Unemployment Benefits

Stepping softly onto a slippery slope...

• Europe ushers in the recession: Euro-Area Economy Contracts for the First Time Since 2009 (Bloomberg)
• Greek conservative takes bailout pledge to the wire (Reuters)
• China Pledges to Invest in Europe Bailouts (Bloomberg) - as noted last night, the half life of this nonsense has come and gone
• Japan's Central Bank Joins Peers in Opening the Taps (WSJ)
• EU Moves on Greek Debt Swap (EU)
• EU Divisions Threaten Aid For Greece (FT)
• Athens Woman facing sacking threatening suicide (Athens News)
  
• King Says Euro Area Poses Biggest Risk to UK’s Slow Recovery (Bloomberg)
• Sarkozy to Seek Second Term, Banking on Debt Crisis to Boost Bid (Bloomberg)

While the government propaganda machine chugs along and tells us to move along, there is nothing to see in the plunging labor participation rate, it is just 50 year olds pulling a Greek and retiring (fully intent on milking those 0.001% interest checking accounts, CDs and 3 Year Treasury Bonds for all they are worth - they are after all called fixed "income" not "outcome") there is more than meets the eye here. Yet while we will happily debunk any and all stupidity that Americans actually have the wherewithal to retire in droves as we are meant to believe (with the oldest labor segment's participation rate surging to multi-decade highs), there is a distinct subset of the population that migrates from being a 99-week'er to moving to merely yet another government trough - disability. Art Cashin explains.

No, don't worry, no new taxes. 

Daily news.

That the fine economists at the San Fran Fed are known to spend good taxpayer money in order to solve such challenging white paper conundrums as whether water is wet, or whether a pound of air is heavier than a pound of lead (see here and here) has long been known. Furthermore, since the fine economists at said central planning establishment happen to, well, be economists, they without fail frame each problem in such a goal-seeked way that only allows for one explanation: typically the one that economics textbooks would prescribe as having been the explanation to begin with. Today, is in some ways a departure from the default assumptions. In a paper titled "Why is Unemployment Duration so Long", a question which simply requires a brief jog outside of one's ivory tower to obtain the answer, Rob Valleta and Katherin Kuang, manage to actually surprise us. And while we will suggest readers read the full paper attached below at their leisure, we cut straight to the conclusions, which has some troubling observations. Namely, they find that "the labor market has changed in ways that prevent the cyclical bounceback in the labor market that followed past recessions...  In addition, anecdotal evidence suggests that recent employer reluctance to hire reflects an unusual degree of uncertainty about future growth in product demand and labor costs."Oddly enough, this is actually a correct assessment: the mean reversion "model" no longer works as the entire system has now broken, and since the administration changes rules from one day to the next, companies are not only not investing in their future and spending capital for expansion, and hoarding cash, but have no interest in hiring: an observation that previously led to a surge in profit margins, yet one which as we pointed out over the weekend, has now peaked, and margins have begun rolling over, even as the rate of layoffs continues to be at abnormally high levels, meaning all the fat has now been cut out of the system. Yet it is the following conclusive statement that is most troubling: "These special factors are not readily addressed through conventional monetary or fiscal policies." And that is the proverbial "changeover" as the Fed has just acknowledged that both it, and Congress, are completely powerless at fixing the unemployment situation. In which case is it fair to finally demand that the Fed merely focus on just one mandate - that of controlling inflation, and leave the jobs question to the market, instead of making it worse with constant central planning tinkering which only makes it worse by the day?

• Fed Holds Off for Now on Bond Buys  (Hilsenrath)
• Bonds Show Return of Crisis Once ECB Loans Expire (Bloomberg)
• Greek Debt Talks Enter Third Day After ‘Substantial’ Discussions (Bloomberg)
• Sharp clashes at Republican debate ahead of vote (Reuters)
• Lagarde Joins Warning on Fiscal Cuts Before Davos (Bloomberg)
• Investors exit big-name funds as stars fail to shine (Reuters)
• Payday lenders plead case to consumer agency (Reuters) - the EFSF included?
• EU Toughens Fiscal Pact Bowing to ECB Objections, Draft Shows (Bloomberg)
• Minister Urges Japan to Use Strong Yen (FT)
• China Eyes Pension Fund Boost for Stock Market (Reuters)
• China Manufacturing Contraction Boosts Case for Easing: Economy (Bloomberg)

