The myth of unemployment insurance

Posted by Ray on April 29, 2010 under Main | Be the First to Comment

First, the weekly initial claims data today was another squishy soft 448,000 and continuing claims dropped a tad, but are way too high. This confirms that job shedding is still the order of the day, 2 ½ years later, and that is not good news. To think that we can post strong job growth or that “employers are on the verge of hiring” with numbers like this is absolutely ludicrous and I would question what drugs one would be taking to suggest otherwise. Seriously, if employers are about to hire why are weekly claims still in nose bleed territory? Why is the work week at 33 hours? Why are wages, the trend at least, lower? Sure, the numbers are better, but less bad is simply less bad.

Now to the myth, conservatives and some economists suggest that unemployment insurance keeps people out of work longer than if they did not have the insurance. The people who make this claim point to old studies or junk science studies to verify this claim. So there is no mistaking my thoughts on this let me be succinct about this, they are utterly and hopelessly wrong. Either they saw what they wanted to see in the data or did not understand what they were looking at.

Studies, and I know this to be true after authoring several of them in my career, rarely surprise the author in regards to their actual conclusion versus the prewritten thought of what the results will be. Essentially, a person’s bias always comes through in the writing and how the data is interpreted. In even worse cases the results will confirm the person who actually pays for the “independent” study thoughts or position, shocking, but very true. Try, for example, to find a study written for the insurance industry that is harsh on insurance industry product. This is what happened with these unemployment insurance studies, they are literally junk science.

Anyone who suggest that receiving $300 a week is worth passing up any job is clinically insane and disqualified right from the beginning. Yet, that is what most of these studies suggest. What they conclude is that a person receiving unemployment benefits will pass on jobs that paid less than their last job and, by some miracle, the person will only accept such a job if their benefits are about to run out. I am not making this up, this is, basically, what these studies conclude. What the person who wrote this nonsense has not done is think through why the previous stated result actually happens, which is why these studies should be disqualified as nonsense.

I am sure you have figured out why people will take any job right before their benefits run out, but let’s talk through it anyhow. Since the person is living large on $1,200 a month unemployment benefits, when their apartment costs $1,500 a month plus other cost of living expenses, they will pass up a $60,000 a year job because it pays them less than their previous $150K a year job. Why would that be? Perhaps this is because they need to make that level of income, because of kids and a lifestyle built on the $150K a year income, or they like not doing any work and collecting $1,200 a month in unemployment benefits. After all, who doesn’t like deficit spending? The intellectual heavyweights claim that this is evidence that unemployment insurance keeps people from taking “any” job and causes people to stay on the benefit until the very end.

Again, that conclusion is nonsense. I agree that some jobs may be passed up because it pays people a lot less than what they were making before, but we are talking about a huge disparity between what the person actually made before and the proposed new income, usually 30%+ disparity in past and potential income opportunities. I highly doubt any of the authors of the study would take a 50% pay cut to “take any job” versus waiting to take the right job with similar income. They literally think that a person who is unemployed should take any job, that is reckless thought and employers would disagree with this conclusion.

Employers often turn down well qualified candidates because they are “over qualified,” why would that be? Simple, because the employer knows the person is just taking “any job” and will leave when another opportunity arises. That is why people who are overqualified are not hired as employers know that high turnover will be disruptive to customers and his/her business and add additional expenses down the road. Instead the employer waits for the right employee to come along. This aspect of the unemployment insurance studies is completely ignored and, instead, the authors say that employees and employers, to a certain degree, should act recklessly and take any job that comes along which will cost employers, nationwide, billions of dollars in future expenses all because unemployment insurance is making people lazy.

Can you see how the studies on this topic are inaccurate and misleading? They reject reality and replace it with their own fantasy land beliefs. What is really funny is that they would never, unless they actually had no choice but to take it, a job that would pay them ½ of what they are currently making, but everyone else should because they are on that “generous” public dole of $300/week. The results are skewed because of the authors bias and because people will take any job if their unemployment benefits are about to run out. However, that is not an example of “these people are lazy” it is an example of “these people are desperate and will take any job.” Even though the taking of just any job is out of desperation the authors accept this as a “see, I told you so” which is a very disturbing way of interpreting the data.

