5% linked quarter 16% year-over-year. Is that supply or demand, what are some of the ins and outs there?

JPM: Consumer portfolios, you have run off portfolios from Washington mutual and in retail, some tightening of underwriting standards in those businesses generally. So expect that at the origination levels, that for a period of time here, we are going to have downward pressure on those balances. We're in the business of making loans against our underwriting standards today. So it is active supply, meeting demand on that score. On the commercial side, you have seen it a little further down this quarter, and that is you know more, it is a little bit of everything but it is more demand clearly because we see extended credit lines utilized at the lowest levels of all time. You can see a swing in those numbers as soon as confidence returns in our commercial clients and they have some use for that money.

they may be waiting a very long time for that swing. a combination of continuing increased bank prudence (it would after all be hard to be less prudential than banks were in 2006) and more importantly net negative demand for loans as households and businesses retrench into balance sheet repair make, in combination with a populist political impulse to control sovereign debt growth, palley's and hoisington's darker view all too plausible. total loans and leases figure to be the predominant face of deleveraging -- until or unless there's another run on wholesale bank funding. retail sales -- via calculated risk -- will be driven in large part by both how (or if) households attack their balance sheet problems and what the government can muster in terms of deficit spending to accommodate their repairs.

recall that peak stimulus is right now. as CR noted yesterday and albert edwards among others have highlighted, all subsequent quarters will see diminishing effects, within a few months yielding to a tightening effect on GDP.

as this effect takes hold, with no further stimulus now in the pipe, with the prospect of accelerating bank failures, accelerating savings, contracting loan demand and continuing tighter lending standards, palley's prospect of a double dip figures to materialize in 2010 with frightening intensity. as was true in japan, this may suddenly forge the political will for greater fiscal stimulus globally -- but i expect only in a much deeper economic crisis can parliamentary will coalesce.

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Thanks for the post, GM. The irony of all this is that the government simply cannot (in the absence of a major war) ramp up spending fast enough to make a major difference even if it wanted to. There is no consensus absent an national emergency which will allow spending to increase quickly--defense spending will increase, but only by about 5%--ditto discretionary non-defense spending in the best case. SS payments are constrained by the lack of increase in the CPI, and Medicare to some extent in the same way. Those are the four basic pieces of the federal budget. The stimulus can increase spending, but slowly (since moneys need to work their way through the approval labyrinth) or else by simply filling holes in the state budgets.

Mind you, the inability of the government to significantly ramp up spending is not necessarily a bad thing, but it is ironic that Washington is incapable of even spending money in a way that will help. The WWI and WWII spending ramps were more significant because they increased from a vanishingly small base (in present terms), and even the small amount of money spent by the New Deal had an impact because it represented a significant increase in percentage terms.

The one body capable of ramping up quickly and almost infinitely is the Federal Reserve--for example, last fall it increased its balance sheet by about $1 trillion in one day. However, the cost is the end of any pretense of central bank independence. Previously, the Fed had only monetized debt in wartime emergencies; now it has played its last trump to bail out bank bondholders. . .

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whether it can be done quickly or slowly, bwdik, i think it has to be done. the alternatives are bleak.

one of course is a deflationary debt deleveraging. the other would be a successful reinflation that somehow sparks some combination of households and businesses to borrow madly once again.

there's a third avenue -- currency devaluation -- but (with apologies to eric janszen, whose views i'm reading up on) i think this something of a phantom. it's easy to forget that the US engineered a severe devaluation in 1933 by exiting the gold standard and nevertheless experienced a balance sheet recession that lasted until 1954. and hoisington has this much right in my opinion:

