Monday, February 27, 2012
The True Unemployment Rate: 36%
How would you define “unemployment?” Statistics on unemployment are bandied around in the media all the time. Changes in these statistics are hailed as good or bad news for the President, with varying degrees of emphasis from the news networks, depending on which party the President belongs to. But what do these statistics truly measure?
Would you define “unemployment” as measuring “people who want a job, but can’t get one?” This is, broadly speaking, the definition embraced by the Bureau of Labor Statistics. The trick to making those numbers dance lies in measuring “people who want a job.” The widely reported U-3 unemployment metric, currently standing at 8.3 percent, is very aggressive in shaving off people who have not made recent efforts to find work. It is further distorted by massive “seasonal adjustments,” which made over a million people vanish into thin air last month.
This is why the official unemployment rate gets lower when the American workforce contracts. Workforce contraction is a very bad thing. People who simply cannot find work, and languish on unemployment insurance for years, are the last thing a prosperous country needs… but those people don’t count in the official unemployment rate. For example, if everyone under the age of 25 abruptly stopped looking for work, it would be an economic disaster, but the official unemployment rate would go down, because the pool of people looking for work would get smaller.
(That’s not quite as far-fetched an example as it might sound, incidentally. Even the heavily-massaged U-3 unemployment rate currently sits at 23.2 percent for ages 16-19, and 13.3 percent for ages 20-24… and it’s about two percent higher for young men. Policies that increase the cost of labor, such as minimum-wage increases and mandated benefits, have a particularly punishing effect on young entry-level workers, since their labor has less intrinsic value than experienced older employees.)
This is precisely what has been happening under Barack Obama. The workforce is contracting with horrible speed, but it has the beneficial side effect of making the official unemployment rate go down a little, although 8.3 percent is still pathetic. The Administration bounces happily before the cameras and announces its policies are “working,” and job creation is now “on the right track,” even as their best months post job creation only slightly in excess of population growth – and they’ve only had a few such months. Pundits begin wondering if the old political rules that say re-election is impossible with unemployment over 6 or 7 percent might not apply to this President, if he can campaign on a slowly declining unemployment rate.
Another side effect of the way our unemployment statistics are prepared, and reported, comes when America's employment picture is compared to the figures from other nations. Are the unemployment statistics reported from, say, Greece or Italy calculated in precisely the same manner as the American U-3 rate? If not, then how can we make valid comparisons between them?
Since the concept of people who aren’t looking for work is so fluid, and some of those people have clearly been persuaded not to look for work because of job-destroying government policies, it might be more logical to measure unemployment using the standard incorrectly offered by the Bureau of Labor Statistics for the U-3 rate: “total unemployed, as a percent of the civilian labor force.” That’s what the U-3 rate claimsto measure, but it doesn’t, not by a long shot.
What is the current percentage of working-age Americans, eligible to participate in the civilian labor force, but not currently working? Answer: 36.3 percent.
That’s the worst labor participation rate in three decades, and it’s part of the worst employment picture we’ve seen since the Great Depression. Labor force participation is the number we should really be looking at, even more than the unemployment figures cooked up on the monthly basis by the Bureau of Labor Statistics. Those figures have their uses as well, but it seems reasonable to measure the overall health of the economy by the number of people who simply are not participating in the labor force.
This would always be a much higher number than the BLS unemployment statistic, even when the economy was humming along at maximum power. There are always going to be working-age people who drop out of the labor force, for reasons that have nothing to do with the nation’s overall economic health. The labor force participation rate hasn’t exceeded 67 percent in the past decade, so we would be looking at a true “unemployment” number that bounces between roughly thirty and forty percent. The difference between good and bad percentages is relatively small, which makes the true “unemployment” figure less sexy for news coverage, and therefore less useful to politicians… but it’s more logical to measure small changes in a large, accurate number than big changes in a small, largely fantastic number.