Sponsored studies should not lose their integrity and confirm the sponsors predetermined conclusions, but they almost always do. This is why when a study is quoted the sponsor should also be disclosed so the person reading or watching can figure out that the study is biased towards a certain conclusion. You may be asking yourself, why are these sponsored studies biased towards a preconceived conclusion and rarely differ? It is because the research business is a tough business and if one firm will not do it another will, for $50,000 to take a little piece of one’s soul and integrity. You will never get rid of sponsored hit pieces, but if the sponsor is disclosed you might be able to figure out which way it is biased towards.

The bottom line is that unemployment benefits are a good thing and we need to keep them. No one is secretly getting rich off of these benefits, but merely using the benefit to pay the basic bills and feed their family. To suggest anything different is insane and merely ideology coming to the surface. But I can assure you of one thing, if they were unemployed they would not turn down the benefit which makes them a hypocrite.

Greece IS a big deal

Posted by Ray on April 27, 2010 under Main | Be the First to Comment

Apparently the markets, that wonderful forward looking discounting mechanism, did not see or have fear what is happening in Greece. It is safe to assume that this proves that the markets are not efficient and it fails to see potential problems. What is interesting is that Greece and Portugal were not or should not have been a surprise to the markets since we have all known about the issues with the PIIGS for months now. How anyone could have been surprised by this news today is beyond me. I guess the junk rating on Greece may have been a surprise, but come on, when the 2 year note was yielding 11% how in the world can it be anything other than junk?

The market has gone up for 8 weeks in a row and while the talking heads thought this perpetual “tortoise rally” was normal anyone who has even a little investment experience knew it was not. I still remember Dennis Kneale, last week, calling people who held cash “fraidy cats” because the market is back and it will be a bull market forever. The world does not work like that and the risk trade has been, frankly, out of whack. Money has been pouring in to everything from high yield to emerging markets in the expectation of a steady 1-2% a day. This was verified from mutual fund flow data reported last week which showed investors moved more money into equity funds, for the first time in a longtime, and, in my mind, confirmed we must be near a top, dumb money always moves in after fantastic rallies.

Whether or not this was a top remains to be seen, but it certainly looks like it from my lens. I have been wrong before and might be again, which I admit. However, even though I was wrong it doesn’t mean that the markets were right either. Earnings are better, I still see some misses in revenue though, but the underlying macroeconomic data has merely gone from very bad to just plain bad. When we cheer a 57% confidence reading that is a problem because that it is a horribly low number. The housing data is not verifiably strong when you have, like in October, a rush of people buying for the tax credit right before it expires. If the housing numbers stay “strong” for May then you may say housing is rebounding, but I highly doubt we will see such strong numbers at that time. Housing is a key indicator because it employs so many people and homes were the collateral that were the bad debt sitting on bank balance sheets.

Unemployment remains incredibly high, use the U-6 data not that foolish headline number, which is a severe problem. Given that weekly claims have stabilized at -450K is horrendous at best. That number shows that private employers are still shedding jobs and I am confident that the employment report next week will show “stellar” job creation in the government sector and in the temporary help area, those are not good areas to see growth in. I am a believer that the temporary help is just that, temporary and will not convert into fulltime employment, we would be seeing that conversion by now, but we are not. Housing problems plus high unemployment will keep the economy down for some time.

On top of the squishy soft economic data being heralded as a full blown recovery, don’t get me wrong less bad is a welcomed improvement, we have a sovereign debt crisis. People claim that Greece is only 2% of Europe’s GDP and dismiss their troubles. That is a bad idea because while they are right about Greece they conveniently forget that all the PIIGS account for some 13% of Europe’s GDP and they are all in trouble. Spanish and Italy’s bonds have been trading lower pushing their yields up over 4% and Portugal was officially downgraded, that is all really bad news. Each country, individually, is not a big deal, but combined we are talking about the potential to default on hundreds of billions of dollars worth of sovereign debt.

