Giving the Fed Excuses for More Tightening

We noted last week that the shorter term risk was to the upside. After outlining many of the technical positives of the market, we noted that modestly supportive words from Bernanke & Co. would be all it takes to light the fuse. We suggested a “more hedged stance than a naked short one,” and advised that “nimble traders can get long.”

That turned out to be the correct short term posture. While we like to use variant perception to determine when the crowd is wrong, we know better than to fight the tape. It is always better to step off the tracks than fight a freight train speeding your way. Indeed, that short term shift kept us out of trouble (or at least out of the way) as we waited for locomotive to pass by.

But even that shift in our trading posture underestimated the degree of denial coming from many traders and fund managers. Despite the Fed’s explicit statement that more tightening is sure to come, many market participants are still rationalizing the “One and Done” thesis as possible.

This is roughly analogous to rooting for George Mason in [last nite’s] NCAA final between the Florida Gators and the UCLA Bruins.

For example, Monday’s ISM reading of 55.2, down from February’s 56.7, was hardly proof of a slowing economy (Manufacturing is an increasingly smaller economically). Yet somehow, the markets overlooked the Index of Prices Paid, which climbed to 66.5 in March, up from 62.5 in February and 65 in January. This served to prove us Humans (traders included) selectively perceive only what we want to. On the ISM and prices paid data, equities extended their gains.

In terms of Fed think, the Central Bank is now awash in excuses to keep tightening. The most recent of which was a study by a group of Fed researchers that concluded unemployment rates are not artificially low due to people dropping from the labor market. The study concluded we are at full employment, that strong job growth is likely over the next year, and that wages may rise appreciably. The Fed is likely to view this as an inflationary risk over the coming quarters. That suggests their bias will be to keep tightening, finishing in a range between with 5.5% and 6%.

We think these researchers are incorrect. While inflation has been robust across most sectors of the economy, the one area where is not has been in wages. Globalization – and a lumpy recovery – has kept wage pressures down. Inflation-adjusted Income is negative, hours worked have slipped, and employee mobility is modest.

We reiterate our first half targets of 11,800 on the Dow and 2600 on the Nasdaq. The topping process includes too much enthusiasm taking markets too high. That sentiment is certainly at work in current market conditions.

(emailed April 3, 2006 noon)

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  1. Bynocerus commented on Apr 4

    From “Fed Gets New Excuse for Tightening Rates:”

    ‘the low participation rate means many people aren’t seeking work because they believe no desirable work is available and aren’t counted as unemployed.’

    Anecdotally, I can confirm this to the fullest. I can’t tell you how many age 50+ clients I work with who went from making $90,000+ @ IBM and GE to making $7/hr @ Starbucks and Home Depot. Many of these people ultimately dropped out of the labor force altogether rather than working for 1/6 or less of their former salary.

    We import deflation in the forms of cheap labor and cheap materials. We then turn around and export our standard of living by sending more and more of our good paying jobs overseas. Ultimately, the standard of living here in the US will come more in line with the rest of the developing world. If the Fed wishes to delude itself by thinking that the job market is at full capacity, it are no longer an independent governmental agency, but rather a shill for the Republican Administration.

    6% Fed Funds would be a massive overshoot IMHO.

  2. john commented on Apr 4

    Yep – I am a real life example. 60+ and can’t get hired. I even tried getting a entry level wage job in my field – system engineering and fahgedaboudit. I won’t work for $7 an hour as I make more than that trading.

    The saying is that there is a “structural change in the labor force participation” – me I’d just rather they called me unemployed and left it at that.

    I see CSC is going to lay off 5000 workers and put the company up for sale. That will be good for their stock price – too bad for the employees (far more than 5000) who will be impacted.

  3. me commented on Apr 4

    I agree with you disagreeing with the researchers. The employement situation is one of my hot buttons. I have posted a few snipets from an article on safe haven and included the link to the entire article. It basically says what I keep trying to say. Just because someone gets a job at Starbucks that used to make 80K, they are not gainfully employed, they are severely underemployed and they have not dropped out of the work force. Perhaps some of those that post on here that only cheap foreign workers can come in and do the jobs they have, maybe they should ask the local barista what they did in another life.

    Hidden Depression In Silly.con Valley & the Seismic Shift In the SF Bay Area Population

    “The employment data is collected for Metropolitan Survey Areas (MSA), or districts, and the most relevant area for Silly.con Valley is the Greater San Jose MSA that contains Santa Clara County, the largest in the Bay Area, and some surrounding counties. The Tech Bubble driven employment, both in Silly.con Valley and Californica, peaked in March 2001 (just as the economy was entering recession). The employment in both areas kept declining into 2003, but the Californica employment has fully recovered and the Total Nonfarm employment, as of Jan’06, is up 1.4%. IN GREATER SAN JOSE AREA, ON THE OTHER HAND, THE TOTAL NONFARM EMPLOYMENT DECLINED BY 20.1%, DURING MAR’01-JAN’04, AND IS STILL DOWN 18.8%. Table 1 gives a snapshot.”

    “It is safe to conclude that some 20% of the working-age population in Silly.con Valley has stopped looking for work after being discouraged. As it turns out I have met quite a few people who live in Silly.con Valley, or surrounding areas, in the 40-55 age group, who are not gainfully employed. Just last month, I was watching a tennis match at a big tournament in Palm Springs Area and I found myself sitting next to a couple, 45-55 age group, from Los Altos (a pricey neighborhood in Silly.con Valley). As we were talking in-between the games, the guy complained, “if I could find a f…ing job” and then he went on to complain about corporate executives. It was clear that he wasn’t looking for a menial job (looked like an ex middle manager).”

  4. Norman commented on Apr 4

    The statement, “…and that wages may rise appreciably. The Fed is likely to view this as an inflationary risk over the coming quarters.” is true but this is GOOD inflation as it is money going into workers’ pockets. We want U.S. citizens and workers to make more and live better. If not, then why do we want a strong economy? When Greenspan was testifying and he made the wage increase/inflation argument and the Democrats on the committees just sat there I wanted to puke.

