Lousy Labor Report, Debt Limit, London & CNBC
July 9, 2011
David R. Kotok
The worries over Greece have receded temporarily. That angst is replaced with fears of a slowing US economy and a developing possible double-dip recession in the second half of 2011. Friday’s employment report iced this cake.
Two things are learned from Friday’s monthly labor statistics and the earlier reports of the week. First, the employment report was awful. In multiple ways, it described the deteriorating job situation in the United States. It counted over fourteen million people who are actively seeking work and cannot find it. They are the counted unemployed. They are in addition to the uncounted labor force dropouts (estimated at 5 to 6 million) and the undocumented workers (7 to 12 million).
The details get worse. They particularly expose the difficulty that women are having, especially the single moms who head households and experience an unemployment rate in the low “teens.” Also, note the broad measure of unemployment, the U-6 rate. It is now back above 16% and has been trending higher for the last four months (March-15.7%, April-15.9%, May-15.8%, June-16.2%).
We will skip the rest of the statistics and dismiss the conspiracy theorists who claim these stats were manipulated by the Obama Administration. The stats are bad. Within the labor force of the United States, things are not good and getting worse.
Another thing may be learned from those of us who are suspicious of the early warning signs of the Labor report. I’m referring to the ADP report earlier in the week. It was particularly hyped on CNBC and other financial reporting services. These early indicator signs must be watched carefully, because they can influence markets to the detriment of investors. We find that most leading indicators of the employment report are not helpful.
That is not universally true. Bill Dunkelberg’s survey data of the National Federation of Independent Business members continues to describe the difficulty in the US economy when it comes to the hiring plans of the half of US business that is privately owned. Dunk, a good friend and colleague at the Global Interdependence Center, has constantly discussed how policies in Washington are damaging the hiring intentions of the job creators in America. He has demonstrated how small, independent businesses are those that create the jobs, not big companies. My suggestion to readers and analysts is that you follow the NFIB data monthly and do so with respect and careful scrutiny of the detail. As for the discredited ADP reports, that is a good time to switch channels or get a cup of coffee.
Let us segue to the continuing debates in Washington. Shame on the Republicans and shame on the Democrats! Their behavior, the uncertainty they have introduced to America’s business, their disrespect for working folks and entrepreneurs, is a cause of the weak economic recovery. Their partisan threats and finger pointing are awful behavior. When I travel throughout the world, I find it an embarrassment to talk about members of the Congress of the United States, both those in the House of Representatives and in the Senate.
If there were only some way Americans could get angry enough with both parties and want to throw them all out and start over again, we would have a catalyst for change. Warren Buffett’s solution for the deficit is the best one. Let me paraphrase him. Whenever the deficit is higher than 3% of GDP, all sitting members of Congress must resign and be barred from running for re-election. Oh, and could we get that as a constitutional amendment?
Segue to the debt-debate specifics.
We believe Bernanke’s forthcoming testimony will warn severely about the risks if the United States ever defaults on its indebtedness. He will call for activities that resolve the budget deficit, but do so in ways that are not injurious to a very tepid and weak economic recovery. The Fed Chairman will have to walk a fine line. We believe he will be very harsh and direct when it comes to the issue of a US default. He will ask the Congress not to play games with the debt limit.
Thinking deeply about the debt-limit debate is infuriating. There is madness in Washington. These fools and idiots we elect to represent us passed the programs and budgets that spent the money. The controversy over future spending has nothing to do with the existing debt ceiling. The debt ceiling is the action item for the activities they have already funded and the money they’ve already spent or committed. The resolution of future budgets can be established in other ways than threatening default and playing chicken with the creditworthiness of the United States.
We leave for London and Oxford on Sunday. We will spend a week in a series of meetings, research sessions, and discussions with economists, bankers, and clients. In addition, we will get to visit some family, including two grandchildren, in Oxford.
We are currently scheduled to guest host the first hour of Worldwide Exchange from the CNBC London studio, and are very pleased to note that we may be joined by Ross Westgate, anchor from London, and Christine Tan, anchor from Singapore. We have had the occasion to be on set with both of them in their home studios. This is the first time we will be together in one place, live and on a single set. I personally look forward to enjoying the discussion without having to endure the pauses necessitated by global television transmission. We expect the conversation to include points about the debt-limit debate in the United States. The date is Tuesday morning, July 12, 9 AM London time, 4 AM New York time.
One additional note is necessary. For the first six months of the year, the total defaults in the municipal bond arena are under one billion dollars, according to the sources that compile them. That is lower than the year-to-date figure last year and in prior years. As readers know, we have been in an ongoing debate with a pundit who once predicted 100 billion dollars of muni defaults in 2011. That pundit has now suggested that the $100 billion will occur during this “cycle.”
We do not know what a “cycle” means in Punditryland. Here is our measurement. If you total all the Muni defaults that have occurred since the beginning of 2007, in the early stages of the financial crisis, and if you accumulate them through today, it will be necessary to have another eight or ten years added to this “cycle” to reach the $100 billion number. Could it happen? Of course, anything can happen. Will it happen? We think not. High grade Munis, well researched and with sound structures, are safe and attractive to high tax bracket Americans. The prospects in Muniland are improving.
Here is why. If you look around Muniland, you see budgets being reined in. You see the demonstration of that activity in the statistics of Friday’s employment report. State and local government jobs are shrinking. Federal government jobs are shrinking, too. Expenditures in the government sector that have had huge previous job growth, with questionable productivity gains to the US economy, have been reversed.
Now, it is a very difficult thing to lose one’s job – especially so if you have become dependent on a bureaucracy of federal, state, or local government. That being said, in order to rein in the rapidly growing government sector and bring budgets into line, it is necessary to change the employment practices of government. Look around, dear readers; it is happening before your eyes. Not because politicians want it to happen, but because they are being forced by events, markets, and necessity to make it happen. We see the results. The government sector has shed almost a million jobs, so far. This shows that we are headed for more streamlined government, more pressure on government spending, and a redirection of American policy into more investment and creation of private-sector income.
Will it be painful? Yes. Is it over? No. Does it go on for a few more years? Yes. Will it end well? Yes. The ingenuity and great productivity of America can resurge if policies are developed and expanded to allow them to do so. We are becoming more optimistic for the longer term of the United States. We remain wary of the short term, because so much of it is being impacted by the Republicans and Democrats we send to represent us in Washington. We own them. We elect them. We get the outcome of those choices.
We fly Sunday and will return in a week. We will report from abroad. And we will pray for our great country, since the Congress is in session.
David R. Kotok, Chairman and Chief Investment Officer