To put this into prospective, France owns some $781B of PIIGS debt, if they all default what will happen to France? They will be in trouble, of course. Then there is Germany, how much PIIGS and French debt do they have? I do not know, but I assume a lot. What will happen to Germany if they get stuck with declining value of all that paper? They will have to bailout their banks, I assume France would have to do the same for their banks as well. That, basically, puts the banking system in jeopardy again, in less than 2 years. What I am explaining, probably in a horrible way, is what contagion looks like and it doesn’t end there either. The U.K. has exposure to all these countries and they are already in horrible financial shape and the series discussed above makes the U.K. susceptible to the contagion.

U.S. banks have exposure to both European banks and sovereign debt which means out fragile banking system could face another challenge. Let us not forget that the U.S. is also heavily indebted, along with Japan, and people may start to question the safety of U.S. Treasury debt, as they should I might add. From my lens, in a worst case scenario, meaning this all happens, it would be a coin toss as to which country goes next, either Japan or the U.S. given their immense debt loads. This scenario is unlikely or has a low probability of happening, but it is possible and it could trigger a global currency crisis.

This explains why gold went up today in the face of a stronger dollar and a rush of selling from the market. Even silver held its own today in the face of dollar strength. This shows that gold is still a flight to quality, it is also in a bull market as well, and it is a trusted currency. In fact, gold’s rally today is why I think it is possible for a global currency crisis because if this was another credit crisis, like 2008, it would have sold off for liquidity, but it did not. I am not sure if I would be buying gold right now because I already own a position, but if I did not own any gold I would be a buyer.

All is not well in the global markets and people should stay nimble as to where to put their assets until things settle down. I would say this decline is extremely bearish and way overdue, the higher the market went the worse the selloff would be, which could make it worse. It was insane to think that volatility would not comeback and that people went from sheer panic a year ago to such utter complacency this year. The worst part about all of this is if this does trigger another crisis what can the Fed or the governments do to calm the markets or remedy the situation? Nothing, they already spent all their ammo and they even had to borrow some to boot. I am not saying this will trigger another crisis, but it certainly has all the ingredients for one, if you look at the big picture.

What year is this?

Posted by Ray on April 23, 2010 under Economy, Main | Read the First Comment

Quotes from The Great Depression: A Diary (click to buy). If I left the dates out you might think I am quoting a modern day book, but I am not. Only a fool thinks history does not repeat itself.

“It is also interesting to note that the effort to create credit by having the Federal Reserve Bank buy U.S. bonds in the open market has failed. Huge reservoirs of credit are available but banks won’t make loans because business is too uncertain. It seems to prove that when business starts moving credit will expand automatically but the artificial creation of credit will not expand business.” November 18, 1933

“The U.S. Treasury will face the task in a few weeks of paying out huge amount for bond interest and maturities. Where will the money come from – greenbacks (printing press)?” November 18, 1933

“Industry continues to boom and the entire public seems to be speculating in the stock market. Almost as bad as 1929. Last Friday was a record day of the year with 9 million shares changing hands. The whole recovery has been so spectacular as to almost be unbelievable. Because so much of it is based on inflation theories I have doubted its permanency. The next few months should tell the story. In the meantime lawyers and professional groups have failed so far to share in the boom.” July 3,1933 – sound familiar? The Depression was just getting going and the boom was because of FDR confiscating the gold and adjusting the price, effectively taking U.S. citizens off of the gold standard, but the U.S. still honored international settlements in gold.

“For the 12th consecutive day stocks have been drifting lower. Congress starts an investigation of short selling.” April 13, 1932

“During the boom years it became popular to buy real estate at inflated prices on a shoestring. This was done by encumbering it with a 1st, 2nd and 3rd mortgage. Second mortgage companies were formed to buy 2nd mortgages at a discount of 10% to 25% per year. It has proven to be a bad investment because at each sheriff sale the 2nd is wiped out. Most of these companies have frozen assets and seem to be heading for bankruptcies.” About June 5, 1931

“Magazines and newspapers are full of articles telling people to buy stocks, real estate, etc. at present bargain prices. They say that times are sure to get better and that many fortunes have been built this way. The trouble is that nobody has money.” July 30, 1931 – He further went on to say in 5/16/32; “This advice was premature. Here a year later prices are 1/3 of what they were in 1931.”