  5. Brian commented on Apr 4

    At some point I wonder if is the US going to be considered an emerging market and the Chinese will start shipping the factories back here. The Japanese already do.

    Until then, I dunno. Buy some farmland in Idaho.

  6. B commented on Apr 4

    We’ve just reached the ultimate level of stupidness. The Transports, on a megabubble roll, gapped up at the open something like 1.5%. There is zero precedence for such enthusiasm this entire bull market.

    The retards are surely going to get the returns they so desire. Regardless of any sentiment readings, there is unprecedented levels of pure stupidity. What’s the Biblical story about the possessed spirits vacating those possessed and entering a group of sheep that then ran off of a cliff? I can’t place it. Something New Testament I believe. An exorcism by Jesus? Baah, Baah, Baah goes the bleating sheep!!!! The sheep are running off of a cliff. (Actually, I think the story is of pigs but pigs don’t bleat and add as much to my post. lol.)

    When the commodities bubble foils, the Transports will go with them. Paradoxical of sorts on the surface.

  7. spencer commented on Apr 4

    On the other hand average hourly earnings growth has risen from a low of 1.6% in early 2004 to 3.5% now as compared to the late 1990s peak of 4.4%

    Moreover, it seems to be accelerating.

    This actual acceleration in wage gains will influence Fed thinking much more then the various studies.

  8. B commented on Apr 4

    Why the buy programs mid day? Did Dallas Fed Chief Fisher open his mouth again? He was supposed to speak today.

    You know, there are two topics on this board that will be very interesting to watch. One is wage inflation and the other is exporting jobs. If history is any key, and I believe it is, people are getting all ruffled for nothing. That is not to say I don’t have compassion for “me” and others who have a hard time finding employment. It is a reality day to day for many. I am talking about long term trends and our economic dominance.

    First, today is very similar to the early 70s when unemployment was almost exactly where it is here and we were experiencing a blow off commodity run and housing boom after a blow off equity run ended in the late 60s. Exactly as today. 70s wage inflation did occur even though malaise in the workforce was very real and imports were crushing many of our industries. ie, Globalization, part 1. While it is counter-intuitive, the old 80-20 rule applies to everything in life. 20% of people earn 80% of the wages and those jobs are tight. So, regardless of what the average joe experiences, wage inflation could easily become a reality in the statistics as it did in the 70s.

    As it pertains to American competitiveness, I have said a thousand times on here (I’m sure Barry is sick of it) that we will surely dominate the world for my lifetime and I am still rather sprightley. A couple of thoughts. Again the 80-20 rule. 80% of CEOs are average at best. So, the decisions to push manufacturing to Asia for labor arbitrage will not yield long term competitive advantage. Many reasons for that. One is that the costs were not understood when they did it impulsively. Regardless of whatever analysis they did, it was likely short sided and wrong. As discussed repeatedly on here, smart money is already leaving China. Taiwanese manufacturing investment, the largest driver in China, is leaving and Intel’s next plant is in Vietnam. The cost of doing business in China has grown significantly. Education is lagging and skilled workers, as McKinsey noted nearly a year ago, are going to gate China’s growth. ie, The commies aren’t taking over the world as we have heard time and again for the last hundred years. McCarthy-ism isn’t dead by any stretch. It’s now Rumsfeld-ism and Schumer-ism.

    In addition, history shows us the Japanese exchange rate was a 800Y to $1 decades ago and was 400 to 1 in the early 70s versus 100 to 1 today. The cost advantage to manufacture in Japan is gone from when it was 400 to 800% higher. So, when that exchange rate changed, Japan moved much of it’s manufacturing to support America to our shores. 150,000 high paying jobs from Toyota alone.

    When China’s exchange rate changes, every single nickel invested for cheap labor alone by those same underqualified American CEOs will evaporate. So, they will have pissed all of that investment away for no benefit. Investing in China is not a waste of money but labor arbitrage is in most instances. (A coincidence GM wants to offshore all of its parts work to China? The worst management team in corporate America.) So, what to do then? Move manufacturing to another country of cheaper labor OR move it back here.

    So, why would they move it back here? Because, as has been noted time and again, those who outsource a core competency, lose their competitive edge, innovation and flexibility in that core competency. Manufacturing is finally being accepted as a core competency in most industrial companies. Cycles to and fro. The retards who viewed it as not part of the innovation chain were wrong. 80-20 rule.

    In addition, as the exchange rate with China changes, and it will, we will be importing all of that inflation we exported as part of the labor arbitrage and manufacturing. So, that has a possibility of playing out rather unexpectedly in the inflation game longer term. ie, Another reason why we aren’t likely to see lower rates again or a collapse in the long term rate which would allow PEs to expand.

    American manufacturing as a percent of GDP hasn’t really changed that much. But, the productivity has changed a hell of alot. As it also has globally when viewing manufacturing employment. Trends never last forever. We aren’t outsourcing our way of life or innovation or future and most executives are wrong in their strategy. That doesn’t help in the short term but…..If it was all about labor arbitrage then how could America be the largest manufacturing country on earth and Germany the largest exporter of manufactured goods? Productivity, innovation, efficiency and positive rates of change in all of these areas are more important than labor arbitrage, which, btw, can negatively impact all of the above.

    It’s not a coincidence the Koreans, Europeans and Japanese are investing heavily in their manufacturing capacity in the US. The trend to manufacture here will likely continue, albiet with short cycle disruptions.

  9. Bynocerus commented on Apr 4

    Eighth Inning Fisher is being “credited” with the midafternoon rally. I guess the sucky breadth and low volume of the rally won’t matter once again.