JPM's head economist Michael Feroli just joined the bandwagon of other Wall Streeters in cutting Q4 GDP, trimming his prior forecast of 3.5% to 3.0%. However, as this is backward looking, it is largely irrelevant if confirming what we already knew: that the economy was certainly not growing as fast as the market implied it was (yes, the manipulated market is not the economy, no matter how much the Fed would like that to be the case). A bigger question is what should one expect from the future. Yes - an in vitro future, isolated from the daily rumor mill of what may or may not happen to the French rating tomorrow or the day after. It is here that there is nothing good to expect: 'we think growth will downshift from 3.0% in 4Q11 to 2.0% in 1Q12. Looking beyond the first quarter, we expect a growing private domestic sector will contend with a fading drag from the external sector and a persistent drag from the public sector." Yet where JPM falls short, is its optimistic view on the private sector. As David Rosenberg showed yesterday, the ratio of negative to positive preannouncements just hit a multi-year high, with the primary culprit being the strong dollar. Unfortunately for Feroli's bullish angle, the private sector will not do all that well at all if the EURUSD remains in the mid 1.20s or falls further. In fact, corporate earnings will likely be trounced, which in combination with everything else that JPM lists out, correctly, could make the second half of 2012 a perfect storm for economic growth, an event which Obama's pre-electoral planners are all too aware of. What is the only possible recourse? Why more QE of course. The only unknown is "when."

The negative incentive effects of unemployments are well known. What's maybe not discussed enough are the less visible effects of jobless benefits, which include reduced productivity on the job, not to mention reduced savings thanks to it being known that unemployment brings with it a check from the government

A few months ago we disclosed that based on its campaign contributions in Q1, Goldman Sachs had turned from Democrat to Republican, as "its campaign spending favored Republicans over Democrats by a margin of 58 percent to 42 percent both for March and the first three months of the year." Furthermore the animosity between the firm and the president is not exactly top secret. So, being the smartest guys in the room, would it not behoove Goldman to endorse precisely those policies which while unlikely to have much economic impact (for the growing futility of Keynesianism see here), are most at odds with prevailing popular opinion of what next steps for the economy should be? We pointed out first two days ago that Goldman is now openly rooting for QE 2.0 and another round of unbridled fiscal stimulus: precisely the kind of behavior that increasingly more people realize is the primary reason why this country is in its current sad place. Today, Goldman economist Alec Phillips continues the shadow attack on the administration, pointing out in excruciating detail what will happen if unemployment benefits are not extended (a topic also discussed previously here), and that some form of passage of the bill is critical, in essence putting the high hurdle strawman before the administration, and boxing it in a lose-lose corner. Regardless of the political sideshow, and we will keep an eye on it, with this week's Initial Claims out due later today, and a likely collapse in Extended Unemployment Compensation and Extended Benefits now that there is, at least for now, no extension, here is how Goldman envisions the over 4 million plunge in those eligible to receive benefits, and the implication of this to the economy.

The following very interesting analysis from Goldman focuses on an issue long-discussed on Zero Hedge and elsewhere, namely what happens when those millions in unemployed currently collecting unemployment insurance, finally start to roll off extended and emergency benefits, as terminal benefit exhaustion sets in, even with ongoing governmental unemployment stimulus programs. Goldman's estimate: approximately 400,000 people will no longer have the backdrop of so-called "government jobs" in which workers receive on average $1,200 a month for doing nothing. "If the rate of exhaustion continues at the current pace, this implies over 400,000 workers will exhaust their benefits in some months, even if Congress continues to extend the current, more generous, unemployment program." What this means for the economy is, obviously, nothing good: "Assuming something on the order of 400,000 exhaustions per month, at an average benefit of $1200 per month, this implies roughly $0.5 billion in lost monthly compensation compared with a scenario in which there are no exhaustions. If the relationship between exhaustions and initial claims 16 to 17 months prior (the maximum benefit period in most states) holds constant, the pace of exhaustions is likely to stay elevated for several months, implying several billion dollars in cumulative lost compensation." Couple this with front-loaded tax refunds, also previously discussed on Zero Hedge, and the "consumer-driven" economy in next few months is sure to see a rather substantial shakedown. Absent a dramatic increase in (c)overt Obama unemployment stimulus, is the extend-and-pretend phase of the bear market rally about to end?