The point of this is that we may very well be in one of the peaks and valleys that were fairly common during the 1930’s. If you look at the economic policies of Hoover, which FDR took over and expanded, they are very similar to what we see the present government doing. As it turns out these policies actually extend the problems because banks cannot purge the troubled loans and assets, sound familiar, which created zombie banks. Eventually banks began to get states to pass laws restricting withdrawals, they did this with life insurance loans as well, and that still did not stop banks from failing. Bad mortgage debt is what caused the banks to fail, sound familiar?

The assets of depositors ended up frozen and shareholders were wiped out when a bank closed, they had double liability back then which means shareholders could lose more than they invest in bank stocks if the bank failed, they would get sued basically. Many of these banks did reopen thanks to Hoover’s Reconstruction Finance Corporation, but the savings accounts or passbooks were frozen. These passbooks were used as currency as people would sell them for pennies on the dollar, in hopes the institution would allow withdrawals at full face value. It is interesting to see how this al played out and what the average person was thinking during those times. I have to tell you, this book is all one needs to read about the Depression. I am sure Ben Bernanke learned a lot about the technical’s of the Depression, but unless he read this book he does not know squat.

The real killer, according to Benjamin, was the Smoot-Hawley Act, which placed high tariffs on imports to prevent dumping. Europe had devalued their currency so the tariff was put in place to make sure people bought American. It did not work and made things worse. Does this sound familiar with the rhetoric coming out of Washington about China’s currency value? The interesting thing is that, just like now, all countries were devaluing their currency in order to remain competitive and export in order to improve their own economies, it failed. When every country is devaluing and trying to export, as Benjamin points out, who is left to buy anything?

I will post more quotes from this book, but I urge everyone to read it. The similarity between the 1930’s and today is amazing to say the least. They tried to create inflation and failed, just like Ben is trying, and they tried the NRA, like the stimulus bill but they made the NRA much more strict and imposed higher pay and shorter hours so they had to hire. The NRA put unions in a position of power and several times Benjamin pointed out that labor troubles would come and they did. The current administration also wants more union jobs and activity, I fear that will fail to as unions strike often and are the primary reason the U.S. is not competitive in manufacturing, among other reasons.

History repeats itself and if we forget that basic rule we will always be doomed to repeat it. People who claim this is nothing like the 1930’s are insane. Sure, it is not as severe, maybe it will be if we relapse, but we are showing many of the same symptoms as were present in 1931, 1932 and 1933. Even the market action is somewhat similar. The one difference I foresee in the future is inflation, which only materialized in the 1930’s through price controls and increasing the price of gold, but overall inflation was very tame in the Depression as there was no money velocity, again, sound familiar?

We are slightly more creative in 2010 so I expect money velocity or a full blown currency crisis in the near future. In 1933 we really could not destroy our currency because of the gold standard, we did float the dollar though, but in today’s world we have nothing backing our money so it could really go to zero. It’s scary if you think about it.

Joe, please pass whatever you’re smoking

Posted by Ray on under Politics | Be the First to Comment

I am not a fan of the current administration, I think most people know this by now and no I am not a racist or anti-government, but the action lately has just gone over the top of prudent governance. Joe Biden, at a fund raising event, said that the economy will be adding 500,000 jobs a month in the near future. Joe, whatever you are smoking, please pass it because you are feeling no pain and I could use that for a little while.

The notion that this economy will create 500K jobs a month in the “next few months” is absurd and irresponsible. How in the world will this happen? We are still seeing 450K+ a week in initial claims which shows that employers are still laying people off. The work week is still well below 40 hours, coming in at a little over 33 hours a week, and wages are starting to deflate. If this economy was going to create 500K jobs in the next few months we would not be seeing what we are seeing. I understand this administration is under tremendous pressure to boost employment, but there is a difference between giving people hope and flat out lying, Joe is doing the latter.

I suspect he made this statement because census hiring will kick into high gear for April and with the passage of the health care bill the government will begin hiring for the new agencies being created. However, those jobs are not “real” jobs, yes they pay people and they do work, but they are not private sector jobs which actually create products or services. Government jobs create nothing and are actually a drain on the citizens of the country as the salaries for these positions must be paid for by some type of tax or fee which sucks capital out of the economy.