  10. fred hooper commented on Apr 4

    I read your comments yesterday with great interest. You asked some excellent questions and appear a very experienced investor. I’m not but have enough of a finance background to stay out of trouble. You said:

    ” BUBBLES in Oil, GOLD, GOLD, all metals, GOLD, SILVER, OIL, etc. There’s no friggin gold standard. Gold collapses with every recession. This ain’t 1929 when the Feds had a contract to buy gold and keep a price underneath it. Not to mention this housing mess. Not to mention the freaking absurd valuations on the small caps due to PE EXPANSION into rising rates more than earnings growth. WTF. I’m about ready to piss my pants here.”

    Seems you’re on the right track, and for good reason, pissing your pants. This isn’t 1929. There’s no gold standard, and there are many bubbles as a result of worldwide liquidity and cheap money. The money has to go somewhere, and over the last few years, it’s obvious much as gone into US stocks and real estate. If the likelyhood that the dollar and other currencies are out of control, would you rather be

    1. Sitting on Cash $usd
    2. Long on US stocks
    3. Short on US stocks
    4. Treasury Bonds
    5. Commodities
    6. Precious metals
    7. Any combination of the above
    8. Other

    I submit that there are no precedents for what is happening right now:

    1. Impending US housing crash and global housing bubble.
    2. $70 bbl. oil to come to a gas station near you soon.
    3. China and India’s growth rates and their demands for commodities and everything else we have or want.
    4. Globalization, declining US wages
    5. US deficits and rapid increases in consumer debt
    6. A convenient refuge for cash in ETF’s such as GLD.

    As to #6, I am betting that the generic profile of the investor in Gold isn’t the short-term trader type. In addition, GLD is potentially a cartel of like-minded investors and bank of sorts, with stock that is fully backed by gold. So, I’m long on GLD and physical gold, and am short on home builders, and transports (FDX at $115-116, crazy huh?). My positions make me feel nice and warm, kinda like a good scotch. I’m a bit of a novice. I could get blown out in gold short term, but that doesn’t to matter to me as I’m in it for the long run. I’d appreciate your comments.

    Thanks Barry for a great blog. I look forward to your newsletter.

  11. David Silb commented on Apr 4

    Oooh Boy! Feel the heat in here. Too bad spring is here, we could’ve used this to reduce heating bills over the winter.

    Screwin with the numbers is so bad and its been done for so long I sometimes wonder if we’re walking on the clouds.

    Repeating my mantra “Sooner or Later all markets adjust. Sooner or later.”

    In other words the traders may be able to justify current levels but in the end if there isn’t sufficient fundamentals on which to base these gains then a correction will occur.

    I used to think hedgers were a bad thing. Then I realised that markets are biased up or biased towards inflated numbers. Hedgers just take advantage of the inequalities in the market up or down to produce a positive return.

    All I can say is if the street keeps pushing numbers up because they can’t think of anything better to do than Hedgers will reap that much larger a profit.

  12. Bynocerus commented on Apr 4

    “We reiterate our first half targets of 11,800 on the Dow and 2600 on the Nasdaq. The topping process includes too much enthusiasm taking markets too high. That sentiment is certainly at work in current market conditions.”

    Yesterday and today’s action underscore just how true that last sentence is. The Naz has a negative A/D with negative breadth and crap volume, yet the Naz is up et again. What will it take to actually pull the market down? The bulls have used a helluva lot of fire power up during the first two days of this quarter. Makes me think Barry’s original call for a first quarter top was more on the money, even if that top came on the last day of the quarter.

  13. Mark commented on Apr 4


    I am with you. The bulls are in 3rd gear trying to get this thing up over the ridge. If we get some negative earnings forecasts I think it’ll roll over. If we get some rosy ones , well, better short targets I guess. Panzner said a day or so ago that that was the top for the Naz. No evidence yet that he is wrong. Indices can advance while the majority fall off. That’s what tops are made of (Desmond).

  14. John konop commented on Apr 4

    The gains in the stock market is based on employees wages being driven down by illegal immigration, outsourcing and legal immigration. We have a race to the bottom economy based on competing with billions of people willing to work for $2 to $5 a day. Our I.T. work at a 33% to 50% less. This is why Warren Buffett pointed out corporate profits are up but the average American wages are down. I suggest you read the following links.

    If we do not change the game , and level the playing field , it will be a ugly race to the bottom.

  15. B commented on Apr 4

    I think you should be long airlines fully margined. I’m celebrating the insanity in Wall Street by adopting an insanity in my behavior by going on a posting binge. I’m out Wednesday through Monday so I’m just doping it up.

    You don’t want to listen to me because I called the top in January. Unfortunately it was a little bit of giving Nostradamus a run because price hadn’t yet abated and I never would have actually gone short ….. yet. But, other than pushing pennies, I am anticipating my next major move will be short.

    I would say if you can hold the load in your pants, you’ll be fine with the Transports. Obviously, that is not advice. I am of the fabled three monkeys. But, there is a chance they will blow higher to around 5100. I hearken back to one of my favorite literary works along with Shakespeare, Emerson and Socrates. That would be Jack & The Bean Stalk. The bigger they are, the harder they fall axiom holds true on Wall Street in particular. So, if 5100 is reached, I’m repenting of all of my sins because the world is coming to an end. I don’t think that will happen. You might want to look at the underlying short interest of the top five weighted stocks in the index. You can do so on Yahoo Finance. If it’s less than 2%, we are likely close to done. If it’s greater than say five to ten percent, well, you might get a bigger load in your pants before it’s all said and done.

    I just have to totally disagree with gold. Since we are on a fiat money system as the rest of the world is, I believe gold as a safe haven is a ruse. You can’t call in your Federal currency for gold. What intrinsic value is gold? I see none more so than tulips in the great Tulipmania. It might be an inflation hedge but so is copper at $2.5 a pound. I just don’t think it has any value or hedging ability to other disasters IMO. I’m not sure what is gold is telling us but I think I know. But, in the end, the central bankers will win. Without a gold or silver or both backed money system, how would you propose gold stay inflated long term?