The inflation outlook from the monetary and fiscal standpoint looks truly deflationary, yet some believe that dollar weakness will reverse this circumstance and create inflation. This is unlikely. First, our imports are about 13% of GDP, and even if the dollar were to halve in value, the price of imported goods would not only have to compete with U.S. producers, but also their price adjustment would have to offset the other 87% of factors included in the pricing indices. Second, unlike the 1930's a 50% decline in the dollar would be difficult to engineer. Fisher recommended to Roosevelt that the U.S. should exit the gold standard, which he did in April of 1933. That was a fixed exchange rate system, and within three months the dollar lost more than 30% against the gold block countries and fell to 60% of its former value within the next five months. This spurred our exports and provided some price inflation (2.9% per year, GDP deflator) for the next four years. Then, in 1937 the tax increases (the next policy mistake) reversed the positive growth rate of the economy and drove price levels and economic activity downward again. However, even with that small period of price increases the overall price level never recovered from the 25% decline that occurred from 1929 to 1933, and thus deflation reigned. Today the declining dollar is a good thing in terms of our trade balance, but the modest change will be insufficient to offset the negative forces of insufficient domestic demand.

moreover, the yen strengthened remarkably, from 144 in january 1990 to a high of 83 in 1995 -- and yet japanese deflation remained controllable and their GDP did not collapse. that too would seem to indicate that the more important determinant by far is fiscal policy.

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the economist also notes the trend.

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Hi gm,

"koo estimates a multiplier of fiscal stimulus in japan during their balance sheet recession between 1990 and 2005 of close to seven -- which is to say ¥2000tn of private sector debt was retired with a stimulus of ¥300tn"

What is your source for this? I don't remember it in either the October or March CSIS talk. Is it in Koo's book?

I recently dug up Japanese debt data including the private sector and graphed it -- see this post. My derivation of the debt data seems sharply at odds with Koo's statement above (see especially this graph of nominal debt by sector which though unlabeled is in billions of yen).

By this data, private sector debt was well under 2000 trillion yen in 1990 (so couldn't have shrunk that much in any scenario), and really didn't contract much through 2005 since it kept growing until 1997 in nominal terms (though not as a ratio to GDP) before shrinking. Yet the public sector debt expanded significantly during the same period. I don't contest Koo's claim that fiscal policy prevented a depression, but I am puzzled by the debt data here.

Any suggestions on how to reconcile these facts? Even looking at total balance sheet liabilities in Japan (not just those categorized as debt), the official Japan Cabinet Office data shows them expanding from 4405 trillion yen on 1990 to 5890 trillion yen in 2005, so that again is inconsistent with an overall contraction. jck of alea blog kindly looked at my sourcing and seemed to think it valid, plus it matches some published data points I've found elsewhere. Hmmmmm.

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i thought someone would ask hbl! just after 28 minutes in the march talk, though i expect you could also do the math out of the data in his books (i haven't).

i doubt koo would disagree with you re: private sector debt -- his exhibit 13 slide shows debt growth halting in 1990 and earnest repayment (>4% GDP) kicking off only in 1997 following the only true credit crunch of the delevering.

i expect his 2000tn yen figure also includes 1500tn in capital losses in land and shares (ex 12). elsewhere in the talk he points out that this actually underestimates the losses by exclusing other assets, such as golf club memberships. in ex 26 he shows the change in japanese systemic bank balance sheets from 1999 to 2007 as being down about 100tn yen.

ex 13 also shows how he arrives at the 300tn yen fiscal stimulus debt figure.

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sorry -- in ex 26 he shows the change in japanese systemic bank balance sheets accounted as lending to the private sector from 1999 to 2007 as being down about 100tn yen.

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gm, thanks so much for your very helpful thoughts on this!

In terms of amount of government stimulus, the cabinet office data show a 640tn increase in government debt... but now that I look at the raw numbers again I see that the change in net worth of the government was closer to 300tn yen, i.e., the government also expanded its assets. So looked at in that way, the "cost" half seems to agree with Koo's claim.

I looked at the data and still couldn't figure out where the 2000tn reduction in private debt would come from (or why you would add in the loss of asset value to that). Then I managed to watch the part of the video again that you mentioned (though the time seek doesn't work right and I can't get to it again!) and I think he said what was avoided was a potential 2000tn yen loss in GDP (not a reduction in private debt). Which is baffling given that GDP was only 442tn yen in 1990. Perhaps he meant a potential cumulative 2000tn yen GDP loss over 15 years... I bet that's it.

