Labor Day, Leen’s Lodge, Employment Report

Labor Day, Leen’s Lodge, Employment Report
David R. Kotok
September 4, 2011

My long-time friend and fishing guide Ray Sockabasin put the onion rings in a special beer batter concoction that he characterizes as an “old Passamaquoddy Indian recipe.” With the frying pan on the fire, in went the onion rings… sizzle, sizzle, sizzle, and out they came – fabulous. They were so light you could think of them as almost floating – why, you might use one as a ‘bobber’ if you were bait fishing in Big Lake in Grand Lake Stream, Maine.

Labor Day weekend is a quieter time in Maine. This is a place where you can read, study research reports, take some time to go fishing, have conversations, and at the same time consider some very serious issues. On Friday morning via Leen’s Lodge satellite connection, the eyes were fixed on the employment report.

We channel-flipped between CNBC and Bloomberg. We happened to catch the release on CNBC when another good friend and skilled economist, Bob Brusca, was guest hosting for the hour. We listened to the dialogue among Brusca, Diane Swonk, Mark Zandi, Steve Liesman, and others. Setting aside some commentary, which I would consider rather innocuous, let me focus specifically on the skilled comments that came from Liesman and the three guest economists.

No matter what one does with this employment report, one has to come away with an ominous feeling. It simply was not good. Interpretation of details could suggest that it was break-even, or “not any worse than I thought,” or subject to reinterpretation because of the revisions. There was nothing in it that was robust or optimistic.

There is much speculation about why this is so. Some of us, myself included, expected the second and third quarters of 2011 to be particularly weak. We attributed the loss of at least a half point in GDP to the supply-chain interruptions in the manufacturing sector due to the tragedy in Japan. We cannot blame the earthquake and the hurricane for August employment data. The effects of those natural events will be seen when we get the report in early October for September. We can attribute some major employment composition changes to the changes in government policy, the debate over layoffs in Minnesota, or to the labor interruption that took place with Verizon. In addition, August is notoriously a difficult month for employment data. It is impacted by all sorts of cross currents, from vacations to auto cycles to other causes.

With certainty, the employment report guarantees that interest rates will remain low and stay low for a protracted period. On the heels of the employment report, the Treasury market rallied enormously. Ten-year Treasury yields dropped by a quarter of a point, and thirty-year Treasury yields did the same. The Federal Reserve did not act in the hour preceding or following the employment report. So, when you look at this extraordinary volatility in which Treasury securities moved by more than two full points, you cannot attribute that to the Fed. You can attribute such violent moves to the high volatility applicable to Treasury securities in a climate of enormous uncertainty.

Our view remains the same. We expect the fourth quarter of 2011 to be better than the second and third quarters of 2011. We expect the supply-chain interruptions to have run their course. We expect the rebuilding and recovery in states from South Carolina to Maine and Vermont to be underway in the fourth quarter. We also expect the commitments that will be made to continue that rebuilding and recovery to take place in the early part of 2012.

It is a shame that the failed policies in Washington from our political leaders, both Democrat and Republican, House, Senate, and White House – that is right – failed, failed, failed – miserable policies coming from Congressmen, Senators, Democrats, Republicans, and the President – all of them carry the unemployment burden of the United States on their shoulders and in their hands. On the left, they would spend without reservation and without constraint. On the right, they would continue to subsidize very wealthy, specialized investment managers with carried interest tax at fifteen percent and subsidize ethanol production at the cost of billions of dollars a year, while failing to pay those who need help or threatening payments to those who serve in the Armed Forces of the United States. Our political system in Washington is broken. Democrats, Republicans, Congressmen, Senators, and the President have failed to lead. They all put their re-election possibilities and their personal political careers ahead of the nation’s interests.

The employment report should be the time that the President speaks to a joint session of Congress. That should be convened at 9:00 am on the first Friday of the month, when the unemployment statistics from the previous month are released to the public.

Labor Day, Leen’s Lodge, employment report. Satellite television brings the unemployment report onto the lake, into the blue sky, and into the sunshine. It interferes with the ambience of a wonderful location in Maine. We will take a little time off, but must confess, the ruminations and discussions here are on national policy issues, markets, and economics. The good news is, the fishing is terrific, and the geography of pristine waters and wonderful green surroundings survives in spite of the monsters that lurk in our government in Washington.


David R. Kotok, Chairman and Chief Investment Officer

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