    Obviously, I hold no great insight that other market prognosticators don’t. I just like to write and I’ve chosen to abuse this board as my short term medium.

  16. me commented on Apr 4

    Looks like John Crudele isn’t buyint the research either.

    ” At 8:30 on Friday morning the Labor Department in Washington will report the latest job growth – and the figure is likely to be much stronger than the majority of overpaid economists are predicting.

    Don’t get me wrong. There isn’t really a boom in the job market, although Washington politicians would like you think there is.

    What is happening is much simpler (and, in a way, more inister): starting with the March number to be released Friday, the government starts making optimistic assumptions about hiring spurts caused by new companies coming into existence.

    Each spring the Labor Department adds hundreds of thousands of jobs on the theory – never proven – that new companies suddenly pop into existence when the weather gets nicer.

    Last March, for instance, the federal government added 179,000 of these phantom jobs to its monthly count.

    And there’s every reason to believe it will add as many – if not more – this year.

    What this does is boost the actual number of new jobs reported. And it throws off any economist who is making his prediction based on, say, jobless claims or the gross domestic product.

    As I predicted last fall, interest rates have been heating up with the weather.

    But long-term borrowing costs, the kind most people care about, have not risen as quickly as the short-term rates that the Federal Reserve more easily controls.

    Even though housing sales are weak, car sales stink, gasoline prices are hurting the family budget and consumers look tapped out, a few deceivingly strong economic reports like this Friday’s could send long-term interest higher than they ought to go.

    And Washington will continue to report deceptively strong employment reports until July.

    The government will assume that around 200,000 jobs a month are being created by new companies in the April, May and June report.

    This won’t be good for the stock market, which rallied strongly yesterday simply because the start of a new quarter begets some portfolio reshuffling.

    While stocks had a fairly strong first quarter, investors have been extremely worried – both at the beginning of the year and now – that the Federal Reserve would continue to raise interest rates.

    If the next four jobs reports reflect the seasonal abnormalities that I think they will, then the markets will be soon expecting a whole lot more rate hikes.

    The experts are expecting 190,000 new jobs in Friday’s report – bet the over.”

  17. B commented on Apr 4

    As you do not agree with the concept of immigration of any sorts, I vote you take your toys and go home. Home being from whence your ancestors came. Unless you are American Indian, that isn’t here.

    There is absolutely any evidence of that statement other than Xenophobia at best.

    I’m not stating I support illegal immigration but I totally encourage legal immigration with aggressive immigration quotas. If you want to keep the people in Mexico, which I am sure you are alluding to, you need to get the Mexican government to adopt anti-corruption legislation and to adopt market based reforms to create opportunity for their citizens. In such an economy, there would be less of a desire that all humans have to better themselves by going to where there is economic opportunity. Until then, I must say personally, I support their right to come here and collect a pay check. While that is debatable and I may be on the wrong side of the equation, I can find no historical precedence that we all haven’t benefitted from 200+ years of immigration by those who want a better life.

    Maybe you’d have all foreigners take their trillions of dollars and millions of jobs created in the US by their money as well?

  18. jkw commented on Apr 4

    We are currently in the middle of a major economic change. The inevitable result of increasing productivity is people working less. Just as feudalism gave way to capitalism, capitalism will give way to socialism. It started about 80 years ago and may take another 100 years to finish, but we will get there eventually. On the way, there will be a period of increasing economic disparity as the wealthy use their power to take all the benefits of productivity gains. If they get too greedy, there will be a bloody revolution and they will be killed. As long as they control their greed enough that only a few people are starving in the streets, capitalism will live on. Ideally, socialism can be brought in slowly without a bloody revolution, but that wold require the people in power to limit their greed.

    As factory automation continues, we will eventually get to the point where everyone could work for 5 years of their life and produce enough to maintain a reasonable standard of living (better than what was common in the 70s for example). You can convince people to work more to increase their standard of living for a while, but eventually people decide they value their time more than they value the money they get from working.

    Reduced labor force participation is the natural consequence of increased productivity. Why would you expect people to work hard enough to produce significantly more than they used to? The big question is whether decreased employment results in stable wages with earlier retirements or decreased wages with the extra productivity going to corporate profits. Right now, the US economy is favoring giving the excess to corporate profits. But eventually the people will demand their money.

  19. thecynic commented on Apr 4

    i just read a brokerage report that shows S&P 500 earnings (think it’s first call est) to be $81.31 in ’06 for a gain of 8.2% and $85.00 in ’07 for a gain of 4.5%. Now that the unprecedented stimulus is going away, earnings growth is now coming back to reality and consistent with long term growth rates and with current economic conditions (real GDP)..
    so what is the bet by the bulls? either better than expected growth or multiple expansion driven by an end to the Fed’s tightening cycle.
    since we know the housing market is slowing down and inventories are rising i find it hard to believe that this sector which has been a big driver of economic activity over the last 3 years will provide the growth.
    YRCW pre-announced big earnings shortfall on weaker volumes from WMT and HD – WMT later confirmed this by announcing 1.3% SSS growth. if shoppers aren’t shopping at WMT they aren’t shopping anywhere else. the other strong engine of economic growth (a debt ladened consumer) is slowing down. is the consumer going to provide upside surprise growth? doesn’t seem likely.
    What about corporate capex? maybe, but they aren’t really hiring and don’t appear to be restocking inventories or buying new computer equipment (see DELL near 52 wk low). so a capex binge doesn’t seem to be occurring.
    must be multiple expansion. that may be the trade but not very compelling. i think contrary to conventional wisdom that when/if the Fed quits tightening, the dollar will take a dive and the yield curve will steepen to curtail the inflationary implications. 2s/10s was 250bps in 2003 when the dollar was puking on the Fed’s negative interest rate policy. say it widens to 125bps. that puts the 10YR well over 6%, an area that will crush the housing market, the consumer and P/E ratios..
    earnings growth is fairly stable over time. market returns are driven by multiples expanding or contracting. we continue to be in a bear market because the multiples are contracting. throw a 10-12 multiple on that ’07 $85 number and you see what happens to the S&P…

  20. john commented on Apr 4

    B: at first blush I thought you were talking to me and I never mentioned immigration of any kind. Don’t get me started on that – my belief is that America is a huge empty country that can use all of the culture we can get – regardless of how it gets here.