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hbl -- of course you're right. in calling it the most successful fiscal stimulus in human history, he notes that spending 300tn yen prevented a cumulative loss of GDP of 2000tn yen -- and then says that the multiplier is therefore about seven, and not one or less than one.

this is a different statement of the fiscal multiplier than i've usually heard, but it's no less effective -- koo is essentially saying, is he not, that 300tn in govt spending translated into something like 2000tn in income that would otherwise very likely not have existed. koo derides much of the criticism of japan's fiscal stimulus which assumes (consequent of equilibrium modeling of this kind) that had the govt done nothing there would have been no change to GDP -- this makes it seem that fiscal stimulus produced only the difference between no growth and very slow growth, whereas in reality is produced the difference between very slow growth and total collapse.

but of course that extra income was not exclusively directed to debt retirement -- it seems very much that the govt spending replaced the portion of the income stream which was redirected from consumption to debt retirement on a one-to-one basis. so, for example, if businesses directed 6% of GDP to debt retirement and households further saved 4% of GDP more than before, the shortfall of 10% of GDP is what the govt had to borrow beyond its initial condition deficit to maintain GDP. ex 16 indicates lending to corporate sector declined from 400tn to 250tn, a reduction of 150tn, and in so doing declined from 85% GDP in 1990 to 55% in 2005.

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Yeah, I basically agree with you on what Koo is saying (thanks for elaborating). However I'm unclear on where how he derives the 2000tn yen estimate and how subject to debate that figure is. In the audio I got the sense maybe it was something basic like assuming a return to 1985 GDP levels (but then what level of growth?) but I could be wrong and it wasn't obvious to me which slide he referred people to.

So whatever the multiplier really was (since we don't know what would have happened under a different policy response), I do think your last paragraph is basically right on with respect to fiscal deficit spending needing to offset the increased private sector desire to save (where saving includes debt repayment) in order to prevent a contraction in GDP (and thus the desired savings level being thwarted). This is one of the core tenets of Modern Monetary Theory (Chartalism) as I understand it, though I still have more reading to do to finish assessing it. You might be interested in this Bill Mitchell post that mostly agrees with Koo's policy approach but comes from a different understanding of the monetary mechanics.

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Great comments, GM and HBL. I have always assumed that Mr. Koo's numbers were a little nebulous and stretched to suit his case. But I have a bigger bone to pick with his argument. One of his unspoken assumptions was that because massive government borrowing and ZIRP "worked" (i.e., prevented a disastrous deflation) in Japan in the last fifteen years, that the same strategy will "work" in the US now.

I have to think that the yen carry trade from 1995 (the advent of ZIRP) had some effect on world asset prices through the increased leverage it allowed. A second major economy going to ZIRP will have a much smaller effect (those who wanted to borrow at 0% have for the most part already done so. This assumes that the world's major financial players were able to borrow at near 0% in Japan.) But the rise in worldwide asset prices surely led to the continued increasing level of Japanese exports, which no doubt helped reduce the private debt levels. Absent this boost, would things have been the same?

I don't know if this theory is relevant, but it is only one example of how results could be different the second time around. Once people have been burned once or twice with the excess leverage that "free" money encourages they generally learn to leave it alone.

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Macro-man leans toward inflation by highlighting the argument that the "domestic" output gap may not be as large as believed.

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bwdik, your point -- we can't export our way out in a global contraction -- is well taken. of further particular distress to me in considering koo's argument is the primary difference between japan and the US -- which is the nature of systemic funding.

as john hempton really drove home to me, japan's banks were always surfeit with cash -- never did loans exceed deposits, and excess cash was always a feature.

the US is not that way; a large chunk of american loans are backed by wholesale funding based on borrowed foreign deposits. as a result we're highly unlikely to see ZIRP beyond policy rates -- we must compete for global funding as japan never did, and will suffer interest rate volatility as a result. more likely than not (presuming the fed fears and will not engage in a hyperinflation) that loans decline over time to better fit the deposit funding base as our current account imbalance normalizes.

stubbornly high interest rates limiting borrowing capacity, general decline in bank credit outstanding, permanently smaller securitization complex, working down wholesale funding hopefully without a run -- not a pretty picture, and not nearly so clean as was japan's.