Writing at Red State, Rep. Jim Jordan (R-OH), who chairs the House Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending, offers an eye-popping chart measuring the effect of President Obama’s “stimulus” policies on workforce participation:
Jordan writes in support of the Jobs Through Growth Act, a package of dramatic reforms that includes a flat tax with two low rates, reduced corporate taxes, regulatory relief, and increased domestic energy production. Those are the sort of changes America needs to make, if we want to do more than fiddle with imaginary unemployment numbers, whose very definition is subject to “adjustment” on a massive scale. Those who define “unemployment” as “the number of working-age Americans who aren’t working” should waste no time on small reforms.
US deficit ‘a serious accident waiting to happen’
The rise in the United States public debt is a serious threat to the whole world if Washington fails to rein it in, the head of the Institute of International Finance warned on Feb. 25.
“You look at the U.S. budget deficit, and you cannot help but feel that this is a serious accident waiting to happen. And not just a serious U.S. accident, but a serious global accident,” IIF chief Charles Dallara told a conference on the sidelines of a G-20 meeting of finance ministers and central bankers.
“Countries that are occasionally immature in their ability to manage their economic affairs as well as they should -- and that includes most of them -- are going to find that the world is at risk,” Dallara said.
‘Shower of cold water’“These countries are going to wait for the marketplace to give them a shower of cold water. And we know that when that happens... it can give a shower of cold water to the global economy.”
The non-partisan U.S. Congressional Budget Office estimates that President Barack Obama will finish his first mandate with four consecutive fiscal years showing a deficit above $1 trillion.
Earlier this month an administration official said Obama’s budget for the current fiscal year projects a $1.3 trillion deficit, slightly higher than the $1.296 trillion in 2011.
According to estimates from the International Monetary Fund, the U.S. national debt surpassed the country’s gross domestic product (GDP) in 2011 and should rise to more than 107 percent of GDP this year.
Economics
Lloyds Banking Group makes annual loss of £3.5bn
Lloyds Banking Group made a loss of £3.5bn for the year to 31 December after setting aside £3.2bn to cover payment protection insurance claims.
In 2010 the bank, which is 41% owned by the UK taxpayer, had made a pre-tax profit of £281m.
The bank said last year that it was setting money to cover claims over mis-sold PPI - loan repayment insurance for borrowers should they lose their job.
Lloyds said its bonus pool for 2011 was £375m, down 30% against 2010.
The average bonus for each of its 100,000 staff will be £3,900.
Earlier this week the bank, which also owns TSB and Halifax Bank of Scotland, announced it would not be paying £2m of the pre-announced bonuses to 13 executives, including the former chief executive Eric Daniels.
The current chief executive, Antonio Horta-Osorio, took over at the start of last year. Towards the end of the year he took two months off after suffering severe sleep deprivation.
He returned to work last month, but said he would not take the bonus he was entitled to, which was worth up to £2.4m.Challenges
The bank is undergoing a wide-ranging reorganisation, which includes 15,000 job cuts and the disposal of 632 branches.Continue reading the main storyThe bank's shares fell after the results announcement.
Lloyds is also cutting its international activities to 15 nations by 2014, compared with 30 currently.
Its share price was 63p at the time the government took ownership of what was then just over 43% of the company. But it was about half that, at 35p, in Friday morning trading.
The bank said that it was "in a significantly stronger position than it was 12 months ago", but that the 2012 financial year was likely to present a raft of challenges, from regulatory issues to the eurozone economy.
Lloyds' chief executive, Antonio Horta-Osorio, said in a statement: "We expect the external environment to remain challenging in 2012, with a subdued economy, continued high levels of regulatory scrutiny and political uncertainty relating to the banking sector, and the continued potential for downside effects from financial market volatility and instability in the eurozone."
Lloyds, which is the country's biggest retail bank, said it expected the unemployment rate to top 9% in 2013.
It does not expect to see any improvement in the housing market this year or next and is forecasting prices to remain flat well into 2013.
Mr Horta-Osorio told BBC business editor Robert Peston that Lloyds is only one year into a three-to-five-year process of rehabilitating the bank.
He said that by the start of 2013, Lloyds may have adequate capital for the board to start thinking about the resumption of dividend payments, something that is crucial if taxpayer is ever to see a return on their investment in the bank.
BBC
$200 Oil Coming......