    Gold should be treated like any other investment. If it is going up – buy some (not physical – hard and expensive to store and protect – too heavy to carry around – and absolutely no liquidity). If it is going down – short some. As long as primitive peoples (as far as we’re concerned) such as Chinese or Indians are making more money than they know what to do with (which they are) and since they know about gold and silver as significant of wealth (to them) then gold and silver will continue to go up. When the Chinese and Indians stop making the “big bucks” it will stop going up. Pretty simple.

    In the same vein (sly pun) – as long as China and India and most of the civilized part of the mid-East is building things there will be no end to the “commodity bubble.” If the “commodity bubble” is still in effect tranies will continue to grow. (A simple 1+1=2 equation – no spread sheet required). Nothing moves without a truck being involved.

    Then, finally, there is no housing “crash”. Oh prices might drop a bit – they always do when interest rates go up – but so many people are currently priced out of the housing market what do you think is going to happen after prices drop? All those who answered “houses are going to sell” get a star for the day. And trust me – the bankers who are holding the mortgages will find a way to get the monthly payments affordable.

    This is one hell of a skitterish stock market. The internal volatility in some of the shares I own is making my eyes cross. Then others that I think should be doing something are just sitting like mother hens on a clutch of eggs. In about 40 minutes or so there’s going to be some changes made.

  21. John Konop commented on Apr 4


    I did not see anywhere in my post that said I am anti -immigration. I am a businessman who understands the basic concept of Supply and Demand. If their is such a shortage of labor why are real wages going backwards ? If we have a shortage of I.T. people why is the average visa holder coming here making 13K less for the exact same job ? All of this is interesting twist on supply and demand.

    I have, been called racist,isolationist for brining up facts that even liberal Paul Krugman now aggress with Paul Roberts,John Williams.. are true. In all fairness the racist and isolationist empty, lazy and fact less argument comes from some NEOCONS front the right and some Liberals from the left. I noticed like most ,who make emotional arguments you never deal with facts in the EPI or Paul Craig Roberts post.

    Cesar Chavez a (non MBA elitist) made the point that immigration is a tool to drive wages down ,when he testified before congress in 1979. His brother Manuel and him ran the first Minuteman project. In 1969 MLK successor Robert Abernathy, Walter Mondale and the Chavez brother demonstrated to block the boarders. My question are all of them racist ? As you sip your $3 latte from the migrant worker who pick the beans, you might want to think about it.

  22. Bynocerus commented on Apr 4

    Since this appears to be a momentum driven market, has anyone else noticed that we are in a 4th stage base from the December 02 lows (at least on the Naz)?

    Seems like O’Neil said that lage stage bases usually fail. Makes me wonder if all the other momentum traders aren’t thinking the same thing.

  23. John Konop commented on Apr 4

    I would think you might consider that 31% of consumer spending are people using their homes as a credit card via interest only refinancing to keep up with bills. Wages are dropping for 80% of Americans while healthcare is growing 4 times faster than wages. Childcare, college cost,energy prices are growing between 2 and 4 times faster than wages.As interest rates keep going up you keep seeing defaults rising and values dropping. I think you are under estimating the concentration of 30 to 40 percent of Americans to far in debt to handle interest rate adjustments.

  24. B commented on Apr 4

    Show me the scientific facts to your statement. The historical correlations, at a minimum, to wages and immigration. You may post the link on here for me to peruse.

    You hit the nail on the head. John said, “I have, been called racist,” What is that phrase on Contact that someone uses on this board all of time. The scientific precept, Occam’s Razor? ie, What appears to be obvious usually is. Or as us hicks say, “If the shoe fits……….”.

    Quoting Cesar Chavez now? I didn’t know he had done any scientific analysis of immigration’s tie to labor rates. Got a link to that? Is that before or after he nationalized the foreign investments in his country? He a hero of yours? A cohort? One you look up to? Nice! How in God’s name did Ted Kacyzinski get access to this board from jail and post under the ID “John”? I’m playing with you. I don’t give a sh*t what you think. People like you aren’t worth my effort other than a little pawing like the kitty with the mouse. It does bother me that those Sunday-go-to-meetin types with similar views were lynching people the night before just forty years ago in MY country.

    Oh, and for your information, I only sip beans purchased under the coffee “Fair Trade” initiative. Like me to buy you a cup?

    Oh well, gotta run. What will you do without me for a week? LOL!

  25. thecynic commented on Apr 4

    how would you define a housing crash? 20%? 50%?
    i would bet that we are already seeing a 20% correction off the top. a good friend of mine who owns a title company said he hasn’t seen anything but 100% ltv in months. if houses were bot with cash i might agree with you but since they are bot with credit at 100% financing at inflated prices, the unwind could be quite unpleasant. the buyers you think will step in to pick up the pieces may save the day but where is the bid? down 50%?
    i have to disagree with your notion of commodities being driven by demand in India and China. that’s what they say on CNBC, but it’s highly misleading. Did these emerging markets start building their infrastructure in march of 2003? i don’t think so. but we were running negative interest rates for the dollar, where these commodities are priced. my first job out of college was in the pits in chicago. my first lesson in the pits: watch interest rates, they drive commodity prices….

  26. John Konop commented on Apr 4


    The amount of adjustment will be based on each market.The factors to look at is average income against home values. This gives you the soft spots if you break it up dollar categories of income. As you know mean average can be misleading. Some other variables to consider are second homes in your market market. They tend to be first to go in tough times. The basics trends of what are the industries supporting the market you most look at. My background is in Factoring and credit cards which is behavioral via environment rather than pure credit. Your pits background will be great if you use the same logic. You cannot milk a turnip !