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That was an interesting link to the Janszen presentation in your Twitter feed. BTW, the Mitchell link was by hbl above.

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Einhorn is betting on a currency crisis up to four or five years out.

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rb -- here's the speech in toto. i'm still waiting for reinhart/rogoff to come to fruition, which is to say something like 50% of sovereigns will default.

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hbl -- sorry for the twitter slight!

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check gregor's october 5 postings re: argentina -- interesting to note the powerful deflation that held for a year before the default and hyperinflation. anyone remember this? i doubt it.

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Wednesday, October 07, 2009


3q earnings season

via pragmatic capitalist -- expect upside surprises to dominate.

Unit labor costs have come down at an annualized 5.5% pace in the first half of the year. This is the second largest on record and has allowed corporations to cut costs at a rate that is substantially faster than their revenue deterioration. The math here is simple – profit margins are expanding rapidly. The last time the margin divide was this wide was in 1983. Revenues are likely to be largely in-line or worse than expected, but the market is unlikely to punish firms this early in the earnings recovery.

watch technicals following such a huge equity rally, particularly with liquidity concerns afoot -- but the fundamental backdrop here is very positive in spite of steady credit contraction and revenue slides. i have worried about the margin compression in inputs -- but the biggest input cost is labor, and labor is getting much cheaper.

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Tuesday, October 06, 2009


total loans and leases

chris whalen:

[W]hile we all do hope for better times ahead, the fact remains that the supply of credit available to the global economy continues to shrink with the balance sheets of banks around the world. ...

[W]hether the deal makes sense or not, there is just no financing to be found. The continuing reduction in bank credit is entirely visible, yet somehow the inhabitants of Washington and Wall Street continue to pretend that it just ain't so.

Lending by the largest banks that received government bailout support declined for the sixth consecutive month in July, the Treasury Department said in its monthly report. Average loan balances at the top 22 recipients of government bailout support dropped by 1 percent in July. Average loan balances had also fallen by 1 percent in June, reports the AP.

But the reduction in available credit is not just reflected in loan balances. More important to many industries and investors is the huge reduction in unused credit lines, what we call Exposure at Default or "EAD" in the IRA Bank Monitor. ...

Now it appears that the entire large bank peer group, roughly the same institutions in the Treasury lending survey, are all trying to reduce EAD as the banking industry heads into the worst part of the credit crunch in 2010. This, by the way, is why Citigroup, Bank America and other happy campers like SunTrust (NYSE:STI) are making all of this noise about repaying the TARP, hoping against hope that they can raise more common equity before those Form 13s starting appearing on EDGAR, showing that the smart money is running away from financials at flank speed. More on this next week.

Bottom line is that deflation is still the chief threat to the US economy, driven by a relentless contraction in bank and nonbank credit. Until we see a restoration of the market for nonbank finance and a sustained turn in the EAD of the large bank peer group, which accounts for almost 70% of the entire US industry balance sheet, we do not believe that any economic recovery will be meaningful in terms of jobs or asset prices. Indeed, we have to wonder whether the FDIC should even try to impose another assessment on the banking industry to fund failed bank resolutions when the effect of this action is to remove capital from the system and thereby accelerate the shrinkage of the collective balance sheet of US banks.

Before Secretary Geithner and the G-20 talk further about raising bank capital levels, we first need to find a way - and fast - to stabilize the existing capital base of the banking industry. Failure to do so, in our view, could be catastrophic for the global economy and could also further radicalize the political situation in the US, where many Americans are starting to realize that the party is well and truly over. As we said on CNBC on Monday, talking about raising bank capital at the present time is the functional equivalent of the imposition of the Smoot-Hawley Tariff Act of 1930. We desperately need a different approach.

