Unemployment

Earlier today we got another indication that Europe's recession will hardly be a "technical" or "transitory" or whatever it is that local spin doctors call it, after the European December Industrial Output declined by 1.1% led by a whopping 2.7% drop by European growth dynamo Germany, which slid by 2.7% compared to November (which in turn was a 0.3% decline). This was worse than the Greek number which saw a 2.4% drop, however starting at zero somewhat limits one's downside. Yet even as the German economic decline accelerated, German ZEW investor expectations, which just like all of America's own consumer "CONfidence" metrics are driven primarily off the stock market, which in turn is a function of investor myopia to focus only on nominal numbers and not purchasing power loss - a fact well known to central bankers everywhere - do not indicate much if anything about the economy, and all about how people view the DAX stock index, which courtesy of the ECB's massive balance sheet expansion, has been going up. And if there has been any light at all in an otherwise dreary European tunnel, it has been the dropping EURUSD, which however has since resumed climbing, and with it making German industrial exports once again problematic. Which in turn brings us back to the primary these of this whole charade: that Germany needs controlled chaos to keep the EURUSD low - the last thing Merkel needs is a fixed Europe. It is surprising how few comprehend this.

• BOJ Adds to Monetary Easing After Contraction (Bloomberg)
• EU to punish Spain for deficits, inaction (Reuters)
• Obama, China's Xi to tread cautiously in White House talks (Reuters)
• Global suicide 2020: We can’t feed 10 billion (MarketWatch)
• Greece rushes to meet lender demands (Reuters)
• Obama Budget Sets Up Election-Year Tax Fight (Reuters)
• Foreign Outcry Over ‘Volcker Rule’ Plans (FT)
• Moody’s Shifts Outlook for UK and France (FT)
• France to Push On With Trading Tax (FT)

ZeroHedge’s post on the apparent breakdown of Okun’s “Law” highlights the ongoing tragicomedy of how the science of central economic planning eventually confounds, and then consumes itself. Economics is, after all, a social “science”, an elaborate study of human beings and, most importantly, human interactions. Robert Okun, for his part, merely observed in 1962 that when “output” (whatever statistical measure is en vogue) rises by 3%, the unemployment rate seems to fall by 1%. For some reason, economics assumes that if it is true in the past, it will be true forever, so it was written into the canon of orthodox economic practice. Economics has inferred causation into that relationship, giving it a layer of permanence that may not be warranted. Econometrics has always had this inherent flaw. The science of modern economics makes assumptions based on certain data, and then extrapolates them as if these assumptions will always and everywhere be valid. There is this non-trivial postulation that correlation equals causation. In the case of Okun’s Law, it seems fully logical that there might be causation since it makes intuitive sense – more economic activity should probably lead to more jobs, and vice versa. But to assume a two-variable approach to something that should be far more complex is more than just dangerous, it is unscientific. In fact, Okun’s Law has already been adjusted somewhat, most famously by Ben Bernanke and Andrew Abel in their 1991 book. It was upgraded to a 2% change in output corresponding with a 1% inverse change in unemployment. Apparently with the economic “success” of that period, Okun needed a re-calibration.

You know there is a reason why Europe just came crawling with an advance handout looking for US assistance: Moody's just went apeshit on Europe.

• Austria: outlook on Aaa rating changed to negative
• France: outlook on Aaa rating changed to negative
• Italy: downgraded to A3 from A2, negative outlook
• Malta: downgraded to A3 from A2, negative outlook
• Portugal: downgraded to Ba3 from Ba2, negative outlook
• Slovakia: downgraded to A2 from A1, negative outlook
• Slovenia: downgraded to A2 from A1, negative outlook
• Spain: downgraded to A3 from A1, negative outlook
• United Kingdom: outlook on Aaa rating changed to negative

In other news, we wouldn't want to be the company that insured Moody's Milan offices.

Two weeks ago when discussing the latest lunacy surrounding America's exponential curve #1 also known as its debt balance, we suggested what the GOP election strategy should be: "[if] the debt ceiling becomes a sticking point at the election, Obama's chances of reelection plunge. Which makes us wonder - will Republicans grasp that the paradox of defeating Obama is precisely in giving him a carte blanche on all the stimulus programs he wants? Because if Congress approves another $200, 300 or even $400 billion in stimulus pork (the only thing better than one Solyndra? One thousand Solyndras!) the Treasury will drown in the need to raise hundreds of billions more, and will in fact hit the ceiling well in advance of the elections. As for the stimulus projects themselves, they will crash and burn just like all centrally planned endeavors, and actually result in a far worse outcome than if they had never been attempted. [Because] the best way to finally get back to a fiscally prudent regime? Why go to town, of course." We were delighted to discover that our policy anti-recommendation has finally been adopted. Because as the WSJ reports when it comes to the latest payroll tax extension we find something quite stunning: "House Republican leaders said Monday they would introduce a bill extending the payroll-tax break for the rest of the year without finding spending cuts to offset the program's cost. The proposal marks a major shift for Republicans, who previously had insisted that the costs of extending a trio of provisions expiring at the end of the month be offset with spending cuts." That's right - no offsetting spending cuts. Which means one thing - much more debt.  How much more? At least $160 billion much. Which means that the debt ceiling discussion will hit not in November as we speculated previously, but potentially as soon as September.

On Friday, we gave the skinny on some of the more amusing and/or aggressive key assumptions in the president's 2013 budget. Now hear the TOTUS, as presented via the president.