  27. Anonymous commented on Apr 4

    I would think that a guy who has run around in the “Big Boardrooms” would know the difference between Cesar Chavez and Hugo Chavez.

    Try this “B”:ávezésar_Chávez

    I enjoy reading your posts B, but your ass is staring to show today. I think you need a week off.

  28. john commented on Apr 4

    I don’t define “crash” or “correction” as both terms are meaningless. Prices, as always, are driven by supply and demand. And no one will convince me that there is an oversupply of single family homes in this country. Maybe on a moment to moment basis certainly but not over a period (say 5 – 10 years) time. If some people are in over their heads they are in over their heads – what can we do about that except cry for them or with them? Unfortunately they don’t teach common sense in school and they certainly don’t teach anyone about interest rates. That’s a grad school subject.

    I never watch CNBC, I do pay attention to the shipping news. You should too. Actually they (China/India) did kind of just start building their infrastructure. You do realize that when I say India and China I am speaking of over half the world’s population? You do understand that is a rather large number? Pretty big. Housing, roads, Mickie D’s, Burger Kings, Malls, Men’s Wearhouses etc etc etc. Stop being an American (and I do mean that in a derogatory sense). Try thinking a little. Stop watching CNBC then you won’t know what they are saying and it won’t clutter up your mind with biases.

    What interest rates are you watching – U.S.? British? Australian? Japanese? Indian? Korean? South American? Does it matter? Are all interest rates the same? Are American interest rates somehow better than other interest rates? Wouldn’t surprise me if some folks thought so.

    We aren’t the only providers of commodities in the world you know. Nor do we provide all of the transportation. Yes, of course there will be a draw back, correction, crash whatever you want to call it. But that’s normal and expected and will probably be short lived – then it will resume again. Remember following WWII we had a 30-year commodities boom in this country. And we are no where as big as the rest of the world. We only think so.

    Sorry for going on and on. I’m just expressing an opinion. And opinions are like assholes – everybody’s got one and they all stink.

  29. B commented on Apr 4

    LOL! My mistake! It doesn’t change the tone of my rant.

  30. jc commented on Apr 4

    not worried about being bullish with the vix at these levels?

  31. John Konop commented on Apr 4


    Cesar Chavez was born in America and never ran a foreign country.
    I do not know what you mean by”he nationalized the foreign investments in his country”

    You are not serious, that Cesar Chavez is wrong and migrant pay is going up ? I gave you the study about how it is driving wages down in other jobs, Paul Krugman uses 8% decline. I gave you the EPI and Paul Craig Roberts which study do you not like ? Do you have anything other than your opinion ?

    When your done feeling better about yourself for drinking fair trade coffee. Why not focus on the Middle Class in our country who are seeing their wages go backwards.

  32. john commented on Apr 4

    jc – I am not a bull nor a bear – I’m a trader. I go where the market takes me.

    I watch the vix in relation to it’s 10-day average. Whenever there is a 10% delta I take it seriously – otherwise it is just noise. Currently, including today it is just noise.

  33. pjfny commented on Apr 4

    I agree with you. watch interest rates……There is no chance of a softlanding if the fed stops raising rates and we have a dollar crisis…however the only way for the fed to get out of the corner and engineer a softlanding. is by holding the dlr up with rates, increasing the savings rate by the consumer/government to slowly cut our budget/current account deficit with a slower economy….this only work until the economy looks like it rolls over, which becomes a hardlanding (more likely imho)

  34. John Konop commented on Apr 4


    Many consumers tend to understand cash flow not savings or debt. When you raise equaity payments ie credit cards, and at the same time you raise interest rates, to a group that repersents up to 40% of consumers who are tapped out. And real wages are dropping, while credit will tighten. So how do you have a soft landing?

  35. Daniel Secrest commented on Apr 4

    “not worried about being bullish with the vix at these levels?” jc

    I wish I understood the vix volatility index. Looking at this chart — — it seems that the volatility is low. Can anyone help me to find and interpret volatility indices?

  36. thecynic commented on Apr 4

    the real interest rates in the currency where the commodities are priced, which were negative for about 2 years.

  37. Mark commented on Apr 4


    Go to and enter VIX in the term search box. It will pull up about 6 entries. Read and enjoy.

  38. Get Long Vega commented on Apr 4

    If VIX = 16, market vol implies a 1% move up or down per trading day.

    If VIX = 8, market vol implies a 0.5% move up or down per trading day.

    So, VIX / (252^1/2) gives you the daily expected % move of the SPX.

    VIX is 11ish these days and BDM (Big Dumb Money) can’t sell enough. Yikes. And don’t forget: LTCM was short the world in SPX paper and got their head handed to them. I think they got short from 18 to 20ish. When they had to cover it was high 30s / low 40s. Billions down the drain.

  39. brian commented on Apr 4

    From The Young And The Jobless by Bob Herbert…
    //a recent report from the Center for Labor Market Studies at Northeastern University in Boston tells us that the employment rate for the nation’s teenagers in the first 11 months of 2004 – just 36.3 percent – was the lowest it has ever been since the federal government began tracking teenage employment in 1948.
    Those 20 to 24 years old are also faring poorly. In 2000, 72.2 percent were employed during a typical month. By last year that percentage had dropped to 67.9 percent.
    Even the recent modest surge in jobs has essentially bypassed young American workers. Gains among recently arrived immigrants seem to have accounted for the entire net increase in jobs from 2000 through 2004.//

  40. rwbil commented on Apr 5

    So many topics in this thread, it would take forever to address them all. But I wanted to comment on the employment comments, especially to the System Engineer, because I have a Engineering degree. In today’s market you have to be willling to be more mobile and flexible. I live in Maryland and work in the defense business and during the Reagon years the buisiness was booming and then during the Clinton years there were defense cuts and I saw massive layoffs. Now during the Bush Administration the Defense business has been booming again. I can tell you we have hired engineers, software programs, accountants, janitors, and etc. of all ages who have relocated from Colorado and other Dot Com areas that have gone bust. There are jobs out there if you are flexible. Also, I have seen many people laid off druing the rough years and some refused to be flexible and re-train, but if you are flexible then there are many opportunities out there. One of friends who was an engineer who got laid off, went and taught math in the schools (there is a shortage of math teachers) and he tutored math on the side for $50.00/ hour. He did not go work for Home Depot for $7.00/hour. Another friend who got laid off went back to school to get is CPA degree and another friend of started a business when he got laid off.