i wholly agree with whalen -- traditional inflationary concerns are a non-starter in an environment where private sector credit reduction is overwhelming central bank balance sheet expansion and inexorably overtaking undersized fiscal stimulus. the much-discussed withdrawal of such support will, i suspect, relatively quickly create the political will for its reinstatement. (as an aisde, the reserve bank of australia today became the first to raise its policy rate, from 3% to 3.25%.)

the final arbiter of where we are going, absent a miraculous revival in securitization, will be total loans and leases. albert edwards via zero hedge:

One question I am often asked at the end of a presentation is “how will you know if you are wrong?” Resisting the temptation to totally reject this possibility, I think perhaps I can identify one thing that might indicate this post-bubble world had defied the law of gravity and was reinflating again. Back in the early 1990s minicredit crunch it was not until the middle of 1993 that private sector demand for credit began to grow (supply was not a problem as banks were already healthy). To gauge whether the world economy can surprise and escape this balance sheet recession, keep a very close eye on the bank lending numbers. They may hold the key.

the h.8 is arguably, barring the re-emergence of systemic funding pressure, the most important report being released for the duration of this balance sheet recession.

UPDATE: more from whalen via distressed volatility.

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ECRI, as you know, has called for a cyclical change in the FIG pointing to increasing inflation. Janszen continues to be resolute that deflation is impossible.

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What the heck happened in 2004? Why the big down spike then?

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they are banging on the table hard, rb. and who can really argue against their track record?

well, maybe i can, though poorly.
the harvard economic society immortalized by galbraith and others was forecasting recovery all the way into 1932. why? were they (and many others, including moody's and an as-yet-unrepentant irving fisher) stupid? of course not. indeed they were more intimately familiar with business cycles and intermittent depression than anyone now living.

i've never been able to track down one of their analyses, but i imagine they monitored a variety of cyclical indicators similar to what ECRI monitors in the LEI and FIG. i rather amateurishly attempted to get at that idea in deconstructing LEI.

what undid these persistently optimistic forecasts throughout the following few years was what they did not really attempt to observe -- a secular inflection point in private sector leverage.

i would say that, if this has not been a secular inflection point for private leverage in the united states and elsewhere, the ECRI will be right. if the fed can create larger current account deficits, get securitization kickstarted, start bank balance sheets expanding, we will avoid depression.

i find this to be illuminating:

Persons, Brookmire, and Moody, all looked to past data-series to understand the future. This technique can illuminate useful economic relationships that hold during “normal” times. Yet it is unhelpful when major unprecedented events (such as wars or depressions) occur. The forecasters studied here talked of having models, but in fact did
not have true models. A model is something that considers causation, and only Fisher perhaps meets that criterion. Most of the others really studied trends. They looked at the past and said, “if something happened before it will happen again.”

reading this paper for just the history of walter persons and his "A-B-C" (speculation-business activity-banking, or lead-current-lag) anticipation of business cycle turns might -- only might, pending future outcomes -- be a useful antidote to any hubris over the ECRI's magnificant cyclical record to date.

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rb, i read janszen only intermettently but with interest -- do you care to summarize your takeaway from itulip?

from my end, it seems he thinks a 2002 repeat is underway -- massive easing averts debt deflation. is that a fair characterization?

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funny bwdik -- i thought if anything someone would comment on the huge two-period surge in september/october 2008. that was the reclassifying of thrift assets (countrywide, washington mutual) to bank assets as BAC and JPM took them on -- so clearly the data is unadjusted for acquisitions.

that big tick down is october 2003, and could be related to the BAC-fleet deal -- but i hasten to add that i don't know.

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of course right after i hit 'publish' i find this:

A number of balance sheet items have changed as a result of declines in some banks� reported consolidations of variable interest entities (VIEs). Most of these declines reflect some banks� decisions to stop consolidating their VIEs in response to the announcement by the Financial Accounting Standards Board on October 9 that it had decided to defer the implementation of its Interpretation No. 46, Consolidation of Variable Interest Entities from the first reporting period beginning after June 15, 2003 to the first reporting period ending after December 15, 2003. For further information, please see the FASB website, In addition, a small part of the decline reflects a restructuring of some VIEs so that they no longer need to be consolidated on bank balance sheets.

in other words, that's where many off-balance sheet special purpose vehicles that later became so infamous as securitization imploded -- SIVs, conduits -- went off-balance sheet. bloomberg reflects in february 2008 -- cute how they speculate that maybe even lehman is in trouble....