Clearly Joe was being Joe when he made that statement because, as usual, it was reckless and inaccurate, like most of the things Mr. This is a Big F****** Deal says. I see a trend with this administration that is eerily like that of FDR’s administration, please read The Great Depression: A Diary by Benjamin Roth to see the similarities, which would not stand for criticism of any kind. I get many do not like the Tea Party because there are a few nut jobs in the crowd, as with any crowed, but look at what they are doing to them. They branded them anti-government, racist and dumb which is largely unfounded accusations and I seem to recall liberal rallies which were supported by the Democrats as citizens exercising their right to free speech. However, when the speech is criticizing the Democrats, well, they can’t have that now, can they?

Regardless, let’s take a look at another report about the health care bill. A new report from the Associated Press today says the bill will cost far more than what was projected by the CBO and by the Democrats, are you really surprised by this? The bill will cost $311B between 2010 – 2019 and, which the CBO already admitted, will raise premiums for everyone. However, there is way more cost than most people think about, let’s take a look at some back of the envelope costs.

The bill mandates that everyone has to have coverage or face a fine, but because of this mandate the government will offer generous subsidies up to individuals/couples making $88K a year. Who knows if these subsidies get bigger or smaller in the future, but we will use what we know for sure. The good news is that the poor will get “free” coverage and as your income increases so will the amount you will have to pay. The range of premiums owed is based on a sliding scale and will cost you between, assuming you make less than $88K, 3% – 9.5% of your income.

That is a heavy burden on a family even making $88K a year and for the kind of poor, making, say, $50K a year, you are taking a big chunk of a person’s income which they have no choice but to pay. On $50K a year they will end up paying about $1,500 a year for health insurance, $125/month, that is a lot of money considering the bi-weekly pay is about $1,200 for someone in that income range. This means that money will impact their standard of living perhaps preventing them from even owning a home. At the very least this bill will pull billions out of the economy every year, that is not what we need right now.

If we look at the 32M this bill will insure times the estimated about they will have to pay, the number gets pretty ugly. If we assume the average person will pay $3,500 a year in premiums, who much money will that take out of the economy? The answer, $112,000,000,000, almost 1% of the current GDP. If we look at the average subsidy you will receive, which the government, i.e. other taxpayers, will provide people, how much would that be? The answer, $288,000,000,000 (32M x $9,500 – average subsidy by my calculations based on current insurance premiums on an annual basis). I am not sure how Congress came up with the cost of this bill being only $930B or so, but I do not want whoever crunched those numbers to do my taxes.

The point I am making is that this bill which is being bragged about by the Democrats is not good for business and not good for the middle class. Let’s not forget that the real middle class, couple, will more than likely make more than $88K per year which means no subsidy at all for them. Paying for a $12K or $1,000 a month for a health insurance policy is a lot to ask. Most people do not realize that making $100K in today’s world is not that much money, after taxes, mortgage payments, property taxes, energy costs, kids and so forth.

The worst part is that the GAO has estimated that by 2020 93 cents on every dollar collected by the government through taxes will have to go towards entitlement programs. That means only a small portion will be available to go towards everything else we have, you know, like debt servicing costs. Does anyone think taxes on everyone are not going to go higher? I know, they promised that only the rich will pay higher taxes, news flash, politicians lie, shocking. If we do not have a VAT, value added tax, it will have to come from higher income taxes and, more than likely, we will end up with a VAT AND income taxes which would be horrible. I am not even going to go into the tax base they used to calculate this, but I will say it is absurd.

No one did not want to reform health care we just wanted it done right. I think people would have been for the stimulus if it was done right. The problem is that these programs were not done right and will cost us all dearly in the future. This is not about party lines, the Republicans stink as well, this is about the countries very survival. To put this into perspective, Obama just said I walked into a bad situation with trillion dollar deficits and $8T in national debt. Well, it is Obama’s second year in office and the national debt is now reaching $13T and somewhere along the way we are being told that 2 wrongs make a right, because bush did it first.