Okun's rule-of-thumb relates the long-term empirical finding that a country's unemployment rate is closely related to a country's output (or GDP) - perfectly sensible and comprehensible. In fact to be a little more explicit, it is the change in unemployment that is more notable in its relationship to the potential GDP (the output gap). His original work noted that a 3% increase in output corresponds to a 1% decline in unemployment rates (and/or rise in labor force participation, rise in hours worked, and rise in labor productivity) but as Goldman Sachs notes this week, Okun's Law has broken. As they point out, even though US real GDP growth has averaged a meager 2.5% pace since the end of the recession, the unemployment rate has fallen almost two percentage points from its peak. There are three implications, in our view: the unemployment rate is hopelessly miscalculated (and is much higher); potential growth is much lower than economists have been expecting (not such good news for real growth); and the multiplier effect of money has dropped structurally (in other words the implied money flow from more workers is not circulating the way it empirically has to juice growth). It seems to us that none of these are good for growth as the reality of a higher unemployment rate (BLS adjustments aside) is negative, lower potential for growth impacts earnings expectations (as we are already seeing in company and analyst outlooks which has perplexed those market watchers pinning their hopes on the jobless rate), and the balance sheet recessionary impacts of the 'employed' minimizing debt rather than maximizing potential gain is a further drag. Either way, as Goldman notes the potential growth rate going forward (2012 and 2013) is likely to remain quite weak, in the neighborhood of 2% in line with the CBO's dismal views and this could be further exacerbated by the drop in labor force participation we have noted vociferously.

Is a bonus culture beneficial to the economy?

Last week, there were relatively few US data releases, but Initial Jobless Claims continued to surprise on the positive side, while U of Michigan Consumer Sentiment saw a small decline. This week, the FOMC minutes on Wednesday with guidance on the Fed's balance sheet will be the key event. Aside from the Fed, there will be many key releases in the US with IP, CPI, and the regional business surveys. The market expects an increase of 0.6%mom in IP, 0.3%mom in CPI, and small gains in the surveys. ?In Greece, negative headlines over the new austerity package on Friday caused some reversal of the rally in the first part of the week, and as a result, we were stopped out of our short $/CAD recommendation (for a small potential gain). However, the Greek cabinet agreed on the new austerity measures late on Friday, and parliament appears to be on track for a positive vote. The Eurogroup meeting scheduled this coming week will be important to watch as well, and Greek GDP will give a sense of the cyclical damage caused by austerity.

To confirm a reversal in Treasuries we need a bona fide breakout. 

We all getting paid for this - it's like, $60 dollars per head

While unemployment is a big problem for the Chinese Government, inflation is a HUGE problem. Over one third of China's population lives off less than $2 a day. If the price of food rises in China... those "mass incidents" will explode into outright widespread rioting and civil unrest.

While we have excoriated the unemployable, C-grade, goalseeking, manipulative excel hacks at the CBO on more than one occasion by now (see here, here and here), it appears this time it is the administration itself which has shown that when it comes to predicting the future, only "pledging" Greece is potentially worse than the CBO. WSJ reports that "President Barack Obama's budget request to Congress on Monday will forecast a deficit of $1.33 trillion in fiscal year 2012 and will include hundreds of billions of dollars of proposed infrastructure spending, according to draft documents viewed by Dow Jones Newswires and The Wall Street Journal. The projected deficit is higher than the $1.296 trillion deficit in 2011 and also slightly higher than a roughly $1.15 trillion projection released by the Congressional Budget Office last week. The budget, according to the documents, will forecast a $901 billion deficit for fiscal 2013, which would be equivalent to 5.5% of gross domestic product. That is up from the administration's September forecast of a deficit of $833 billion, or 5.1% of GDP." Where does the CBO see the 2013 budget (deficit of course): -$585 billion, or a 35% delta from the impartial CBO! In other words between 2012 and 2013 the difference between the CBO and Obama's own numbers will be a total of $542 billion. That's $542 billion more debt than the CBO, Treasury and TBAC predict will be needed. In other words while we already know that the total debt by the end of 2012 will be about $16.4 trillion (and likely more, we just use the next debt target, pardon debt ceiling as a referenece point), this means that by the end of 2013, total US debt will be at least $17.4 trillion. Assuming that US 2011 GDP of $15.1 trillion grows by the consensus forecast 2% in 2012 and 3% in 2013, it means that by the end of next year GDP will be $15.8 trillion, or a debt-to-GDP ratio of 110%. Half way from where we are now, to where Italy was yesterday. And of course, both the real final deficit and Debt to GDP will be far, far worse, but that's irrelevant.

Recent times have been particularly hard on young adults. As we look around the world at Europe and the Middle-East, it is all too often the youth that are leading the social unrest as they again and again are the hardest hit by the global deleveraging (and admittedly most socially connected). The US is not insulated from this (though perhaps more Xanax-subdued) as youth unemployment is around 20% (with 16-19 year-olds around 25%). As Pew Research Center notes though, that fully 55% of those aged 18-24 (and 4% of 25-34 year olds) say young adults are having the toughest time in today's economy. The day-to-day realities of economic hard times are somewhat shocking for a country supposedly so far up the developed spectrum as roughly a quarter of adults aged 18 to 34 (24%) say that, due to economic conditions, they have moved back in with their parents in recent years after living on their own. In the 25 to 29 age range a shocking 34% have moved back home with mom and pop (hardly likely to help with the huge shadow housing inventory overhang we discussed yesterday) Finding a job, saving for the future, paying for college, and buying a home are seen as dramatically harder for today's young adults compared to their parent's generation while Facebook saves the day as staying in touch with friends/family is the only stand out aspect of life that is 'easier' for today's youth. As these increasingly disenfranchised young adults make some of life's biggest transitions (or not as the case seems to be), we wonder just how long it will be before Al-Jazeera is reporting on the Yankee-Spring and showing video of young hoody-wearing Americans throwing their 'Vans' at 80 inch plasma TVs; or maybe the BLS will decide to redefine basement-dwelling (or rioting) as a full-time job.

Lots of motion, little progress.