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From my notes on what the ECRI uses as components of its FIG:
1. Industrial material prices
2. Real estate loans
3. Insured unemployment rate
4. Interest rates (yield spread)
5. Civilian employment
6. Federal and nonfederal debt
7. Import prices
8. Percentage of managers reporting slower deliveries (I have my notes down as vendor performance component of ISM index)

ECRI calls this their 3ps move i.e., pronounced, pervasive (broad-based among their indicators) and persistent.

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Couple of other notes:
1. ECRI claims to have validated their models for periods including the 1930s depression
2. I read Janszen intermittently too and my takeaway was the same as yours.

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Thanks for looking that up, GM.

The ECRI is just trying to sell their service--they are willing to twist things any which way to "prove" that they were right in the past.

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Not to bang ECRI's drum, but it's good to be aware of what they say about their own models . What if 2009 turns out to be like 1932-lite ?

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great link, rb. it's important too to realize that the private sector deleveraging of the US ran from 1929 to 1954 or so -- and in that time there were cyclical upturns.

as i said the other day, if that deleveraging doesn't get started -- and ed harrison for one is skeptical that it is starting -- ECRI is very probably right.

but if this is a secular turn in leverage -- and that's my disposition, given the heavy damage to both banks and pledged collateral valuations -- chances are ECRI's outlook right now is excessively rosy. the truth is that the ECRI dataset isn't comprehensive enough -- it hasn't seen but one other instance of a secular delevering, during which it did in fact miss a signal in 1930-31. and even then, the scale of private sector leverage this time around is much greater and inclusive than in any previous example thanks to the democratization of credit. i wish we'd been collecting data for 400 years through several of these long cycles; but as we haven't, we're stuck on correlations, any and all of which may break down.

to that end, i'm looking forward to reading the rogoff/reinhart book "this time its different" -- but the conclusions that emerged from their paper were obviously quite pessimistic. even then, the scarcity of fiat/floating rate currency regimes in even the 800-year record makes this blind sailing in many respects.

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Janszen says "Do not fight the Fed" and that the end-game is a currency crisis.

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Friday, October 02, 2009


BLS acknowledges birth/death model misstating job creation


The U.S. economic slump earlier this year was so severe it short-circuited the government’s model for calculating payrolls, raising the risk that today’s jobs report may be too optimistic.

About 824,000 more jobs may be subtracted from the payroll count for the 12 months through last March when the figures are officially revised early next year, a Labor Department report showed today. The revision would be the biggest since the government started adjusting the numbers in 1991.

The bulk of the miss occurred in the calculations for the first quarter of this year, the Labor Department said. The economy shrank at a 6.4 percent annual pace in the first three months of 2009, the worst performance since 1982.

The figures raise the possibility that the government’s calculations continue to miss the mark.

“We are probably still underestimating job losses,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “There could be another 30,000 to 40,000” that the data isn’t picking up.

That would mean the loss of jobs for September could turn out to be as high as 300,000, rather than the 263,000 reported today by the Labor Department. Today’s report also showed the jobless rate climbed to 9.8 percent last month, a 26-year high.

The potential revision for the year through last March would mean that the economy lost 5.6 million jobs for the period instead of the 4.8 million now on the books.

that would be a 16% underestimation of job losses for the period ending march 2009.

From April 2008 through December, the tax records showed the Labor Department’s payrolls figures overestimated payrolls by about 150,000, said Chris Manning, the national benchmark branch chief at the Bureau of Labor Statistics. That implies the estimates missed the mark by about 675,000 in the first quarter of this year, which currently shows a 2.1 million drop in payrolls.

“In this period of steep job losses, the birth/death model didn’t work as well as it usually does,” Manning said in an interview. “To the extent that there was an overstatement in the birth/death model, that is likely to still be there.”