This is unsustainable and I mean any annual deficit is now unsustainable. Adding even $500B a year is irresponsible and will have catastrophic consequences let alone adding trillions more to this figure. People say we have to run deficits because we have trade deficits. What they don’t tell you is our trade deficits are not that big and we have enough debt outstanding that would cover our trade deficits for a very, very long time. I believe we are past the point of no return and freezing spending after increasing the budgets of government agencies by 20% is doing nothing to reduce our long-term debt obligations. Just like we are seeing in Greece now, this will all come to ahead very soon and who will bail us out?

In the meantime, if you actually believe we will have 500K a month job growth in the next few months while initial claims come in at 450K per week, pass me whatever you’re smoking.



It is getting ugly out there

Posted by Ray on April 22, 2010 under Main | Be the First to Comment

Earnings for 1Q10 actually look OK, depending what companies you look at, but there seems to be some weakness in top line revenue, which is what I thought would happen. Even with a few firms not reaching their revenue estimates the EPS seems to look positive. What it looks like is companies are still living off of cost cutting measures which mean that new hiring will be sparse at best. The weekly initial jobless claims still look exceptionally weak, 456K this week which was down from 480K last week, which shows firms are still laying people off, not a good sign, even though there is some stabilization in the claims data. Essentially, we have stabilized from really bad to just bad on the jobs front.

The big issue of the day is Greece, their 10 year is now at 8.7% and rising and the 3 year is at 11%, as they have been caught, again, lying about their debt to GDP. The other PIIGS are also moving into the limelight, Portugal, Italy and Ireland specifically, which is also not a good sign. Why is Greece such a big deal? It is because European banks own a ton of this debt, private banks and central banks, for instance, France holds $781B on such debt and the CDS spread on their debt is rising because of their exposure. In other words, this could be a trigger for another banking crisis and governments are low to out of bullets to fight another crisis.

Existing housing numbers just came out, for March, and the numbers are up 6.8%, but it is because of the closure of the tax credit at the end of April. However, inventories are building, again, which means there will be some downward pressure on home prices in the near future. I am afraid that we are far from a healthy housing market and in my opinion, the government needs to let prices fall in order to clear the inventory and to have real price discovery for real estate. Inventories in the existing housing market is simply too high at well over 3M which, compared to the 5.28M run rate, is terribly high getting closer to a full years worth of inventory waiting to be sold. This is not even looking at the new construction data which will add a significant amount of supply to the market. We need less housing and the only way to clear that inventory is to let prices fall, but that will never happen and look for another extension of the home buyers tax credit.

What is interesting is that banks are reporting stellar earnings, but prices on homes are down, inventory is building and commercial real estate is, literally, blowing up. The question is, how can earnings be so good when the assets are or should be declining in value? Answer, suspension of mark-to-market. Essentially, banks are now practicing the same accounting gimmicks as Enron by using mark-to-model (make believe), but this is legal because the FASB allows it… unreal.

There is little question that the data is getting better, but when we look at why and what levels the data is getting better it is disturbing to say the least. While the numbers are better, the term “better” is a relative term in itself, and we have stabilized from horrible to just bad. In my opinion, all the elements of a double dip or even another serious banking crisis exist in the markets. If we went back to real accounting or factor in a Greece default the markets would get hammered as this would show we have climbed too fast and risk is not priced into this market at all. The longer we refuse to acknowledge the bad debts on the banks books or a default from any of the PIIGS the worse the inevitable correction will be.

While I am bearish on the overall market, mainly due to valuation, I like many sectors of the market. I am partial to biotech, high yield dividend stocks – i.e. MO, PM, VZ, T, etc. – esoteric no correlated assets – frontier markets, country specific ETF’s, precious metals, etc. – and I like bonds, deflation is here folks. I do own MO and PM, I also do not like ‘talking my book,’ but own several biotech’s and PBE, biotech ETF. In my opinion one should be very careful as we are once again looking at new ways to value stocks, this is what they did in 1999. If you cannot value stocks using older methods like P/E multiple and so forth it is not worth owning, in my opinion. I see little real value plays in this market and there is no need to jump into this market right now, your patience will be rewarded. I think one should hold core holdings, dividend paying stocks, high grade bonds and some cash. Cash may be king at the end of the day.