We have been saying it for weeks, and today even the WSJ jumped on the bandwagon: the sole reason why crude prices are surging (RIP European profit margins: with EUR Brent at a record, we can only assume the ECB will pull a 2011 and hike rates in 3-4 months even as it pumps trillions in PIIGS, banks bailout liquidity) is because global liquidity has risen by $2 trillion in a few short months, on the most epic shadow liquidity tsunami launched in history in lieu of QE3(discussed extensively here in our words, but here are JPM's).
Luckily, the market is finally waking up to this, and just as world central banks were preparing to offset deflation, they will instead have to deal with spiking inflation, because the market may have a short memory, it can remember what happened just about this time in 2011. And the problem is that when it comes to the inflation trade, the market, unlike in most other instances, can be fast - blazing fast, at anticipating what the central planning collective's next step will be, after all there is only one.
And if Bank of America is correct, that next step could well lead to the same unprecedented economic catastrophe that we saw back in 2008, only worse: $200 oil. Note - this is completely independent of what happens in Iran, and is 100% dependent on what happens in the 3rd subbasement of the Marriner Eccles building. Throw in an Iran war and all bets are off. Needless to say, an epic deflationary shock will need to follow immediately,just as in 2008, which means that, in keeping with the tradition of being 6-9 months ahead of the market, our question today is - which bank will be 2012's sacrificial Lehman to set off the latest and greatest deflationary collapse and send crude plunging to $30 just after it hits $200.
How do we get to $200 crude? BofA's Francisco Blanch explains:
Oil could spike to $200/bbl to further slow down demand
In a supply-constrained world, however, oil is unlikely to spend much time hovering around its price floor. Rather, we believe oil prices will likely remain a key constraint on global economic growth. This suggests that prices will continue to spike over the next five years to keep on rationing demand back down to the limited available supplies. As we have highlighted before, the world economy can hardly afford to spend more than 9% of its GDP on energy (Chart 4). But central banks such as the Fed or the ECB will likely remain focused on expanding their nominal GDP values to smooth out the ongoing deleveraging cycle in the US and European economies. In a supply constrained world, increased liquidity should set oil prices on an upward path. In other words, as nominal global GDP in USD expands to $92tn through 2016, demand rationing will likely require ever higher $/bbl prices. On our estimates, occasional demand rationing episodes could result in prices occasionally spiking to $200/bbl over the next five years (Chart 5).
And for the nth time, IT IS ALL THE CENTRAL BANKERS' FAULT!
High liquidity is likely boosting Brent crude oil prices
As we have explained in previous notes, the prices of constrained real assets tend to appreciate in times of ample liquidity. Oil prices are no exception and have been supported by the environment of negative real interest rates prevalent in DM, in our view (Chart 6). Using historical data on USD real interest rates, we have previously tried to estimate the impact of negative interest rates on oil prices (Chart 7). Our conclusion is that a 100bps decrease on USD real interest rates historically increased Brent crude oil prices by more than 6% in the subsequent year.
Liquidity impacts oil prices through several mechanisms
This negative correlation between real rates and oil prices is the result of several mechanisms; some very direct and some more subtle. First, not all sectors of the economy respond in the same way to monetary policy. As a sector with severe supply constraints, oil prices should behave differently from other prices in the economy when demand is expanding (or contracting less) due to easy monetary policy measures. In addition, if easy monetary policies are to force consumers to consume and companies to invest, the impact of low real rates is likely to gear consumption towards durable goods and investment towards infrastructure, both of which are energy intensive components of GDP. Finally, oil producing nations have very little incentive to produce beyond their budgetary requirement if returns on their assets, held in international reserves or in a SWF for instance, are yielding below inflation expectations (Chart 8).
The only solution: price exhaustion, plunging margins, and a deflationary shock, yet one which is unexpected and stuns the market out of the liquidity feedback loop. Lehman 2.0 anyone?