The model added about 184,000 jobs to the payroll total last quarter compared with a 135,000 increase in the same period in 2008, before the financial crisis deepened with the collapse of Lehman Brothers Inc.

“This birth/death model is still assuming that we are getting new jobs from new-business creations,” David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, said in an interview.

“These additions are coming somewhere from ‘Alice in Wonderland,’” he said....

the birth/death adjustment has been a bone of contention for quite a while, with a dash of insight among others advocating the model and barry ritholtz disparaging it. while i joined in criticizing the adjustment, a year ago i believed oldprof to have been proven out. the voiding in his perceived vindication, however, appears to be material as ritholtz's essential criticism -- that the adjustment would fail, as an extrapolation of past conditions, to properly state job creation during turns of trend -- looks spot on.

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Barry (and many others) have criticized the BLS approach to measuring job creation for many years. Up until Q109, the modeling process worked very well.

I thought that q408 would be the "stress test" for this approach.

I'll write something that goes a bit deeper, and I trust that you will keep reading with an open mind, as you always do.



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of course, prof -- you are always thought provoking and worth reading! these are extraordinary times and it seems few models have dealt well with them. here's looking forward to your analysis!

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Trying to measure the number of jobs to the nearest 10,000 in a country with 160 million or so working people is an impossible task--by the time you can finally figure out what the count was in any particular month it is far past the time that the number was of any particular use.

I think that the real time (OK, one day delayed) withholding tax receipts data is a much better barometer of how things are going in the labor market. I assume that it is correct. . .

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What? We don't believe that 100K jobs a month were created in companies too small to count the past 2 years? Gasp ;)

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Trader Mark -- Instead of gasping, you could actually look at some data. The last published data from the Business Dynamics Series (which draws on the same state employment records used in this article) showed that during Q408 there were about 1.3 million new jobs at newly opening businesses (and therefore not in the survey) and 5.3 million at existing businesses.

So that would be closer to 100K jobs per week, not per month.

You may now breathe again.

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AWHI recovery in question

i've previously blogged on the aggregate weekly hours index as a leading indicator of cyclical recovery and revisited that view after last month's jobs report. today's employment situation release from the BLS, though better than those from the depth of the recession some months ago, was nevertheless somewhat disappointing.

the employment ratio, or EMRATIO, one of my favorite leading indicators of recession, ticked lower to 58.8% -- a level reminiscent of times before the mass migration of women into the workforce. most disturbingly, in falling over the previous three months from 59.5%, or (-0.7%), the pace of employment contraction is -- almost two years into this contraction -- seen to be accelerating again.

similarly, AWHI has reversed a moderation in its decline and ticked lower to 98.5. total hours (weekly) fell to a new low of 33.0 hours from 33.1. there's quite a bit of noise in the first derivative of AWHI, though there's little doubt that the rate of contraction peaked in march. but this will bear watching over coming months. turns up in AWHI have tended to lead EMRATIO, but if the recent stimulus-aided inventory cycle upswing has run its course further contraction in AWHI is likely.

and that double-dip scenario is really the primary concern. the excellent edward harrison posted his updated macro framework yesterday.

A lot of the economic cycle is self-reinforcing (the change in inventories is one example). So it is not completely out of the question that we see a multi-year economic boom. Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment opportunities and greater business and consumer confidence. If employment turns up appreciably before these cyclical agents lose steam, you have the makings of a multi-year recovery. This is how every economic cycle develops. This one is no different in this regard.

However, longer-term things depend entirely on government because we are in a balance sheet recession. Ray Dalio and David Rosenberg make this case well in the previous quotes I supplied, but it was a recent post about Richard Koo from Prieur du Plessis which got me to write this post. His post, “Koo: Government fulfilling necessary function” reads as follows:

According to Koo, American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage…

Again, when asked what would happen if the government cuts back on its fiscal stimulus, Koo replies: “Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest – to speculate on these things.’

This view of a second, more serious downturn mirrors the one I wrote of when I wrote about high structural unemployment last week. And, again, it is predicated on what government does. I wrote last November that if government stops the support, recession is going to happen. ...

Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009. I am convinced that it is politically unacceptable to have the government propping up the economy as Koo suggests it should. The question now is one of timing: when will the government stop propping up the economy? The more robust the recovery, the quicker the prop ends and the sooner we get a second leg down.

this looks a massive problem for the economy going forward. i've already been eyeing fed pressure for liquidity withdrawal, but given the pileup of excess reserves its questionable as to how much an expansionary fed has really aided the economy (beyond, of course, preventing the cascading collapse of bank liabilities that was otherwise inevitable following lehman brothers). but stimulus spending is another thing entirely. there's no question but that government deficits have enabled the economy to tread water since such spending began in earnest, offsetting the collapse of private consumption and increased savings. with pressures on household and business balance sheets as severe now as ever, such spending remains perhaps the only pillar on which the economy is supported. and yet, as eric sprott and others have noted, fiscal stimulus will gradually become a drag on GDP henceforth, as GDP is a first derivative statistic and stimulus was as frontloaded as was practicable. with the passing of one-off programs like cash-for-clunkers and the $8000 housing credit as well, the change in the level of stimulus spending is set to be down without the congressional passage of some further degree of deficit spending.

is there any political will for another, perhaps yet larger fiscal stimulus? i doubt it -- but i also suspect that a consensus in favor will be built out of the desperation of coming quarters, as it becomes apparent that (changes to net exports aside) increased private sector saving and balance sheet repair will be possible only through sustained, planned, large government deficits. failing that, we'll see a depressionary contraction in incomes and tax revenues which will force the necessary deficits at a much lower level of economic activity.

UPDATE: more commentary via mark thoma.

UPDATE: via pragmatic capitalist, david rosenberg picks up on the household survey.

[C]onsider that the Household Survey showed a massive 785,000 plunge in September which again was sequential deterioration because the decline the month before was 392,000. We’ll see if the legions of bulls will add this in their post-payroll write-ups today, but the Household survey actually leads the labour market at true turning points in the business cycle – and employment on this score has now slid by 1.2 million in the past two months.

These numbers far from validate the overwhelming consensus view that the recession has come to an end just because of one positive stimulus-crazed GDP print (didn’t we have that in 2008 too?); not to mention the fact that the last time we came off such a two-month falloff in Household employment was back in March when the stock market was testing fresh 12-year highs. Sustainability is the key and there can be no durable recovery without net job creation and organic wage growth. Both were lacking in today’s report – in fact, the combination of the workweek edging back down to retest the all-time low of 33.0 hours and the near-stagnation in hourly wages dragged the proxy for personal income down 0.2% (reads: in nominal terms) and the year-over-year trend is getting perilously close to deflation terrain at +0.7% from +0.8% in August and +1.2% in July.

UPDATE: and to reiterate rosenberg, spencer of angry bear.

[E]mployment growth in the household survey no longer appears to be bottoming. Usually the household survey leads the payroll survey at bottoms and the latest data does not look encouraging. Even the apparent bottoming in the decline in payroll employment stems more from the point that the employment drop was more severe a years ago, not that the current data is improving.

Finally, average hourly earnings were virtually unchanged as they rose from $18.66 to $18.67. With the drop in the hours worked this means that nominal weekly wages actually fell and the year over year gain fell to 0.7%. Consequently, the growth in nominal personal income is likely to remain negative. Something that has not happened since the depression.

UPDATE: albert edwards via zero hedge makes the point about GDP change all too well.

The lesson from the balance sheet recession in Japan is that the massive private sector headwind to growth has a long, long way to run.

If that is the case, we can expect, just like Japan, frequent relapses back into recession. The market now understands how an end of inventory de-stocking can boost GDP, i.e. it is the change in the change that matters. Similarly as Dylan Grice points out - link, it is the change in the fiscal deficit that is a net stimulus or drag to GDP. A massive 6pp stimulus last year is likely to turn into a 2pp drag on growth next year (see chart below). With continued private sector de-leveraging likely next year and beyond, how can one seriously not expect the global economy to relapse back into recession next year taking nominal GDP deep into an abyss?

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