    We are not France, with craddle to grave protection and everybody riots because businesses want to be able to fire people in the first 2 years.

    People from all over the world try to get into this country for the work opportunities. And the opportunities are limitless. My wife is from Central America. She came to this country barely able to speak English. First she worked as a Day Care Provider and then in the restaurant business and eventually started her own restaurant and now makes more than me and she does not have a college degree.

    Gosh, if you think the unemployment today is bad what happens when we eventually have a recession and the unemployment rates starts to rise significantly.

  41. donna commented on Apr 5

    47 year old consultant and 20 year old son not working in this household. My excuse is I’m sick of getting hit with the AMT. Son was “working” as seasonal labor last fall – they hired 16 kids at one Gamestop store and then gave them all 4-8 hours a week of work, no work found yet for him this year. Only “jobs” that are out there are fast food….

  42. david price commented on Apr 5

    Barry, I confused. We are 150 days beyond the longest period in history without a 10% correction in the market. Now we hear Dow 11,800 not 6800. Warren Buffet is betting 14 billion that 4 markets do not a 20% correction in the next 20 years and Hans Blix says no nukes in Iran for at least five years. Forget Buffet and Blix what about the DOW!

    (BR: 11,800 was the original 1H call; 6,800 the 2H; I pushed the top back 2 months from March to May for technical reasons

    See this for the specifics from the Business Week Forecasts

  43. john commented on Apr 5

    rwbil – I too am in Maryland – also have all of the special credentials (clearances etc) – The defense business has dried up – at least for older folks. I really hope you aren’t over 60 and if you are you never lose your job.

  44. Mark commented on Apr 5

    What am I missing here? “Warren Buffet is betting 14 billion that 4 markets do not a 20% correction in the next 20 years…” I know WB has a big currency bet but what is this statement?

  45. me commented on Apr 5

    “We are not France, with craddle to grave protection ”

    No, but there used to be rules like stay in school, work hard and now the rules change and many of us have no time to recover.

  46. Get Long Vega commented on Apr 5

    Mark: RE: Buffett’s $14B equity index bet… He’s sold puts on about $14B notional of stock indices (SPX, Nikkei, EuroStoxx, maybe FTSE…). Anyway, he’s short the downside HUGE, but final settlement for his trade is very long-term, perhaps as long as 20 years (but I’ve heard from someone who knows that it’s closer to 15 years). The “$14B bet” headline is a little misleading because that amount is the total notional. So, sure, Buffett could lose a $14B if the market goes to zero, but…

  47. Daniel Secrest commented on Apr 5

    Thanks for the VIX references. Investopedia has been bookmarked!

  48. Mark commented on Apr 5


    Thanks. Like your posts. What is your take on PMs and commodities here?

    (And BTW, is “B” now on vacation? No rants today!)

  49. thecynic commented on Apr 5

    agreed with Vega,

    Buffett’s bet makes sense for Berkshire if you think about his cash position. he’ll take the premium today and if stocks get crushed he’s got something like $40 billion to buy the indices or stocks or whatever at a 20% discount + his premium. this would be consistent with his thesis that stocks trade sideways for the next 10 years. my only problem with his logic is he’s selling volatility at historic lows.
    he’s one of the few that can justify the trade because of his cash.

    you obviously sound like an options trader..
    did you see any disruptions in options market when this trade was executed? wouldnt’ the dealer that booked the trade have to lay it off by buying the respective indices or the futures or calls. i would think this would have caused some commotion in chicago and london

  50. rwbil commented on Apr 5


    I wonder if you use to work for the same company that I currently work for. I am not 60 yet, but many of my co-workers and friend are. One co-worker, Jim, was recently forced to retire. He was 66 years old. I worked with Jim and he was one of the brightess persons I have worked with. The reason he was forced to retire was not due to his age, but the fact that his skills were antiquated and they could not find work for him. Many professions force the workers to go back and take continuing education courses, but not in enginneering. Jim worked on the same type of projects for years and when those projects dried up, he could not find work in other areas. I understand that it is a Pain in the Butt to go back to school and keep updated and unforturneatly most older engineers do not keep up with the new technology.

    What really upsets me though, is I have so many friends who are around 60 who not only don’t keep up with the new technology, but they do not save a dime to their name. I understand people who work at Burger King not being able to save, but these are engineers making “Good” Money and they spend every sent they make. And it is just excuse after excuse way they can not save. I had kids paid for their education and all the other excuses, but the difference, I lived below my means and saved and invested and can retire early. John, it sounds like you were smart enough to save and invest also. My other friends better hope they never get laid off, because they will need to keep working forever

    John, one last comment, even if you have not kept up with the latest technology I am surprised you could not find employment anywhere in the Maryland – VA- Washington – Penn. area. Did you actually contact a head hunters and send your resume out throughout the entire area or are you being selective and only will to work close to your home??

  51. john commented on Apr 5

    rwbil – I have developed my own web site – I have created many unique methods for sorting through 7500 stocks every single day and as a result make many dollars every week. I have done these things in the past several years. I am not only up to date I am beyond leading edge – always have been always will be.

    I interview several times a month. I have several contingency offers that will be honored as soon as someone opens a contract.

    For that reason I don’t NEED a job – I just WANT to be counted as unemployed and not some imaginary category that lets the government crow about how well everything is going.