High prices will ultimately cure high prices
But oil prices cannot go up forever. Should the price differential to natural gas stay this wide or even continue to widen, large-scale substitution could come into play. Substitution out of oil has been going on for decades, but the price differential between oil and other fuels is now at record levels (Chart 9). Inevitably, ingenuity will trigger unforeseeable changes in energy demand patterns on a ten year time horizon. So even if the super-cycle in oil continues for the next five years on tight supply and demand balances, new technologies should start to reduce global oil consumption in a meaningful manner by 2016. Having said that, we believe that oil will continue to trade at a substantial premium over other fuels through the end of the decade, even if the current Brent crude oil to US natural gas price ratio of 10 to 1 seems unsustainable in the long run.
Luckily, we have seen this all play out before: liquidity surge, collapse, rinse, repeat. Only in the meantime it is only the lower and middle classes that lose. Prepare to see some astronomic numbers in crude, gold and all other commodities before the cycle is primed for repeating all over again.
How do we get to $200 crude? BofA's Francisco Blanch explains:
Oil could spike to $200/bbl to further slow down demand
In a supply-constrained world, however, oil is unlikely to spend much time hovering around its price floor. Rather, we believe oil prices will likely remain a key constraint on global economic growth. This suggests that prices will continue to spike over the next five years to keep on rationing demand back down to the limited available supplies. As we have highlighted before, the world economy can hardly afford to spend more than 9% of its GDP on energy (Chart 4). But central banks such as the Fed or the ECB will likely remain focused on expanding their nominal GDP values to smooth out the ongoing deleveraging cycle in the US and European economies. In a supply constrained world, increased liquidity should set oil prices on an upward path. In other words, as nominal global GDP in USD expands to $92tn through 2016, demand rationing will likely require ever higher $/bbl prices. On our estimates, occasional demand rationing episodes could result in prices occasionally spiking to $200/bbl over the next five years (Chart 5).
And for the nth time, IT IS ALL THE CENTRAL BANKERS' FAULT!
High liquidity is likely boosting Brent crude oil prices
As we have explained in previous notes, the prices of constrained real assets tend to appreciate in times of ample liquidity. Oil prices are no exception and have been supported by the environment of negative real interest rates prevalent in DM, in our view (Chart 6). Using historical data on USD real interest rates, we have previously tried to estimate the impact of negative interest rates on oil prices (Chart 7). Our conclusion is that a 100bps decrease on USD real interest rates historically increased Brent crude oil prices by more than 6% in the subsequent year.
Liquidity impacts oil prices through several mechanisms
This negative correlation between real rates and oil prices is the result of several mechanisms; some very direct and some more subtle. First, not all sectors of the economy respond in the same way to monetary policy. As a sector with severe supply constraints, oil prices should behave differently from other prices in the economy when demand is expanding (or contracting less) due to easy monetary policy measures. In addition, if easy monetary policies are to force consumers to consume and companies to invest, the impact of low real rates is likely to gear consumption towards durable goods and investment towards infrastructure, both of which are energy intensive components of GDP. Finally, oil producing nations have very little incentive to produce beyond their budgetary requirement if returns on their assets, held in international reserves or in a SWF for instance, are yielding below inflation expectations (Chart 8).
The only solution: price exhaustion, plunging margins, and a deflationary shock, yet one which is unexpected and stuns the market out of the liquidity feedback loop. Lehman 2.0 anyone?
High prices will ultimately cure high prices
But oil prices cannot go up forever. Should the price differential to natural gas stay this wide or even continue to widen, large-scale substitution could come into play. Substitution out of oil has been going on for decades, but the price differential between oil and other fuels is now at record levels (Chart 9). Inevitably, ingenuity will trigger unforeseeable changes in energy demand patterns on a ten year time horizon. So even if the super-cycle in oil continues for the next five years on tight supply and demand balances, new technologies should start to reduce global oil consumption in a meaningful manner by 2016. Having said that, we believe that oil will continue to trade at a substantial premium over other fuels through the end of the decade, even if the current Brent crude oil to US natural gas price ratio of 10 to 1 seems unsustainable in the long run.
Luckily, we have seen this all play out before: liquidity surge, collapse, rinse, repeat. Only in the meantime it is only the lower and middle classes that lose. Prepare to see some astronomic numbers in crude, gold and all other commodities before the cycle is primed for repeating all over again.
Zero Hedge
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