  52. rwbil commented on Apr 5


    How would you suggest the government keep such a statistic. How would they identify somebody like yourself from somebody who decided to retire early. Should they be going through some large door to door calling effort.

    I think the government numbers are relative but not exact. Of course after saying that I do think their reported inflation numbers are completely false.

    BTW, how is that stock picking program doing?? I spend a lot of time setting up screens and picking my own stocks. I use a value style approch. You might want to become a financial advisors instead. I am sure someone as resoursefull as yourself will be fine.

  53. john commented on Apr 5

    rwbil, OK one last post on this – at least from me – how about this – there are about 300 million people in this country. About 30 million are drawing social security about 60 million are below the age of 18. That’s 90 million. There are about 150 million working. The rest (including yours truly) are not – don’t play games – if you are not working and not in a category where the expectation would be that you are working then you are unemployed. That means of 210 million potential workers – 60 million are unemployed. that makes the unemployment rate about 28% or so.

    Fiddle with the figures any way you want – you aren’t going to get the number much below 25%. It is really that simple. Count the number you got figure out who is working and who could be working and voila – you have it.

    And thank you very much I am doing very well.

  54. John Konop commented on Apr 5

    This might give some of you an insight to the real job market.

    Nuking the Economy

    Last week the Bureau of Labor Statistics re-benchmarked the payroll jobs data back to 2000. Thanks to Charles McMillion of MBG Information Services, I have the adjusted data from January 2001 through January 2006. If you are worried about terrorists, you don’t know what worry is.

    Job growth over the last five years is the weakest on record. The US economy came up more than 7 million jobs short of keeping up with population growth. That’s one good reason for controlling immigration. An economy that cannot keep up with population growth should not be boosting population with heavy rates of legal and illegal immigration.

    Over the past five years the US economy experienced a net job loss in goods producing activities. The entire job growth was in service-providing activities–primarily credit intermediation, health care and social assistance, waiters, waitresses and bartenders, and state and local government.

    US manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job.

    The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is “the envy of the world.” Communications equipment lost 43% of its workforce. Semiconductors and electronic components lost 37% of its workforce. The workforce in computers and electronic products declined 30%. Electrical equipment and appliances lost 25% of its employees. The workforce in motor vehicles and parts declined 12%. Furniture and related products lost 17% of its jobs. Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43%. Paper and paper products lost one-fifth of its jobs. The work force in plastics and rubber products declined by 15%. Even manufacturers of beverages and tobacco products experienced a 7% shrinkage in jobs.

    The knowledge jobs that were supposed to take the place of lost manufacturing jobs in the globalized “new economy” never appeared. The information sector lost 17% of its jobs, with the telecommunications work force declining by 25%. Even wholesale and retail trade lost jobs. Despite massive new accounting burdens imposed by Sarbanes-Oxley, accounting and bookkeeping employment shrank by 4%. Computer systems design and related lost 9% of its jobs. Today there are 209,000 fewer managerial and supervisory jobs than 5 years ago.

    In five years the US economy only created 70,000 jobs in architecture and engineering, many of which are clerical. Little wonder engineering enrollments are shrinking. There are no jobs for graduates. The talk about engineering shortages is absolute ignorance. There are several hundred thousand American engineers who are unemployed and have been for years. No student wants a degree that is nothing but a ticket to a soup line. Many engineers have written to me that they cannot even get Wal-Mart jobs because their education makes them over-qualified.

    Offshore outsourcing and offshore production have left the US awash with unemployment among the highly educated. The low measured rate of unemployment does not include discouraged workers. Labor arbitrage has made the unemployment rate less and less a meaningful indicator. In the past unemployment resulted mainly from turnover in the labor force and recession. Recoveries pulled people back into jobs.

    Unemployment benefits were intended to help people over the down time in the cycle when workers were laid off. Today the unemployment is permanent as entire occupations and industries are wiped out by labor arbitrage as corporations replace their American employees with foreign ones.

    Economists who look beyond political press releases estimate the US unemployment rate to be between 7% and 8.5%. There are now hundreds of thousands of Americans who will never recover their investment in their university education.

    Unless the BLS is falsifying the data or businesses are reporting the opposite of the facts, the US is experiencing a job depression. Most economists refuse to acknowledge the facts, because they endorsed globalization. It was a win-win situation, they said.

    They were wrong.

    At a time when America desperately needs the voices of educated people as a counterweight to the disinformation that emanates from the Bush administration and its supporters, economists have discredited themselves. This is especially true for “free market economists” who foolishly assumed that international labor arbitrage was an example of free trade that was benefitting Americans. Where is the benefit when employment in US export industries and import-competitive industries is shrinking? After decades of struggle to regain credibility, free market economics is on the verge of another wipeout.

    No sane economist can possibly maintain that a deplorable record of merely 1,054,000 net new private sector jobs over five years is an indication of a healthy economy. The total number of private sector jobs created over the five year period is 500,000 jobs less than one year’s legal and illegal immigration! (In a December 2005 Center for Immigration Studies report based on the Census Bureau’s March 2005 Current Population Survey, Steven Camarota writes that there were 7,9 million new immigrants between January 2000 and March 2005.)

    The economics profession has failed America. It touts a meaningless number while joblessness soars. Lazy journalists at the New York Times simply rewrite the Bush administration’s press releases.

    On February 10 the Commerce Department released a record US trade deficit in goods and services for 2005–$726 billion. The US deficit in Advanced Technology Products reached a new high. Offshore production for home markets and jobs outsourcing has made the US highly dependent on foreign provided goods and services, while simultaneously reducing the export capability of the US economy. It is possible that there might be no exchange rate at which the US can balance its trade.

    Polls indicate that the Bush administration is succeeding in whipping up fear and hysteria about Iran. The secretary of defense is promising Americans decades-long war. Is death in battle Bush’s solution to the job depression? Will Asians finance a decades-long war for a bankrupt country?

    Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at:

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